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Edited Transcript of SOFO earnings conference call or presentation 11-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Sonic Foundry Inc Earnings Call

MADISON May 19, 2017 (Thomson StreetEvents) -- Edited Transcript of Sonic Foundry Inc earnings conference call or presentation Thursday, May 11, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary R. Weis

Sonic Foundry, Inc. - CEO, CTO and Director

* Kenneth A. Minor

Sonic Foundry, Inc. - CFO and Secretary

* Tammy Jackson

Sonic Foundry, Inc. - Director of Communications

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Presentation

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [1]

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Good afternoon, and welcome to Sonic Foundry's Second Quarter 2017 Earnings Call. I'm Tammy Jackson, Director of Communications for Sonic Foundry, and will be moderating today's webcast. We'll begin with the safe harbor statements, followed with a presentation by Gary Weis, CEO; and Ken Minor, CFO. (Operator Instructions) We will begin Q&A directly after the prepared remarks. (Operator Instructions) Please note, this presentation, including questions, is being recorded.

In compliance with the SEC regulation regarding fair disclosure, we'll 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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from the 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 release 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 our CEO, Gary Weis, will begin the call.

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

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Thank you, Tammy, and good afternoon, everyone. I'd like to begin by covering a few slides to give you the highlights from a business perspective of the quarter result. And then I'll turn it over to Ken who will go through the detailed financial information that deals with these items that I'm going to discuss.

First, let me talk about areas in the second quarter in terms of billings and revenue that met our expectations. The first of these are events business. We continue to see very strong customer participation in our events service, led by Learner's Digest International, and really focused around health care. Later in the presentation, I'll talk a little bit about the details of some of the events that we've captured for Learner's Digest in the quarter.

We continue to capture and stream events of all types in all industries, but with special focus on the higher technology segment. Many of our customers are higher technology industry participants.

From the standpoint of our European business, we saw strong performance in the Netherlands. We continue to be the dominant lecture capture provider in the Netherlands. And our customers are not only very loyal, but are continuing to grow in the use of our products and services.

We actually originated our partnering strategy in the Netherlands, and the business there continues to grow. We've talked about health care in previous earnings calls with Noordhoff Health, but we've added a couple of new businesses to the partnering strategy and financial services and in corporate learning. So we're pleased with the progress that we've made in that area.

Mediasite also is turning out to be a very unique capability that allows our partner customers to do something that we're referring to as co-creation of e-learning content. And again, I'll talk to you a little bit more about that later in the presentation after Ken is done.

Similarly, in the Americas, we saw strong performance in terms of displacing competition, both in existing customers and winning new customers. We've seen continued customer expansion and recommitment. A couple of examples are Harvard, North Carolina State and MIT. North Carolina State is a very long-term customer. They continue to renew their large support contract and continue to do refreshes of our recording technology.

So that represents places in the business where we are pleased with our performance. Unfortunately, not everywhere in our business met expectations. I'll now talk about a couple of those areas. In Japan, our billings were about $900,000 short of expectations. Now part of that is due to the fact that we actually closed our largest ever refresh transaction in Japan. But the customer decided, unlike how we planned for the transaction, to do this over a 5-year period with a lease.

As a result, the billings that we can recognize in the second quarter is really only 20% of the total contract value. Besides that, though, we did see some slow starts in our channel partnering business, namely with Sony and NTT. Again, I'll talk a little bit more about this later, but all of that will recover later in the year.

The one channel partner that probably will not recover is Toshiba, where we were working with them to integrate with their learning management system. Unfortunately, those of you who follow the business news in Japan realize that Toshiba has run into some difficulties, especially their Westinghouse nuclear business went bankrupt here in the United States. And we think that probably about $100,000 of channel business will probably not be achieved with Toshiba.

In China, we recorded billings in the quarter of $300,000 versus $625,000 last year. They -- this is totally due to our distribution partner pacing their buys under the contract with us to match with their sell-through to their customers. They have a very strong pipeline. We're very close in terms of recognizing and working with them to close business in that pipeline. And we continue to ensure that our technology is modified in the appropriate way to give them success in selling in the China market.

