U.S. Markets close in 23 mins

Edited Transcript of SOFO earnings conference call or presentation 13-Feb-18 9:30pm GMT

Q1 2018 Sonic Foundry Inc Earnings Call

MADISON Feb 14, 2018 (Thomson StreetEvents) -- Edited Transcript of Sonic Foundry Inc earnings conference call or presentation Tuesday, February 13, 2018 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Gary R. Weis

Sonic Foundry, Inc. - CEO, CTO & Director

* Kenneth A. Minor

Sonic Foundry, Inc. - CFO & Secretary

* Tammy Jackson

================================================================================

Presentation

--------------------------------------------------------------------------------

Tammy Jackson, [1]

--------------------------------------------------------------------------------

(technical difficulty)

We will begin Q&A directly after the prepared remarks. In compliance with the SEC regulation regarding fair disclosure, we will be using SEC filings and public presentations, like the one you're viewing and participating in today, as the principal means of informing The Street and investors about our current and past results, financial projections or any material nonpublic information during those meetings.

Sonic Foundry will continue to meet with analysts, investors, the media and others on an intra-quarter basis, but will not provide updates regarding quarter-to-date results, financial projections or any material nonpublic information during those meetings.

Sonic Foundry's disclosure policy defines the period beginning on the 15th day of the third month of each fiscal quarter and ending on the day we publicly release the results of that quarter as a quiet period. During such quiet periods, we will not make any comments about our financial performance nor provide forward-looking guidance, except in press release form.

Finally, this conference will contain forward-looking statements about the products and services of Sonic Foundry within the meaning of 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those forward-looking guidance we provide. Any forward-looking statements should be considered in context of the risk factors disclosed in our periodic forms 10-Q, 10-K and other filings with the SEC. These filings can be accessed online at sec.gov and other websites or can be obtained from the company's Investor Relations department.

From time-to-time, Sonic Foundry refers to various non-GAAP financial measures or measures not defined as Generally Accepted Accounting Principles. As an example, we refer to adjusted EBITDA in this presentation. The company believes that this information is useful to understanding its operating results without the impact of special items. Refer to our earnings releases for a description and reconciliation of adjusted EBITDA.

All of the information and disclosures we make today regarding our business, including any forward-looking guidance, are as of the date given, and we assume no obligation to update or change this information regardless of subsequent events. An archive of this presentation will be available at sonicfoundry.com for 90 days.

And now Gary Weis will begin the webcast.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [2]

--------------------------------------------------------------------------------

Thank you, Tammy. Welcome to the call today. You'll be happy to notice that the call is on time this quarter, because we were late last quarter. You've already kind of seen a preview of this if you saw last quarter's and the year-end conference.

Let me just go through the highlights quickly. Billings for the Q1 this year increased by about 5% over the prior year, reflecting improved demand in North America higher education, Japan and EMEA. One thing I think that we're very pleased with is that while the revenue actually decreased on an as-reported basis, if you take account of the large $1.5 million Middle Eastern transaction that we booked as revenue in Q1 of last year, we actually show a revenue increase of 13%. We believe that's a fundamental indicator of the health of our basic business.

Recorders shipped likewise, which basically shows a 50% increase over last year, illustrate a couple of things. Number one, we're shipping more of our low-end recorders, the RL220 and the Minis, but that's good -- equally good for us in a gross margin perspective, because those products maintain approximately the same gross margin, again, another reflection of the fact that demand for our recording appliances is increasing.

Operating expense decreased by $775,000, which really is a reflection of actions that we took during 2017. We had an unusual situation this quarter where the tax impact of the changes in law resulted in a $1.3 million noncash credit. That obviously isn't a cash impact and it resulted in a swing to profitability for the quarter. But that is not included in the fundamental way we manage the business. On that basis, we will have lost about $1 million in the quarter.

I'll turn over to Ken, and he can go through the details of the financials.

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [3]

--------------------------------------------------------------------------------

Great. Thank you, Gary. I'll begin by going through a summary of our billings. Our Americas product and support realized a significant increase in recorder billings, as Gary said, as primarily through our named account, domestic higher education channel. Recorder billings were roughly 50% improved, as we mentioned. Over last year, the number of units sold of our lower priced versions were well more than double last year's results.

