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Tuesday, August 3, 2010

The Mediasite Franchise Alive and Kicking as Sonic Foundry is in the Black and Maintains Solid Outlook

We wanted to briefly relay several key points about Sonic Foundry's (SOFO) June quarter results (F3Q10) following our post the other day, The Value of the Mediasite Franchise? First, Many Firms Could Clearly Benefit; Second, Ask Massey University and Others Around Globe.

Full results can be found here, including a link to the brief 28 minute Mediasite Webcast (note: we had a few questions that would have extended the discussion, but didn't get our request in soon enough!). A few takeaways:

(1) Top-line results support our Mediasite franchise thesis: revenue of $5.6 million (+12% Y/Y) and record billings of $6.0 million (+19% Y/Y) as adoption continues. One of two slides highlighting recent customer additions from Sonic's presentation:

More organizations continue to realize the benefits of the Mediasite solution over other Webcasting services, which is fantastic and apparently accelerating. Recall the Nasdaq (NDAQ) Shareholder.com example of Microsoft's Analyst Meeting we highlighted the other day. Why not move to Mediasite for a better experience?

(2) Bottom-line profitability is what the doctor ordered: GAAP EPS of $0.06 and cash NON-GAAP EPS of $0.24, with the latter pointing to our expectation that the company could potentially deliver $1.00 of cash earnings over the next year. While the company continues to have a small net cash position -- now $839 thousand versus $1.1 million at 3/30/10 -- we think today's results confirm that Sonic Foundry is moving past the inflection point. Working capital requirements to fund growth should be met by internal cash generation (operating leverage) and/or the currently untapped $3.0 million line of credit from Silicon Valley Bank (SVB) (details in last 10-Q). Here's the management view from Sonic's presentation:

(3) Outlook/commentary calls for revenue growth of 10-40% (wide range on lumpy deal timing) over the next 12 months -- supports our thesis, but points to the low/mid point of our March earnings scenario range (+10% Y/Y = $21 million, +40% Y/Y = $27 million, midpoint = $24 million) - click to enlarge:


Deal timing remains the big swing factor and, for valuation, we'll see what the Market decides. Above, we use a 20-times P/E multiple, but -- right or wrong --higher multiples are often awarded by the Market to well-positioned, growing niche companies. Full disclosure: we will gladly oblige Market demand if multiples move beyond our estimate of fair value. As noted in our prior posts, we believe recent M&A transactions also provide relevant valuation benchmarks from a private market valuation (PMV) standpoint.

(4) Finally, don't forget about the importance of collaborating with the A/V channel to build the business, which management mentioned in discussing Sonic's presence at the recent Infocomm/Educomm show:

AND, recall what we shared in July 2009 regarding the A/V channel relationship as a barrier to entry:
  • The key focal point for us remains the Mediasite franchise, which we believe continues to grow in value as customers expand footprints, new customers join the community, and -- importantly -- the global A/V channel increasingly recommends Mediasite for rich media Webcasting. We think the channel promotes Mediasite because the solution works extremely well, is reliable, and has a clear product development road-map. The growing, installed customer base, combined with brand recognition, trust, and global distribution, are all difficult for a competitor to replicate and take years to establish. In our view, these aspects mitigate the risk of rapid technological change and help secure Mediasite's leading position in the marketplace.
We think this competitive advantage is likely strengthening for the company, which is another positive.

Lastly, as an unrelated aside, we wonder if many customers have explored placing Mediasite content on Google's (GOOG) YouTube? We happened to stumble upon this -



That said, most content no doubt remains behind firewalls and/or directly housed in continually expanding Mediasite catalogs (again, please see our post with Tweets about rapidly expanding usage from university customers). Still, interesting to watch (but a bit small and too blurry if enlarged to full screen).

Happy investing,

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: long SOFO.