I think it's important to stress that up until the end of the second quarter, the Chinese distributor has paid us $1.4 million in cash for acquisition of Mediasite recorders and software. And they have invested actually more than that in China, investing in staff and other resources to build out their business in China. So they are very committed to the business, and we totally understand their pace in terms of matching with what they sell through to their customers.

Probably the largest disappointment, if you will, is in the Middle East and Africa, where we were about $800,000 less than expected in opportunities, largely in the Middle East. Most of those opportunities are due to timing, and we would expect those transactions to come about in the third and fourth quarter of the year. You've heard this from us before that in the Middle East, timing is difficult to predict. And none of these transactions were lost to competition. None of these transactions went away. They're all still open in the pipeline, but we will have to rely on closing them in the third and fourth quarter.

Now I'll talk about some changes we're making in the business to improve our performance and to continue to build product that focuses on growing both our top line and bottom line. One of the things that we did this quarter is we made some reporting changes and some organization changes to sharpen the focus on our sales activity, both for existing customers and for new customer acquisition.

In the past, our sales organization had also included customer care and systems engineers. We've separated that off now from the sales organization. And the sales management will be totally focused on generating business, either with new customers or growing existing customers.

We have also realized that our Catch offering, Mediasite Catch offering is becoming very, very popular with our customers. And we've actually accelerated our deployment plans in hosting to allow customers who want to deploy Catch in time for the fall semester, to be able to do that. So we anticipate that improving our situation later in the year.

We also have implemented in this quarter some automation, which improves our efficiency and will allow us to reduce operating expense, largely in terms of people.

We have looked at our channel efficiencies and distribution efficiencies to provide more visibility to what the channels are doing and how we can optimize the performance of those channels.

And finally, we continue to focus our innovation to grow the core business and increase the bottom line by developing some new recorder models and some different price points. We find that that's very much complementary to what we're doing with Catch. So all in all, we think that the changes that we've made during the quarter will improve our bottom line, and will also enable us to move more product more rapidly, not just in the second half of the year, but also in 2018.

So with that, I will turn it over to Ken, and he'll go through some of the details.

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

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Great. Thank you, Gary. Our Americas billings for the quarter and year-to-date have been flat, with a decline in the middle-market, higher education and growth on other areas. We believe [no] market values, those lower-cost solutions that Gary was talking about, that benefit the rooms that just don't show enough value to justify the expenditures of our higher capability products.

Management believes our software product, Catch, which is scheduled for release in the fall in terms of general availability and our lower-cost hardware solutions we're looking at, will meet that need.

As Gary mentioned, our international operations in Japan were flat with last year, with approximately $900,000 below expectations, which we would have been up slightly from a year-to-date basis, had we not fallen short on a quarterly basis. We anticipated that transaction with Teikyo, which is the transaction that Gary was talking about. That was actually written up in a contract effective April 1. So the day following the quarter. As Gary said, it is a 5-year transaction for JPY 125 million. Hence, the $1.1 million that he referred to. We do believe that it's going to account -- be accounted for as a sales-type lease that would apply to Q3.

Now assuming that we're correct in interpretation, we would be in a position then to record the present value of the product portion of that as revenue in Q3, which is about 60% of the total.

As Gary mentioned, again, our distributor in China continues to invest in Mediasite product. They have paid us $1.4 million to date. As a start-up, we continue to see significant progress in their development of the market in China. And although they are running behind their expectations and their contractual revenue commitments, we do still have a lot of confidence in what they've been able to do.

The other international, as Gary mentioned, is the greatest miss from both last year and expectations. We had one large transaction where we expected to close for $250,000 that did not close in the quarter. The majority of the deals built into the plan for international are continuing to progress, but they're often very difficult to predict in terms of that timing.

In terms of revenue, revenue varied similarly to billings, with reduced billings and no revenue recognition from our Chinese distributor. The Chinese distributor impact had a pretty significant impact on revenue, as we did have $600,000 of billings and revenue, which was all software billings last year in this quarter. We did achieve $300,000, as I've shown in the last slide, as billings for China, but we did not record any revenue associated with that. We continue to defer that. So China's progress is likely to allow further revenue recognition during the last half of the fiscal year.