Software billings were down a little over the prior year, and that's due in part to a couple of large transactions in the prior year. Our events and hosting declined a little over the prior year. That's primarily due to some timing related to our events business.

Internationally, we saw increases nearly across the board, with Benelux, Japan and the other international areas in detail. Japan, the primary driver was due to events and hosting, while our customer support billings drove the increase for our Benelux business. We continue to see a delay in the further transactions in the China area, and we didn't record any activity as a result with that distributor.

In terms of the summary income statement items, our revenue, as Gary mentioned, was down 4% over the prior year, due to the $1.5 million recognition from the Middle East transaction we had in Q1 of '17. And that was a transaction that had been billed in the prior year. And obviously, that was absent for this transaction this quarter. So absent that amount, we would have had a $1 million increase in revenue year-over-year. We also completed a number of events during the quarter, which were billed in Q4 of this last fiscal year, which led to improved event and cloud revenue over the prior year. Total recurring revenue, as a result, then increased from the 64% that we had in the prior year to 70% this year.

Our gross margins likewise improved slightly over the prior year, showing about a 1-point increase, and that's despite the increase of mix that we're seeing in our lower-cost recorders. Primarily, as a result of those recorders carry a lower unit cost as well as a lower unit price to our customers.

Our operating expenses were well below last year, reflecting the reductions, as we said, in -- that we completed in Q3 of last year. That's primarily as a result of employee travel cost, other incentives. I do have another chart that follows this one that I'll go through in a little more detail.

Another significant change, as Gary mentioned, was the noncash tax credit this quarter. That's a result of the change in the federal tax laws. We do carry a pretty significant liability on our books that's a long-term deferred tax liability. Given the fact that, that's recorded as a result of the old rate applied towards a number using a different rate, now that the rates have come down, results in a reduction in that liability of $1.3 million, and as a result, then the credit that hits our income statement.

The combination of the improved operating results as well as a significant tax credit then led to the significant change in the results from $1.5 million of last year to the $320,000 of income this year.

In terms of some other metrics for our income statement. The lower ASP is reflective of the mix change towards more of the 220 version recorders that well and the Minis. The lower unit count is distorted due to the fact that we had that significant transaction that we recorded with the Middle East, which was billed. But we -- it was billed to the prior period. That transaction included 208 recorders, which obviously is a pretty big contributor to the 464 units that we had in the prior year. As I mentioned earlier, our recorder billings increased about 50% without that Middle East transaction.

Our operating cost recorded a significant decrease over the prior year. Last year, it included exceptionally large external transaction commission that was related to the Middle East transaction that we recorded last year. The remaining decrease in selling and marketing as well as product development was primarily headcount related as well as travel, some supplies and other associated costs, based on some initiatives that we took in Q3 of last year. The remaining impact was, we had one category go to the other direction. Our general and administrative costs increased and offset to some extent the impact that we saw from greater cost reductions. And that's associated with the extended review that we had of goodwill and other intangibles during this last quarter, which cost about $150,000 in terms of additional accounting costs and related costs.

On our balance sheet, our current assets reflect good collections, which led to a $2 million reduction in our customer accounts receivable, which is primarily seasonal. We have greater activity in working capital in our third and fourth fiscal quarters and corresponding reductions in the first fiscal quarter. The reduction in current liabilities is, likewise, seasonal and reflects a decrease in our unearned revenue, which had a $1.3 million reduction. Working capital improvement led to a $1 million swing in the cash from operations. We have $231,000 of cash generated from operations in the current quarter versus the nearly $800,000 cash used in operations in the first quarter of last year.

The other significant balance sheet change, of course, is the decrease in the long-term deferred tax liability I mentioned earlier. You'll see that in the reduction of those liabilities.

During the quarter, we raised $500,000, which was in November of 2017, which was the result of the issuance of preferred stock that was handled in the same fashion with issuances that we had completed during the summer of last year. We also announced a few weeks ago that we were -- we had a similar transaction with that same investor for $1 million and that we were going to seek approval from our shareholders for all those preferred stock transactions, given the fact that the primary investor is an insider and we had sold those transactions at a 9% discount. The current transaction that we announced, once the shareholders' approval is accomplished, that will convert into preferred stock automatically. It's currently being accounted for as a note until that date.