© 2010 Jeffrey Walkenhorst
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5 comments:

  1. Hi Jeff,

    Great analysis of Conference Call. Thanks for your work on SOFO. Were you going to ask about the large deals and the announcements? They didn't announce any big deals in quarter yet still had a $5.6 million revenue quarter. To me this indicates that SOFO doesn't need large deals to grow but that large deals are really the icing on the cake. I would guess that Rimas' projection of 10-40% growth indicates that 10% is in the bag and that a realistic number would be closer to the middle of that range. Look forward to further discussion.

    Ray

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  2. Hello Ray,

    Great to hear from you. Thank you for chiming in and for your feedback!

    Based on the slide showing sales into community colleges, I think some of the "large" deals have been quietly happening. However, I think the larger, multi-quarter opportunities that Rimas alluded to last quarter remain in the works. Hopefully, we'll have more details next quarter on this front. Nonetheless, I think you're also right that (1) the mega deals would be icing on the cake, (2) the low-end of guidance is probably conservative, and (3) as Rimas indicated, the existing core book of business can generate fairly steady growth as customers expand footprints. Also, the global event Webcasting opportunity remains sizable and growing. There's no reason Mediasite should not see significantly wider adoption as, per my posts, alternatives remain lackluster from what I see and experience on a regular basis. Sonic Foundry should be aggressive in marketing this service and viral marketing should help.

    Listen the the plans at Massey from the link I shared the other day:

    "Basically, our roadmap is to get a number of units so that we can do automated recording across our campuses in three different cities and we can cope with the demand we're getting and that we expect to get over the next year or so.... and, what we like about it [Mediasite], is it's consistently high quality."

    I don't think Massey is alone with these plans, which bodes well. From the press release yesterday, "The outlook remains strong with larger scale opportunities continuing to fill its sales pipeline, now in the strongest position in corporate history."

    I was still formulating my questions when Erica said "there appear to be no more questions" and then quickly submitted the below (but not in time):

    > update on mobile device playback capabilities and plans to support iPad - timing? what are customers asking about and seeking?

    > any potential large deployments in hotel/conference area?

    Fortunately, Rimas and Ken covered a lot of territory on the call. Longs should now feel reassured and, as I've pointed out, the valuation remains very attractive on many levels.

    Br,

    Jeff

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  3. Hello Ray,

    I just wrote a lengthy response that Blogger didn't publish (too long) and is now gone! Here's the gist:

    Great to hear from you and thank you for your comments! Given the sales into the community college area, I think some "large" deals have been quietly happening, but I believe the truly larger, multi-quarter deals alluded to on the last conference call remain in the works. Hopefully, we'll see something this quarter or in the fall. Nonetheless, I agree with you: (1) the core business is capable of generating steady growth as customers expand footprints, (2) the low-end of guidance is probably conservative, and (3) any mega deals would be icing on the cake. From the press release:

    "The outlook remains strong with larger scale opportunities continuing to fill its sales pipeline, now in the strongest position in corporate history."

    AND, recall what Massey said in the video I shared the other day:

    "The automation has just started. It's very successful and again that means we can cope with minimum resources. our roadmap is to get a number of units so that we can do automated recording across our campuses in three different cities and we can cope with the demand we're getting and that we expect to get over the next year or so... What I like about it [Mediasite], is that it's consistently high quality."

    I don't think Massey is alone in this direction and sentiment.

    I'll post a bit more in a follow-on comment.

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  4. I was still formulating my questions when Erica said "there appear to be no further questions" and then quickly submitted these:

    > update on mobile device playback capabilities and plans to support iPad - timing? what are customers asking about and seeking?

    > any potential large deployments in hotel/conference area?

    Fortunately, the call covered a lot of territory. LONGS can now feel more confident that the Mediasite franchise is expanding. My own view is that we've been making steady progress in the right direction over the past year. Of course, we were all waiting for a solid earnings quarter. Now we have it.

    Jeff

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  5. whoops, looks like Blogger did get my first comment! I'll leave all in just in case I missed something in rehashing.
    JW

    ReplyDelete

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