Our service revenue was impacted, to a lesser extent, with support on lower product revenue driving the overall service revenue change to a decrease from the prior year. Our gross margins were impacted primarily by 2 things. We had no software revenue from China. We also had, as a piece of the Teikyo project, very high concentration of peripheral sales. So we bundled some additional third-party equipment that we resold as part of that. This Teikyo project is really the only customer, the only project that we've tended to do very significant amounts of that. And so while it had an impact this quarter, I don't expect that, that will have another impact. We'll see that again for quite a while.

In terms of -- I guess, without these 2 events, our gross margins for the quarter would have been inconsistent with last year for the quarter, and we would have been actually a little ahead of gross margins of last year on a year-to-date basis. Our cash balance is typically just the cash balance that's held in our foreign subsidiaries. Since any cash that we have in our bank here in the United States, we used to pay down the line of credit on that same day. So with this significant project with Teikyo in Japan and Shibaura, which is one that we closed, that had extended payment terms, the Japanese subsidiary had very large accounts receivable balances at the end of March. They received all of that in April. So they collected $2 million worth of receivables in April alone. Likewise, the project that we've been talking about for some time with [eMAM] in the Middle East was supported with a letter of credit, which was paid in full on April 12. So we had some very significant collections that happened in April, which were, of course, just beyond the point where -- the balance sheet date.

Our operating expenses were less than last year Q2, but lower revenue drove our greater loss and reduced adjusted EBITDA. Our actions, as Gary mentioned, with respect to greater sales and cost efficiency as well as the new products, are expected to improve results and result in positive EBITDA by Q4.

Our recorder sales and units have been pretty consistent, but the lower-cost recorders continue to represent a greater percentage of the mix of total recorders. While margins are similar, ASP is affected. So we have an additional lower-cost recorder model that's planned, as I mentioned. That will likewise reduce the ASP. I think it will likewise maintain margins, and we believe increase the number of recorders that we ultimately sell as we address those lower-value, lower-cost rooms. Our operating expenses were less than last year for the quarter and marginally higher year-to-date. We've identified between $2 million and $3 million of additional cost savings that are not reflected here. We expect the savings to begin to positively impact Q4. And of course, the full-year impact will be felt in fiscal 2018. Due to the gross margins of 70-plus-percent that we enjoy, a significant reduction in operating costs will reduce our breakeven revenue as well. And so we expect that the breakeven point will be reduced by about $3 million to $4 million based on a $2 million to $3 million reduction in operating expenses.

We will have an immaterial charge in Q3 that will be nearly offset by some of the initial savings that begin to be realized in Q3. So we're not going to break that out separately.

Reductions will have a bigger impact on Q4 and, of course, as I mentioned, will be fully reflected in fiscal 2018. Some of the changes we're making will require some modest upfront costs or could potentially impact working capital. So quarterly, we are evaluating a small capital increase of about $1 million that will likely be completed in Q3.

The form could take the place of additional subordinated debt, similar to what we have in place with partners for growth, or it could come in the form of equity. And we'll, of course, disclose the details of whatever we decide to pursue as soon as we have greater visibility as to the form of that raise and the timing. But like I said, that's -- we expect that to be a pretty minor amount.

In terms of the balance sheet, our accounts receivable is up. As I mentioned, cash is down from the last fiscal period, but that really flipped in April with the Japanese transactions and [EMEA] alone accounting for $4 million. I think in total, the company collected $5.5 million or $6 million in April alone.

Our inventory and other current assets were reduced from last year-end as well. We're making a transition to new recorders now, which will allow us, once we fully make that transition, I believe to make a further reduction in the inventory balance before year-end. Our intangible assets likewise were reduced from last year-end. That's primarily due to the fact that most of that's denominated in foreign currency. So as the currency rate changed in Japan, we saw that -- those dollar amounts get reflected a little bit lower.