We also have a revolving line of credit, obviously, with Silicon Valley Bank, if you've been following us for a while. That balance is $1.6 million, which is consistent with the same balance we had as of September of the prior year-end. We paid off our term debt with Silicon Valley Bank in January of 2018. So that balance is now 0. Likewise, our term debt with Partners for Growth is nearing the completion of that note and will be paid in full in May of 2018.

So at this point, I'll turn the presentation back over to Gary, who will run us through a few other business trends.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [4]

--------------------------------------------------------------------------------

Thanks, Ken. I think the first thing that I'd like to talk about is a combination of both quarter one, first quarter wins, recommitments and expansions. I think the logos that you see on this chart are pretty substantial. Most people would recognize the schools associated with this. It's all higher education.

We've divided to talk about these into 3 categories: wins, which means brand new customer; recommitments, which means renewal of hosting or support that's significant; and expansion, the adding of new scope to our existing deals.

So let's talk about the 3 examples. Berkeley University is an example of a new win. It is in fact a competitor situation where we displaced a competitor. The integrator that was involved in a room-based project took us into this project. We are, again, very successful with our integrators in general at getting into schools where we win the business because of the integrator's ability to bid into a new construction project.

The one in business school is a longtime customer. They basically have reopted for our cloud service and signed a 3-year commitment to the Mediasite Video Cloud. They're also expanding their usage of our services.

NC State, you, I'm sure, will recognize that name if you've been on these calls before. They have more than a couple of hundred recorders in total in their campus. What basically they've done with this transaction is for the College of Humanities, they have done a recorder refresh. And we have a very sophisticated relation with NC State. The base of their business is on an annualized, centralized refresh program, which means that the support fee that they pay each and every year is amortizing the cost of the refreshes at the right time that recorder becomes due for a refresh. This is in addition to that. It is one of the schools at the University that has decided to do a 30-classroom refresh. All of these -- the second 2 -- all of the second 2 represent our continued strong relationship with our existing customers and the value they put not just in the Mediasite technology, but also the support that we provide to our customers.

Just recently, we participated in the Integrated Systems Europe show in Europe. It's the world's largest AV and systems integration show. We typically go to this one and one in the United States as a way, again, to demonstrate changes and additions that we make to our technology and products to essentially cultivate and expand our relationships with AV partners, resellers, and in some cases, direct customers.

I want to talk about one of the things that we highlighted at this year's conference or this year's show. We basically announced a integration with NewTek's NDI standards. This capability really allows some very flexible and high-quality connections between our Mediasite recorder family and other technologies in a classroom or in a meeting room. It allows our customers to much more flexibly connect their devices to our recording appliance. And we've gotten very positive feedback from our AV partners that this is a very valuable addition to our recorder technology.

We also, at the show, talked about a few of the enhancements that we've made to our various products. And I'm going to spend a little bit of time positioning all of these. We've talked about before the desire that our customers have to have a rightsized approach to capturing content. And what that means is customer, classrooms or meeting rooms aren't all the same. We have some classrooms that are literally auditorium kind of classrooms with 500, 600, 700 students attending. And in those classrooms, the -- there is a very sophisticated set of inputs that can be attached to recorders. That requirement drives our higher-end recording technology. But a lot of those very same schools who have those kinds of auditorium classrooms also really have very small meeting room-type classrooms that they would like to be able to implement capture in, but at a much lower cost point for them.

And so we now have a full range. We have Mediasite Catch, which is a software solution. We price that aggressively for existing customers that want the completeness of the capture solution across their entire campus. And what we've really found, though, is that, that technology also drives our recorder appliance business. And so many of the classrooms where our customers want to do capture are professionally equipped with AV equipment. And in that case, the RL220 is a lower-cost, very competitive recording appliance that's meant to interface to more sophisticated sources of video and audio content. And the next step down is a prosumer device, which is what we call the RL Mini, which allows classroom to be equipped with, again, a lower price point than the 220, but where there aren't an aggressive set of requirements for attaching AV equipment to the device.

