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Thursday, March 4, 2010

Sonic Foundry/Mediasite + Philip Carret and Water Meters

As a follow-up to our post Wednesday, Sonic Foundry's (SOFO) shareholder meeting today was as expected: consistent message that the business is moving in the right direction with large deals in process. Importantly, the company indicated that debt financing commitments are in place to finance working capital needs related to "rapid expansion". We recommend watching the on-demand replay of the meeting for full details. Several key summary slides -

Unearned revenue is more meaningful:
Poised to see operating leverage and working capital financing in place (as also noted above):
More "platform deployments":

Last month, we included a video featuring the late investment legend Philip Carret. We uncovered an insightful article from 1999 where he shares his advice - it's well worth a read.

Similar to Peter Lynch's common recommendation, one of Mr. Carret's guidelines is as follows -- directly from the article:
  • For your best investment ideas, look around you. I've been following this strategy for more than 70 years.
  • Example I: In the early 1920s, not all water was metered in New York City. That wasn't going to last forever because water is a scarce resource, and there was no incentive for people to conserve water. Sooner or later, they were going to have meters for everyone. So I bought stock in a company called Neptune Meter, and it turned out very well.
Our own approach is similar to that recommended by Mr. Carret. While some value investors may not understand our interest in a micro-cap technology company with a history of operating losses, we think Mr. Carret might at least acknowledge the following: (1) like TV in the 1900s, the Internet is evermore pervasive in our daily lives, (2) online video/media is evermore pervasive as a natural extension of broadband Internet, and (3) online education and "rich media" capture is evermore pervasive.

Putting (1) through (3) together with
the Mediasite franchise -- as we've previously established -- suggests Sonic Foundry is poised to deploy more "meters" around the globe. The company's +19% Y/Y organic revenue growth in fiscal 2009 (end September) also indicates that the "installed base" is growing. Unlike water meters*, "everyone" is not going to have Mediasite, yet the addressable market is sufficiently large and expanding.

(*side note: water meter company Badger Meter (BMI) is an interesting little company)

Recall our analogy last May, where we compared the Mediasite solution to a jet engine:
  • A less-than-perfect but still relevant analogy might be the following: Mediasite is to Webcasting as a jet engine is to flying. Many companies no doubt tried to make jet engines through the decades, but only a handful emerged as market leaders (e.g. General Electric, Pratt & Whitney, Rolls Royce). For Webcasting, Mediasite is increasingly the go-to platform with quality and reliability both immensely important since many customers (e.g. schools) use the system daily to capture and archive hundreds of hours of content.
Anticipated large deals this year should further position Mediasite as the go-to platform and spur additional adoption, thereby strengthening barriers to entry that protect the Mediasite franchise.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
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