Liabilities were driven up by about a $1 million increase in the revolver. We've got about $800,000 available under the revolver at the end of March. But obviously, a lot changed in April. The thing that isn't reflected in the short-term is that we also saw an $800,000 reduction in term debt as we make pretty quick payments under the term debt with Silicon Valley Bank and with Partners for Growth. So it runs about $400,000 a quarter. Current deferred revenue decreased due to recognition of eMAM by about $2 million, but we saw an increase in the long-term section of deferred revenue. So with all these various offsetting current and long-term liability increases and decreases, and that was that liabilities were up slightly from the year-end period in September. So with that, and that's the end of my remarks regarding the financial statements.

And I'll turn it back to Gary that will go through a few of the business trends.

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

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Thanks, Ken. So I'm now going to shift gears and talk about some of the exciting things that we're doing, both from an innovation perspective and a geography perspective, to continue to really exploit the footprint that we've already established and grow our revenue and bottom line.

The first, I'm going to talk to 4 different features that we have added to Mediasite and the releases that will be available in June and in September. Our strategy for some of these features is to realize value by licensing features, which is something that we've done in the past with My Mediasite, but we're continuing to do that as a way to offer the lowest entry price for Mediasite, but then ask customers to pay for added features and functions to provide them specific value that sit on top of the Mediasite platform.

So I'll just talk through these briefly. The first is Mediasite Engage. This is a new feature that we've added with release 7.2, which will be available in September. And essentially, what this does is it implements quizzing, testing, et cetera. And it allows for the capture of the performance of the student against those quizzes and tests to be propagated upward into learning management system the customer chooses to use. That, coupled with the existing analytics that come with Mediasite, really provide a base that an educational institution can use to feed information into electronic grade books. It can do a whole variety of new features and functions with these capabilities. It also serves the student need because the student now can participate in pop-up quizzes to test their understanding of the material that has been presented in the video lecture. We think there's an opportunity going forward to partner with companies, who provide certification services to various industries. We've gotten feedback from Noordhoff and others that the adding of these capabilities add to their credibility in helping their end-users to certify employees or people in hospitals or financial or legal professions that they've actually taken and passed the material that's been presented to them. The next feature is something called time-based annotations. This came up as a specific requirement for a specific new customer that we won last year, and we've now built it into the product. This feature allows in our showcase product -- showcase part of our Mediasite product to allow educators or students to post annotations at specific times during the presentation. This is a very useful feature for educators to go back and add comments after the fact, at a particular point in the lecture, to clarify questions students may have been asking. It's also a feature that we think will help some of our customers outside the United States, where English may be the language that the lecture is presented in, but the student population may have a native language other than English. This would allow an educator, for example, to annotate the course material in that other language to facilitate better understanding for the student population.

Mediasite Join is not a new product. We've talked about that before. But one of the things we've done is we've added the ability to live-stream the videoconferencing session that's being captured.

Many of our customers prefer this to be able to make the content of the presentation that's being interacted through the videoconferencing capability to be streamed to other students or participants watching the video conference. And then finally, Mediasite Catch, which we've talked about in the past, and I won't spend a lot of time on, really is catching on. And there really is substantial demand from our customers to use this in lower-technology rooms. And one of the things that we've done to exploit revenue generation is we packaged Mediasite Catch with a hosting offering to allow customers to quickly turn up Mediasite Catch in lower-technology classrooms.

Now one of the things that we found is we continue to displace competition in the United States for that matter, in Europe as well, but primarily in the United States. I'm going to go through these 3 examples. The first one is Texas A&M College of Engineering. Through our named accounts sales function, we've been at Texas A&M, the university for a while. We've been in the College of Veterinary Medicine, Biomedical Sciences, College of Education and Human Development and so forth. That allows cross-selling. And what we did is manage to sell to the College of Engineering displacement of a competitor, and we are now using our technology in the College of Engineering.

Florida Atlantic is another competitive win. This is a little bit different, in that it is a new customer, who selected us to displace the other vendor's technology. And we have successfully implemented a whole mix of our services and products at Florida Atlantic.

And finally, Florida International, again, similar to Texas A&M, in that we have been in the university for a while in a couple of the schools. We now have gone into a wider position in the university because the CIO has decided to standardize on Mediasite, the entire Mediasite video platform, and we eliminated 2 other vendors that had, had positions in Florida International. So again, you can see that our technology continues to be the best-of-breed and superior and we are regularly displacing competition. This is one that we're particularly proud of. Part of our strategy over the past 2 or 3 years has been to generate additional revenue through penetrating new geographies. If we were to rely just on the United States or Western Europe, we know that we would have a slow growth rate. We knew that 3 years ago.