There is really a very important aspect to this in the sense that software capture is great for an environment where you are not sensitive to the potential loss of content because something goes on between the classroom in terms of network connectivity and the server. And the server could be, in fact, remote in our hosting center. With either one of our recording appliances, we capture the content, no matter what happens to the outside world connection. And that content that's captured locally on the recording devices can then be later published to the server whenever the connections come back. So we've given the customer a wide range of options. And that really is all about the solutions that we construct for our customers as they deploy our technology.

The other thing that we're seeing is a real demand for student engagement. And to us, student engagement means helping the educator compose quizzes, facilitate discussions and take comments from students, do polling and to do social video. Our latest release of Mediasite 7.2, the server product, includes a very rich set of these features that really has now addressed that requirement for our spectrum of customers, mostly in higher education.

And finally, we continue to see, from our corporate customers, a strong demand to have optimized live, behind-the-firewall streaming for communications environment events where executives want to communicate with employees. And our Mediasite Deliver capability implements that and does through software provided by Ramp to support multicasting behind the firewall. So all of these features that we talked about at the show are really generating increased interest on the part of not just end customers, but also our AV partners who want to integrate our technology into how they meet their customers' requirements.

So that concludes the prepared remarks. I'll now turn it over to Tammy to moderate any questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Tammy Jackson, [1]

--------------------------------------------------------------------------------

Thank you. First question is about the Middle East. Are the large deals in the Middle East still in play? And what is changing with the Middle East market?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [2]

--------------------------------------------------------------------------------

Well, the simple answer is yes, the deals are still in play. In fact, not only are they in play, but our pipeline for those kinds of deals continues to build. Again, if you've attended these calls before, you've heard Ken and I both sometimes describe our frustration at timing in these transactions, because most of these transactions are related to new building construction, and they're based on customers not wanting to procure equipment before they're ready to use it. So we're driven by that. But Kuwait University, we've had tremendous success in, I think, 3 buildings already where we've equipped 3 buildings that have been constructed. There's many more of those buildings under construction. And since we are the preferred vendor of capture technology in the school, we look forward to be able to ship more of that equipment into that opportunity. We have probably 6 to 8 other large-scale opportunities in the Middle East that are in the pipeline, but I'm certainly not going to set expectations on when those are going to close. They'll close when the customer is ready. And Ken always has the challenge of making sure that we have enough lead time to produce the inventory, because some of those opportunities could result in literally hundreds of recorders needing to be shipped. There was another part of that?

--------------------------------------------------------------------------------

Tammy Jackson, [3]

--------------------------------------------------------------------------------

How -- what is changing with the Middle East?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [4]

--------------------------------------------------------------------------------

Frankly, we haven't seen a lot of change in the Middle East market in terms of when we're specced into a building. That continues to be more or less the same paradigm that we've had in the past. What we are seeing, though, is more customers approaching us now to actually buy the technology for immediate use in an application. There is a big difference between an AV integrator having a contract with their customer to fit up a couple of hundred rooms in a new building project. It's another thing when the actual end-user has an application ready to go and needs to have us design that solution and implement that solution and put it into immediate productive use. We are seeing several more examples of those kinds of customers. And I won't go into any detail, again, because the pipeline has the same risks of when it's going to close.

--------------------------------------------------------------------------------

Tammy Jackson, [5]

--------------------------------------------------------------------------------

In Japan, we hear a lot about Teikyo University, but are there other major opportunities in Japan?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [6]

--------------------------------------------------------------------------------

Yes, there are. I think Japan is a very sophisticated market. And I guess, I would at a very high level dissect the business in Japan into 2 pieces: a university-focused piece where we provide an integration of our technology into classrooms. Teikyo is always an example we use, because they have multiple campuses. We haven't yet penetrated all of the campuses. But the relationship we have with Teikyo is very strong. And we look forward to the opportunity to provide more of our technology in other classrooms -- in other campuses in Teikyo. We have several other universities that are looking to do pilot programs. So all of that kind of continues on track. This quarter, the second quarter, the quarter we're in now, is usually historically our strongest quarter in Japan. But part of that strength is also due to a strong industry focus we have on pharmaceuticals who use our events technology to capture conferences and so forth that they present.

