Zacks_Analysts' Blog : Sonic Misses as Revenues Dip - Analyst Blog

Sonic Foundry Inc. (SOFO) reported its third quarter fiscal results yesterday. GAAP EPS for the quarter was breakeven versus a negative $0.02 in the year-ago quarter, missing the Zacks consensus estimate of positive $0.01 but beating the Street estimate of a negative $0.01.

Net income, excluding one-time charges and stock compensation expenses, fell 56.7% year over year to $0.9 million. As a result, non-GAAP EPS was breakeven – a small profit from $0.01 in the year-ago quarter, missing our estimate of $0.02.

Although, EPS missed our estimates, it improved for the fifth consecutive quarter due to lower operating expenses and cost control initiatives. The company reduced operating expenses by 11.3% year over year to $4.1million.

Total revenue declined moderately by 1.2% year over year to $5.0 million, missing the Zacks consensus estimate of $6.0 million and Street’s estimate of $5.6 million. Revenue fell across Product (declined 12.7% year over year), and Other (declined 37.8% year over year) segments, offset by an increase of 16.7% in the Services segment.

Revenues particularly from new product sales were impacted by the continuing economic crisis, budget delays affecting state governments and delay in distributing federal stimulus money to the U.S. higher education sector. We expect these issues to be temporary and get resolved in the next few quarters as the economy recovers.

Aggressive cost reductions, particularly the cost of manufacturing Mediasite Recorders and an increasing international customer base helped the company to increase gross margins to 78.0% from 74.0% last year.

As a result of Targeted sales strategies, Sonic now believes that it will exceed 20% in revenue growth for the full year 2009 at current operating expense levels. This compares to the previous revenue growth guidance of 15% to 20%. Sonic is benefiting from increased customer wins with its Mediasite platform. Sonic recently introduced Mediasite 5.1, which is expected to add value to its business.

Since implementing a cost reduction plan in the second quarter of fiscal 2008, the company has realized an improvement in cash flows from operating activities. Although the company has delivered somewhat better results for the first nine months of 2009 by reducing operating cost and increasing customer base, sustainability of the same still remains an issue.

Sonic competes with larger competitors such as Onstream Media (ONSM), Akamai (AKAM), and Blackboard (BBBB) that provide a similar solution to that of Sonic. While longer-term positives are visible, near-term pressures prompt us to maintain a Hold rating on the stock.