So what we've tried to do is go into places like China, Japan, Netherlands, through our acquisition of Media Mission, and now India. We've had a very low-cost capability, people in India working hard to establish our presence there. And what we have done with this particular customer, ICT, which is Institute of Chemical Technology in India, we have sold to them a Mediasite implementation for 33 rooms. This is a big deal for them. The professor that you see here referenced to is the Vice Chancellor of ICT, really has embraced Mediasite as a technology to help him deliver more quality education to more students. The article you see here is in a publication called DNA in India, which is a very prestigious newspaper. And if you read through the article, you can see that it's kind of describing lecture capture maybe the way we would have talked about lecture capture in the United States 10 years ago as something new and exciting. We are very pleased with this opportunity. We think it will become an excellent reference sell, and we have a number of other opportunities that we're pursuing in India that are looking extremely positive. We'll now talk about a couple of other customer wins that aren't competitive displacements. Teikyo, we've already talked about a couple of times. But the kind of key point of this is that this is the largest refresh deal we've ever done. And basically, the campus of Teikyo -- there are multiple campuses of Teikyo, we have a presence on 3 or 4 of those campuses. This campus is one that we equipped 4 years ago. And the President of Teikyo decided that it was time to refresh the technology. And they basically, because the technology has proved very valuable in increasing their student performance and pass rates, decided to do that refresh. The only thing that changed a bit from our original assumption is that he requested us to do this over a 5-year period in a lease form that is actually a purchase-type lease that, as Ken has talked about, will most likely result in a substantial revenue credit in the next quarter.

Kansas State is another example, where Mediasite has been selected as the automated end-to-end technology to displace a bunch of different legacy learning systems that they had at the university. Similarly, with Arizona State, we've installed Mediasite in a brand-new, state-of-the-art facility for the School of Law. And again, they selected us because of our reputation for customer support, and for the quality of the lecture capture experience that we offer.

I mentioned earlier about our momentum in health, and I'm first going to talk a little bit about our relationship with Learner's Digest from an events perspective. We have been very close with Learner's Digest, and we continue to capture their events that are essentially focused on different specialties in medical technology. The 2 here are the American Heart Association and the American College of Radiology. They find that our technology does a number of things that they can't get economically through other approaches, namely that we can provide live-streaming and on-demand playback of presentations in large numbers of rooms, and we use our resources and contract resources to make it extremely easy for that to happen at these events.

We've found that we can integrate our capture with other software, application software around the capture to make it a very productive and effective way for them to carry out their events. We'll continue to work with Learner's Digest. Learner's Digest has expanded. They now have a lot of other associations with the company that acquired them, Wolters Kluwer. So we continue to be very proud of our relationship with Learner's Digest.

I'm now going to talk about another win. And we've talked about Noordhoff before as a partnering opportunity, which it is, and this is the first significant win that Noordhoff has had with one of its customers. So the -- I'll pronounce it in English, so I don't butcher the Dutch here, the Green Heart Hospital is a Noordhoff win. And every time they win, we win. And so what this represents is our ability to provide Mediasite content creation tools as well as review and approve workflows and play back capabilities to Green Heart Hospital as part of the Noordhoff Health association. Now Green Heart will also buy content from Noordhoff Health. So both Noordhoff and Sonic Foundry profit from this relationship.

The other thing I think that's important to view and observe is that our technology continues to grow in usage for our established customer base. So what we do is we have telemetry that we collect from our user sites and from our hosting environment that allows us to measure the amount of time watched, the number of views, the amount of storage, the number of presentations, a variety of statistics about what goes on in our customer base. We don't monitor 100% of our installations, we monitor about 60% to 70% of our customer implementations.

And so from the period of 2015 to 2016, time watched has grown by 20%. Number of use has grown by 34%. And just in the customer base that we can monitor, we have an excess of 50 million views in 2016. So our customers are loyal. Our customers continue to use our technology and continue to grow the use of technology.