--------------------------------------------------------------------------------

Tammy Jackson, [7]

--------------------------------------------------------------------------------

Do you see partners in Japan like Sony taking an interest in Mediasite? Do they have goals that include sales targets for Mediasite?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [8]

--------------------------------------------------------------------------------

Sony is an existing partner. The management of partner sales process, whether it's in Japan or whether it's here in the U.S. or whether it's in Europe is always a very delicate and challenging process. They're not our employees, obviously, and our role is to facilitate their uptake of our products and support them technically as they bid. Japan is a country very focused on a quality culture. We've earned our stripes with Sony in terms of the quality of our technology. They are very aggressively bringing forward additional bids. But the straightforward answer to the question is, we do not have a performance-based goal associated with Sony in Japan.

--------------------------------------------------------------------------------

Tammy Jackson, [9]

--------------------------------------------------------------------------------

More questions about the Asia Pacific region. You've covered Japan. Do you have any updates about China?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [10]

--------------------------------------------------------------------------------

Yes, I can talk a little bit about China. You will recall that originally we went into China with a partner who is willing to make a revenue commitment based on their association with Neusoft and their development of the Chinese market. They have fallen behind in that revenue commitment, as obviously seen from our results. And we've had a discussion with them about enabling our ability to scope back that exclusivity that they've had and allow us to develop other potential Chinese distributors, which we are doing. We have also added a very economical resource to pursue opportunities in South Korea. So we continue to look for the Chinese market to grow. It's unfortunately looking like the Middle East in terms of understanding the timing of it. The -- we lack the power to change that. We're dependent upon our distributor, now distributors, to effect those transactions. And frankly, the interest level we have is very high.

--------------------------------------------------------------------------------

Tammy Jackson, [11]

--------------------------------------------------------------------------------

Has Sonic Foundry ever in the past or going forward been involved in government training programs?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [12]

--------------------------------------------------------------------------------

The -- I guess. I'm only hesitating, because I can only speak to the last several years, and I'll ask Ken maybe to comment on before that. We've been involved in definite training programs that usually are conducted through a partner. So I think there has been a number of defense contractors who have used our technology to facilitate training of the actual government entities or employees, but we have not been directly involved. Sandia Labs is another example where Sandia is a very large customer of ours. But once we ship the product in to Sandia, it's totally secured and we have no visibility into how they're using the product. So yes, they're using it internally for training personnel at the lab, but we are not connected directly with that. Do you have any...

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [13]

--------------------------------------------------------------------------------

No, that's right. We sold through a number of military customers, and they're primarily used in training applications.

--------------------------------------------------------------------------------

Tammy Jackson, [14]

--------------------------------------------------------------------------------

What is the current transport consolidation in the lecture capture business?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [15]

--------------------------------------------------------------------------------

Well, I guess, what we have seen is that the market that we compete in is not as big as we would like to have it. Now our market is not video, because unfortunately, people who look at our business and they look at the size of the "video market," they see it as a very large multibillion-dollar market. That's not what we are capable of addressing. We're addressing in a much more narrow slice. And in fact, we are absolutely convinced that we are the market leader in the use of our technology for the narrow slice called lecture capture, but we're certainly not happy with how fast that total market is growing. Whenever you hear something like that, you would kind of look for a consolidation as a way to change that dynamic. But frankly, we don't see any direct evidence of that at this juncture. We certainly are always going to have our eyes and ears open for opportunities to do something along that line, but there is nothing that we see at present that would indicate something is going to happen.

--------------------------------------------------------------------------------

Tammy Jackson, [16]

--------------------------------------------------------------------------------

Can Mediasite join streamed video conference calls to larger audiences? This is a 2-parter. Do you Join growing in demand? And does anyone else have a similar technology?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [17]

--------------------------------------------------------------------------------

That's 3 part. Let me -- remind me number two and three after I answer number one here. The first question, I believe, was do we support live streaming? We are working on that now. It is a requirement that we recognize. We have it up and running in a live environment. There is a fair amount of complexity to that. But as soon as we complete the industrial strength wrappings around that, we will be making that available as an enhancement to the product. As you know, we run Join in 2 modes. We run Join as part of our cloud service, and we sell Join as an on-premise service. I think that the live streaming part would first be introduced in the cloud service. The second part, I believe, was the demand for Join. Yes, we see demand increasing, but it is, in reality, mostly related to higher education where the educational institution wants to cobble together multiple remote classrooms into a single virtual class and they want to capture that in a way that facilitates, making it look like a regular Mediasite lecture. We do that uniquely, obviously, because it requires integration with Mediasite, but that's probably the primary demand driver right now for our Join technology.

