Sonic Foundry Inc. (NASDAQ:SOFO)
F4Q08 Earnings Call
December 02, 2008; 4:30 pm ET
Rimas Buinevicius - Chairman and Chief Executive Officer
Ken Minor - Chief Financial Officer
Mike Niehuser - Beacon Rock Research
Richard Fetyko - MCF
Good afternoon and welcome everyone. My name is Ken Minor, Sonic’s Chief Financial Officer and joining me today is Rimas Buinevicius, our Chairman and CEO and today we’ll be discussing fiscal 2008 and fourth quarter results, as well as some new developments.
We’ll be delivering our presentation using Mediasite over the internet and we’ll be taking questions via the phone after the presentation from our analysts and then finally we’ll wrap up with some questions from internet, from you all and then obviously you can continue to post those questions throughout the presentation and again we’ll take those at the end.
Before we get going I will read through our SEC regulation fair disclosure information. So in compliance with the SEC regulation regarding full disclosure, we’ll be using SEC filings and public presentations like the one you are viewing and participating in today, as a principle means of reforming the street and investors as to both our current and past results, as well as providing guidance and projected operating results.
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 financial results, financial projections, or any material non-public information during those meetings.
Sonic Foundry’s disclosure policy defines the period beginning on the 15 day of the third month of each fiscal quarter and ending on the day we publicly released 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 the 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.
Forward-looking statements include statements about our products and services, our customer base, new partnerships, our future operating results and any statements we make about the company’s future, including responses to your questions. These types of statements address matters that are subjected to many risks and uncertainties. Actual results could differ materially from the forward-looking guidance we provide.
Any forward-looking statements should be considered in context as a risk factor disclosed in our periodic Forms 10-Q, 10-K and other filings with the SEC. These filings can be accessed online at www.sec.gov and other websites or can be attained from the company’s Investor Relations department.
All 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 www.sonicfoundry.com for a shorter period following this call.
At this point, I’ll turn the presentation over to Rimas.
Thank you, Ken, and thank you for joining us. Quarterly highlights for Q4 2008: billings were up 6% annually, year-over-year compared to Q4 ’07, $5.3 million up from $5 million. This was reflecting a 2008 transition that we made focusing on education and corporate training, as we pointed out back in almost a year ago.
Now, that we are seeing some struggles in the corporate sector, a lot of struggles in the financial sector and obviously the use that we see everyday, reflects a lot of the pain and suffering that we were starting to forecast a year ago. Our strategy resulted in shifting to higher education, where we were seeing a lot more demand building, larger implementations happening and as such we’ve successfully navigated through 2008 in transitioning the business.
Revenue was lower than anticipated and most of this or actually all of this is really due to the billings piece, once again reflecting the services contribution, so we’re down $600,000 from a year ago to $4.1 million on a GAAP basis, but as we continually report, the billing side outpaced the previous billings a year ago.
GAAP loss was $0.03 or $1.2 million compared to $0.04 or $1.4 million last year, but once again reflecting positive non-GAAP net income, which basically takes into account of Pro Forma estimate of billings as if they were revenues, we do make collections on those typically upfront. It also excludes the depreciation, amortization and then stock option expensing and likewise severance payments, although we are now passed a good portion of those severance payments. Likewise, it includes the cash impacts as I mentioned of the billings that are not recognized as revenue.
Quarterly highlight in Q4, what we saw was a climb in deferred revenue once again due to services. Our previous guidance was that we’ve seen over $4 million in fact that ended up $4.7 million for Q4 2008. This gives us a nice cushion going into 2009 and also it shows some good trends upward as compared to Q3 of ’08 as well as year-over-year Q4 2007.
Pro Forma Q4 operating expense was $3.9 million, which is down consistently through 2008, so once again making very good progress on cutting our operating expenses. As we reported previously, this was something we initiated around January of 2008 and we’ve seen steady progress in getting the cost down. So, obviously this is helping to get us through the pro forma positive performance we’ve seen over the last couple of quarters.
2008 fiscal year, overall billings were $17.8 million as compared to $18.1 million; once again reflecting that transition as we have pivoted from the corporate side and more of a horizontal focus and now more of a vertical focus with our focus on education and corporate events.