Now one way we get to build that loyalty with our customers is through our Unleash annual event. And we just finished the 11th annual user event in Madison last week. We get rave reviews from our customers. We get rave reviews from industry analysts, as you can see on this slide. We do this differently than most people. We actually focus and showcase what our customers have done with our technology. So the customers learn from each other. This is not just a sales event where we bring them in to preach to them about how good our products are, this is a showcase for what our customers have actually done with our technology. That sends a very powerful message to the customers, and they want more of this. And one of the things that we're doing to fit in with the economics of our customers is we have now come up with regional events similar to Unleash, a little bit shorter in duration, that will allow the same thing to happen in Europe, in Australia, et cetera.

So again, staying in touch with your customers in a business like ours that requires support contract renewal, it's very, very important that you do this kind of activity. And we have, I think, consistently demonstrated that we're very successful at it.

Now I'll make one more comment before I turn it over for questions. Usually, at this point, you'd see a slide about guidance. We've shared with you the fact that we're making some what we think will be very beneficial and very substantial changes in the business. And in our press release, we described in particular the fact that we're going to basically withdraw the guidance that we've put out at the beginning of the year. And we're doing that because the changes that we're making right now would make it very difficult for us to adjust that guidance to reflect the changes that we're about to make.

All of this, we think, is very positive. I want to ensure everybody that we're not removing guidance because of something we're concerned about. We're simply removing guidance to provide the best information for our investors and the most accurate information for our investors. We think that we've set us a goal to certainly improve our bottom line performance year-over-year. As we said in the press release, because this quarter wasn't a great quarter, it will be very difficult for us to make the top line expectations on our original guidance.

But obviously, we're all, as a management team, working very hard to produce the best possible result we can for the rest of the year.

So with that, I would turn it over to Stephen, our operator for today, and ask him to poll for any questions on the audio bridge.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And there are no questions over the phone at this time. So I'd like to turn the call back over to management.

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Kenneth A. Minor, Sonic Foundry, Inc. - CFO and Secretary [2]

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Thank you, Stephen.

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Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO and Director [3]

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And so now we'll go to Tammy for any questions from the Internet.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [4]

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The first question is, what are your recurring revenues per year in the U.S.?

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Kenneth A. Minor, Sonic Foundry, Inc. - CFO and Secretary [5]

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Well, recurring revenues have been greater than 50% of our total. And I guess, we don't really segregate that between U.S. and non-U. S. I think the percentage has been pretty consistent. But we see 55%, 60% of our revenues come in the form of either annual support contracts, annual hosting contracts or annual licenses for software and events that are done on an annualized basis.

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

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And I would add that from a hosting perspective, we are agnostic. We want to do what the customer wants to do. But in general, in terms of licensing of software, we are moving in general toward an annual license model. So I would imagine that over time, the amount of revenue that is recurring revenue will increase.

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Kenneth A. Minor, Sonic Foundry, Inc. - CFO and Secretary [7]

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Likewise, for the software as well.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [8]

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With such a small percent of current classrooms using lecture capture in the U.S., why is your growth rate flat without adding any new geographic areas?

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Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO and Director [9]

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Well, if I had a reason to that, that I could act on, I certainly would act on it. We've talked to a lot of our customers and looked for their guidance on what we would need to do to increase that penetration, and I think the best advice we've got is have a lower cost solution for many of those classrooms that are not technology-equipped. And I think we've talked about this before, but I'll just ramble for a moment. Wherever a school has an auditorium or a sophisticated classroom with multiple projectors and multiple input sources, our technology is both affordable and very, very capable. When you get into smaller rooms that have maybe just a podium PC that can be shared by educators who walk into the room, with a presentation on a flash drive or a single projector that's connected to that podium PC, or maybe even just a projector that the educator can plug a laptop into, that's the environment that we haven't directly addressed in the past. Catch changes that. Catch offers the customer a lower cost solution for those rooms. And we think that will, over time, increase the percentage of rooms that we cover. We're also pursuing for the China market other lower-cost capture technology, meaning not software, but hardware. But that is driven by unique requirements in the China market. So I would certainly tell you that the management team ask ourselves that question constantly. And we have, I think, made the decision 18 months to 2 years ago to invest in Catch as the primary way that we can get that coverage up.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [10]

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Next question, after doing so well in the Netherlands, and we know that strategy worked for you via acquisition, are there other specific countries you can ID, where you see good prospects?