--------------------------------------------------------------------------------

Tammy Jackson, [18]

--------------------------------------------------------------------------------

The third part was, does anybody else have this technology?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [19]

--------------------------------------------------------------------------------

Yes, it's kind of like a derivative of the answer I just gave you. There are many people out there who allow you to capture videoconference. Obviously, the videoconferencing vendors themselves have that capability. We think ours is more focused on the quality of capture and the multiple sources of capture. But I wouldn't lay out the claim that we're totally unique in that regard.

--------------------------------------------------------------------------------

Tammy Jackson, [20]

--------------------------------------------------------------------------------

During the last call, it was mentioned that Sonic Foundry still has about $10.5 million in goodwill. Do you see more impairment charges related to this goodwill that will continue to increase losses for the company?

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [21]

--------------------------------------------------------------------------------

Well, when you make an adjustment to goodwill, you write it to fair value. And so when you write it to the number, obviously, there is risk that there could be a further adjustment. The creators of the goodwill are the purchases of Mediasite K.K. in Japan; Media Mission, which was in the Netherlands; and the original Mediasite in -- which we purchased back in 2001. The only category that was close and was the result of the impairment charge that we took at the end of Q4 was our operation in Japan. I mean, so the drivers that we'll watch and you can watch as well is that first of all, the initial driver that led to the review was the stock price. I mean, the stock price has been fairly consistent since December. A significant drop in the stock price would be an indicator that we should look at it again. The other indicator is results in Japan, Japan had good results in Q1, and we expect them to continue to have good results going forward through the rest of this fiscal year. So, no, I don't anticipate that we'll have further write-downs related to that. But -- I mean, there is certainly some risk when you write it down to fair value.

--------------------------------------------------------------------------------

Tammy Jackson, [22]

--------------------------------------------------------------------------------

Are you able to break out revenue and growth rates of Mediasite Join, My Mediasite and Mediasite Cloud? And have these individual components been large growth drivers?

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [23]

--------------------------------------------------------------------------------

I don't have the figures for them handy. I mean, the -- we have seen -- and they do vary from period-to-period. So to say that they're consistent wouldn't be accurate. But we have seen significant growth in our cloud offering over the last 2, 3 years. We have seen significant growth in annual licensing of software. The combination of those 2 is certainly lending a lot towards the increase in recurring revenue that we're seeing. Join saw some initial fast growth as it was first introduced, and I think it hasn't grown a significant amount in the last year. So -- but we're making a number of changes to Join, which could certainly have an impact on that going forward.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [24]

--------------------------------------------------------------------------------

But I would add that Join -- there are 2 flavors of Join: on-premise, which is a licensed product, I believe; and the cloud-based one, which is part of our cloud services. More and more where we have the opportunity, we're moving into an annual license for software. We do have still a market, obviously, for perpetual licenses for customers who want to do lecture capture in their own infrastructure. But for functional-related enhancements to the software, we are moving toward an annual license model.

--------------------------------------------------------------------------------

Tammy Jackson, [25]

--------------------------------------------------------------------------------

Where do you see growth in sales coming from in the current fiscal year?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [26]

--------------------------------------------------------------------------------

The short answer is we are seeing growth -- expecting growth almost across the board in terms of our way that we think about billings in the company. So we've talked a little bit about Japan. We do see growth in Japan. The business in the United States, as you can see from the presentation this quarter, is a growth area. Benelux is a strong growth area. EMEA, again, is somewhat dependent upon some of these Middle Eastern transactions. I think for the year, we are being cautious about setting the expectations about growth. So I don't want to go down that path. But I think we've seen in almost every area of the business the signs that we are seeing the growth that we should be entitled to capitalize on. I will say that the last year results, we made some bad assumptions when we put that plan together about the mix of recording appliances we were going to sell. Going into this year, we've rectified that. I think we have a very good plan for the distribution of takings against the various recorder models. And so we're anticipating growth, but we're anticipating modest growth. But there is no segment of the business where we think they will be low performance and other segment that will be high performance.

