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Sonic closer to turning profit corner

Madison, Wis. - Following the announcement of increased quarterly revenues, Sonic Foundry, Inc., a provider of rich-media technology, once again projected cash flow break even for the fourth quarter of 2006, with full year profitability projected for 2007.

Chairman and CEO Rimas Buinevicius and CFO Ken Minor released upbeat results for Sonic Foundry's 2006 third quarter in a live Webcast conference utilizing the company's synchronized web presentation system, Mediasite.

The company reported GAAP (Generally Accepted Accounting Principles) revenue of $3.6 million, compared to $2.2 million for the third quarter of fiscal 2005, representing organic growth of 64 percent.

Meanwhile, the GAAP net loss for the quarter improved to $583,000, or two cents per share, of which $352,000 were non-cash related expenses of stock compensation, including costs related to the 2006 adoption of FAS (Financial Accounting Standards Board) 123 and depreciation and amortization charges. The resulting cash component of the loss improved significantly, leading to the lowest level of operating burn - $231,000 - since the 2003 divestment of other business units.

Sonic Foundry also reported higher product and service billings, which now exceed $4.1 million per quarter - and significantly higher gross margins. The latter rose 78 percent, representing a single-quarter improvement of seven percentage points and 14 percentage points over the same quarter in 2005. Strong sales from server software licenses contributed to improving gross margins.
Minor indicated that growth in gross margins has increased more quickly than previously estimated. "It looks like at this point we won't have any difficulty reaching, and I think exceeding, the 80 percent gross margin level," he said.

In addition to experiencing $1.2 million more in sales than in the same quarter of 2005, Sonic reported improvements in operating efficiency - while sales grew 64 percent, operating costs grew by 36 percent - and continued growth in new, repeat, multi-unit sales and enterprise customers. Among the new customers it added in the third quarter were Genzyme Corp., which last year acquired Madison's Bone Care International, Hallmark Cards, Inc., and H&R Block.

"Operating metrics are improving across the board," Buinevicius said. "We're very delighted with that."

Technology adoption

With new, experienced sales agents introduced west of the Mississippi, Sonic will target existing customers for broader adoption of its technology. One of Sonic's main goals will be to solidify and expand relationships with two significant customers, Dell Computer Corp. and the University of Southern California.

As a supplier to Dell's "Intelligent Classroom" marketing project, Sonic will look to broaden the relationship with help from three sales representatives who bring previous experience as employees with Dell.

But Sonic's primary customer base lies in the education industry. The company's pipeline expanded from $30 to $40 million in the last quarter, with about half of it derived from its 239 educational institutional clients.

Buinevicius said Sonic targets campuses with substantial budgets, student enrollment, and technological familiarity. "Literally every classroom in America could be wired with this technology," he said, adding that Sonic's strategy is to market vertically, within multiple departments and sister campuses.

The strategy has been successful at USC, an institution that recently installed 16 additional Mediasite recorders to its distance-learning infrastructure, making it Sonic's second largest enterprise deployment in education. The recorders have been deployed in multiple USC departments, including business, pharmacy, social work, information sciences, and law.

Wooing the girl next door

This approach, however, has gained little traction with the University of Wisconsin-Madison. Buinevicius suggested that distributed decision-making and a sluggish migration to distance-learning, coupled with its separation from traditional campus instruction, has slowed UW-Madison's adoption of Sonic's Web-based conferencing infrastructure.

Buinevicius asserted that market forces will ultimately drive the university to the technology because of its potential to improve the quality, speed, and efficiency of university instruction. "There is a rich media component that has to happen at universities," he said. "That's clearly what the students are demanding as they enroll now."

Buinevicius said that Sonic has little to worry about in terms of competition. "We are a long way away from having an Oracle-Microsoft rivalry. It's really a wide open playing field," he said.

"Certainly there are a lot people attempting to ride our coattails," Buinevicius added. "This is such a new and burgeoning market that a majority of our deals - greater than 50 percent - have really no competition in them in terms of the bid process because the technology is so new."

Moving forward, Sonic will continue to develop its podcasting products, new server technology and modules, portal-based presentation management, and viewing and the incorporation of multimodal searches through portal and content management software. In addition, expanded capabilities for the core MediaSite software platform will be introduced this fall.

In other quarterly numbers, Sonic reported the following:

• Sales of Mediasite server software increased 480 percent annually to $719,000 in the third quarter of fiscal 2006, compared to $124,000 for the third quarter of fiscal 2005, growing from six percent to 20 percent of total revenues.

• Service billings - service contracts, consulting, on-site training, hosting, and installation, grew 145 percent to $918,000, up from $374,000 in the third quarter of fiscal 2005. As of June 30, 2006, an accumulated $1.6 million of unearned revenue was billed and deferred on the balance sheet for services to be recognized in forthcoming quarters.

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