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Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO and Director [11]

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Well, let me answer that question. Outside of the acquisition discussion, because the answer -- directly to the question about, do we have any other acquisition targets in mind in other countries? The answer to that is a flat no. We don't have anything on the radar in that regard. However, you can see by what we're doing in India, we are looking for other opportunities for geographic expansion. And I'll give you a couple of examples. We have several customers in South Africa. One of those is the University of the Free State. They are aggressively looking to roll out our technology into rural areas in Africa that are driven by VSAT distribution of content. I talked to you about this before. We see movements starting to happen there. To be very straightforward about it, countries like South Africa have a dynamic about them that sometimes makes it difficult to get things accomplished quickly. The environment is not as possibly stable as you would expect it to be in Western Europe or the United States. That's, again, a reality of the geography. But we have, I think, proven out the application with the University of the Free State. And we now are on a path, we believe, to begin deployment in the next couple of quarters. That same application seems to have appeal in New Zealand and Australia for the same kind of reasons, and that the geography doesn't permit a high-speed streaming infrastructure to remote areas of those countries. And so again, the same solution using VSAT multicast technology would fit in those countries as well. So we are looking for those opportunities. And I think we'll find them, but not in the sense of an acquisition.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [12]

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Which areas of the business will be impacted by your cost reductions?

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Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO and Director [13]

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We've been extremely careful to not do cost reductions that impact our ability to serve our customers, our ability to innovate or our ability to successfully board new customers. So the answer is it will not affect those areas. Most of the changes we made are either facilitated by new automation we've put in place or they're facilitated by a change reporting structure that allows the possible reduction of middle management. So we don't believe that any of the changes we've made will affect in any way our ability to deliver services to our customers or grow revenue. We did not reduce any engineers in terms of innovation. We did not reduce any direct selling resource.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [14]

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Do you have any color on the corporate market? Can you talk about any new developments in the corporate area of the business?

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

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Let me take a stab at it. We've talked in the past about our implementation of multicast technology to make corporate customers able to stream content inside their firewall network in a more efficient way in terms of utilization of bandwidth. That product is now in service. We are implementing that product in a number of our corporate customers. So that's one thing. I will tell you, though, that the access to corporate customers has proven to us to be -- they have 2 attributes. Attribute #1 is the average transaction size is much smaller than higher education. Attribute #2 is that, generally, when you sell to corporate, it's a onetime sell. It's not leverageable across a customer into other locations or whatever. So I think while we are still very interested in opportunistically pursuing the corporate marketplace, we're not naive about the fact that we're not going to establish a direct selling for -- similar to what we have for higher education in that space. We will use our channel partners to find customers, and then close those with our inside sales organization.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [16]

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Do you plan on issuing more stock to cover your cost of operation?

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Kenneth A. Minor, Sonic Foundry, Inc. - CFO and Secretary [17]

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Well, as I said, we're looking at a small capital raise. I mean, the capital raise is approximately $1 million. We're looking at either a combination of subordinated debt or potentially an equity. So yes, that's a possibility. I think, again, that would be small, I mean, since $1 million wouldn't result in much common stock that will be issued. But it's something that we would be looking to do likely before the end of June 30. Clearly, I think we would be looking to do something within this fiscal year.

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Tammy Jackson, Sonic Foundry, Inc. - Director of Communications [18]

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Thank you. There are no further questions.

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Kenneth A. Minor, Sonic Foundry, Inc. - CFO and Secretary [19]

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Okay.

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Gary R. Weis, Sonic Foundry, Inc. - CEO, CTO and Director [20]

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Great. Well, thanks very much for your participation today. While we had our -- a bit of disappointment about the results for this quarter, we're very optimistic that we're going to have a significantly improved performance in the third and fourth quarter. And we think that the footprint in the business that we've established is strong. And we'll continue to build on that footprint of both technology and geography and continue to grow the business. Thanks again for your participation.

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

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Thank you.