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [27]

--------------------------------------------------------------------------------

Right. In terms of product and service categories, I mean, we definitely expect to continue to see growth in our lower-cost versions over the quarters. So we saw a significant growth year-over-year in Q1. I mean, I don't I believe we'll always see more than double those results. But that seemed to be an early indicator that customers are very interested in those lower-cost versions. So I do think that we'll see some continued growth year-over-year in the 220s and the Minis. We just released Catch. So I do believe that Catch will contribute towards the growth that we have been seeing in our annualized license software. And Cloud has been a strong performer for us for the last 2 or 3 years. And that's a trend that I believe will continue as well.

--------------------------------------------------------------------------------

Tammy Jackson, [28]

--------------------------------------------------------------------------------

I have followed Sonic Foundry for many years and tried to log on to live webinars when I can and sometimes I watch on-demand. They're very informative and I think the interactivity is great. Can you comment on the value of doing webcasts like this live or webcasting events live?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [29]

--------------------------------------------------------------------------------

Boy! That's kind of an hefty question. I think we're in the small minority of public companies that use interactive video technology as a way to present results. I think we really are in the minority. And I can go back to my days at IBM and tell you unequivocally that I don't -- I can't remember any IBM CFO who would ever want to do a live video of their results, simply because there's a lot of people in the room coaching them on what to say. Obviously, we don't have that, right? We have just the 2 of us. But I think we try to use the technology as a way to: number one, showcase the technology; but number two, to also give you an opportunity to see the way in which we present the information and so forth. And because it's rich media, you see both the slides, the picture of us sitting here and the audio. So we do think it's valuable to do that. Not everybody, unfortunately, has that view in the public company earnings results piece. The live events business is another subject altogether. I think we really enjoy the partnership we have with LDI in terms of what they use our technology for in terms of capturing their conferences and making their conference content available to not just the live attendees, but also the remote attendees and the on-demand later viewing of the content. So I would totally agree with that part of your comment that the events business does really provide a value for people staging event.

--------------------------------------------------------------------------------

Tammy Jackson, [30]

--------------------------------------------------------------------------------

Several questions about raising additional capital. Do you expect to need additional capital in the near future? And have you considered allowing shareholders to participate in the process?

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [31]

--------------------------------------------------------------------------------

We announced the one transaction, which had -- the first tranche of that was executed on. So we do expect to execute on the second tranche. I think in terms of what we would do if we decide it's necessary in the future, that's not -- we haven't concluded on the avenue that we expect to take in. So in other words, we could evaluate additional capital leases for any acquisitions that we need to make in terms of gear for our hostings infrastructure. We could look towards increasing, to a lesser extent, a term loan that we used to have -- the 2 term loans that we used to have. We could potentially look at a small amount of additional equity as well. I think the transactions that we've done at this point have put us in a pretty good place in allowing us to pay off that amount of debt and improve the balance sheet.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [32]

--------------------------------------------------------------------------------

I guess, I would add to that. Historically, you've seen us pursue lots of different avenues to deal with our cash requirements, right? The revolver with Silicon Valley Bank is a very standard thing companies use to finance their receivables. The term loans have been, again, very common things that you do. We did go down a path of Partners for Growth for different kind of financing about, what, 2 years ago, 3 years ago.

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [33]

--------------------------------------------------------------------------------

Yes, it was about 3 years ago.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [34]

--------------------------------------------------------------------------------

And frankly, that kind of financing has warrants that come with it and you have to evaluate the total cost of that financing. We think the latest round of preferred stock financing we did was competitive with what other sources of capital through that style of lending would be. So we're very pleased with the results of what we've done. I think I would echo what Ken said, we're looking -- whenever we think we have a requirement, either for equipment purchase or whatever, we will look for the most attractive vehicle to fund those activities.

--------------------------------------------------------------------------------

Tammy Jackson, [35]

--------------------------------------------------------------------------------

Why is it that companies such Chegg and u2 have been successful in delivering online services in their particular areas of online education and lecture capture companies haven't been quite as successful? Why is the disconnect?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [36]

--------------------------------------------------------------------------------

Well, I think I'll offer an opinion and it's my personal opinion. There is only a handful of providers who really focus on what I'm going to call pure lecture capture or video content management. Every one of them. And we're kind of all addressing the same direct market. That market requires the customer to make a commitment to capturing content for students or business associates or whoever the audience is and buying the technology to do that. Companies like, what was the, 2u, that name...

--------------------------------------------------------------------------------

Tammy Jackson, [37]

--------------------------------------------------------------------------------

Chegg and u2.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [38]

--------------------------------------------------------------------------------

U2 is the old tutor. And their model, they don't provide lecture capture as a service. They provide a broader service to their education customers to, in essence, not just outsource the lecture composition, but also outsource a lot of the administrative pieces of education. I think the other company that you mentioned really started out life as a book rental company for the university students and has now graduated into the concept of providing person-to-person tutoring using video. Again, that is very different than lecture capture. So our products don't address that market, and that doesn't really compete with what we do.

--------------------------------------------------------------------------------

Tammy Jackson, [39]

--------------------------------------------------------------------------------

Has there been any thought of merging with another enterprise video platform provider in order to take advantage of technical and operational synergies and new market opportunities?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [40]

--------------------------------------------------------------------------------

As I said earlier, we don't preclude any possibility to enhance shareholder value. I think that if you're going to take that kind of an action, you have to be pretty confident that the parties involved in it have the right fit. We've done very little to actively pursue that. In fact, we've done nothing to actively pursue it, where we've identified a target company and we want to aggressively pursue working with them to do a transaction. We've not done that. We'll always keep our eyes and ears open to opportunities, but that's how we'll do it.

--------------------------------------------------------------------------------

Tammy Jackson, [41]

--------------------------------------------------------------------------------

Can you give any color on guidance for the second quarter?

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [42]

--------------------------------------------------------------------------------

Color, yes. Specific numbers, no. I think the first quarter was a very pleasant outcome for us. I think the second quarter is on track to our internal plan. I would -- since the first and second quarter are not ever our strongest quarters, I would not want to overset anybody's expectation. Our plan is quite realistic this year, and it does not account for a lot of growth.

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [43]

--------------------------------------------------------------------------------

That's right. Q1 was actually slightly better than our plan, and we're still early in the quarter in terms of Q2. So even if we're ready to provide precise guidance, a lot happens at the end of the quarter that we were not -- we don't know yet. But we're certainly pushing towards achieving our plan in Q2.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [44]

--------------------------------------------------------------------------------

It is very rare for us to have performance during the quarter, and we track it based on 15-day increments. So we have reviews for day 15, day 30, day 45, et cetera. It is almost unheard of that day 45 is greater than 30% of the quarter-end revenue, just to give you some idea of how we develop our revenue during the quarter. So it is not something that Ken or I get terribly excited about when we say we're ahead of plan. It's a good indicator, but it doesn't necessarily predict the outcome for the full quarter.

--------------------------------------------------------------------------------

Tammy Jackson, [45]

--------------------------------------------------------------------------------

What does the CapEx spending look like for the current year?

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [46]

--------------------------------------------------------------------------------

It's modest yet. We don't have any big needs for -- that we've identified at this point for capital spending. I mean, I think that's ongoing. So we -- even though it's not in the plan, we certainly continue to look at ways that we can improve customer delivery of our products and services. But we did not build into the plan anything significant. So nothing more significant than what we've had over the last couple of years on average.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [47]

--------------------------------------------------------------------------------

And the biggest driver of that is buying the [LDO] processors for our hosting complex.

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [48]

--------------------------------------------------------------------------------

Right. It's that and it's providing recorders for events area as well, I mean, that sometimes adds up to $200,000, $300,000.

--------------------------------------------------------------------------------

Tammy Jackson, [49]

--------------------------------------------------------------------------------

Okay. There are no further questions.

--------------------------------------------------------------------------------

Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO & Director [50]

--------------------------------------------------------------------------------

Well, thank you all for your questions. We -- as I said in my start, we're on time this quarter with the presentation, and that means we'll probably see you in about 90 days for the next one. Thanks again.

--------------------------------------------------------------------------------

Kenneth A. Minor, Sonic Foundry, Inc. - CFO & Secretary [51]

--------------------------------------------------------------------------------

Thank you.