Revenues totaled $15.6 million and we’ll have a chart here upcoming that reflects the increase in that deferred service revenue; in fact 63% increase in service revenue was seen. Operating expenses totaled $19.3 million and that compares to $19.2 million in 2007 and likewise we had a couple of quarters where we were getting pass some of the initial cost associated with some of the restructuring costs that we mentioned a year ago.
This particular chart reflects the impact of billings and the deferment of billings, a portion of the deferment of the billings as compared to actual reported GAAP revenue. So, the key metric here to look at is the key difference; 30%, now difference versus 5% year ago in to Q4, so a significant difference; once again this is going to help us going forward.
If you look at annual billings growth metrics, education 57% growth year-over-year; services 47% increase year-over-year, and the shortfall was something which we expected; the corporate side software licenses decreasing as a result of the slowdown on any economy. So, this is very good data for you to absorb and what we see is good trends going forward as we focus on those two sectors.
In terms of services and deferred revenue, $2.5 million of services were built in Q4, up 65% from 2007 and if we look at the breakout of what actually composes those services, hosting was $536,000 events, which is tied to hosting; in a lot a cases $337,000 and then the support installed and training associated with the license business was around $1.5 million. Typically, service billings are prepaid. So we’re collecting this up fronts, good impact on the cash side and as we’ve stated $4.7 million is now deferred.
If you look at the billings breakdown and where the business is actually coming from, we continue to see this education line item growing for us 59%. Most of that is license of sales; corporate is 32%; a bigger chunk of that is now moving into events and hosting and on-demand type of services webcasting as a service and then the balance, the other 9% is other, including some government business.
Looking at the event service business, $1.4 million in annual billings, 132% growth year-over-year and if we look at the different sectors that are actually subscribing or purchasing our services 11% are association, 28% are education and 61% are corporate. So, we’ve seen a big shift from the license side to the corporate side. We believe that this is the way corporations prefer to access webcasting.
I have a couple of comments regarding some of the things we’re seeing economically. As most of you know, being in education and having about 58%, 59% of that business currently coming from education is actually helping to buffer some of the impact that other companies maybe seeing in other sectors, but I’m going to comment and maybe perhaps give you a little bit of a outlook of what we’re seeing out there.
First of all some news of the day if you will; back in October, the New York Times started documenting some of the effects of the layoffs that we’re occurring out there in corporate America; 8% to 10% unemployment expected by next year; and specifically what caught our eye was the fact that they were highlighting some of the distance education aspects of what will happen as corporate America may get laid off out there.
In this particular case they were focusing on a Chrysler employee, who had lost $30 an hour job, but part of the severance package included extended tuition and his objective was to go and take seven or eight courses to hurry up and finish a degree to make himself more marketable and ultimately go back into the work force. We’re seeing this sort of an impact across the board, and many of our university customers who are going to start feeling this sort of impact as the unemployment ranks well.
Likewise, in November we are starting to document some of the strains that you are seeing in colleges and I think the greatest amount of stories that you are seeing are the private colleges where tuitions are obviously much higher and so many families are facing the decision about whether they will send their students to a private institution or whether they are going to try to save some money on the public side.
Clearly the public side is starting to see a lot more in the way of applications and ultimately what we expect will be increase in enrollments. We see reports now that public universities are starting to see applications up by 20%. This may indeed keep claiming as we go through 2009 and some of the tougher times, and in fact some of the private institutions now are looking at ways to retain those students; how do we keep those students in place? How can we expand some of the financial aid that’s available, so that they don’t have to make this sort of a move?
Then some of the graduate level programs and people that are already in the workforce, this particular comment comes from the GMAT, the Graduate Management Admission Counsel, which is the testing organization for getting its MBA programs and this comment, parking yourself in an MBA program during turmoil and remerging two years later when the winds die down, this is I think a common trade that you find in recessionary periods. People go back and they get the degrees and they hopefully comeback better trained, better educated and maybe more marketable from a workforce perspective.
So, we’re seeing this sort of demand also building. As you know, a lot of our early penetration has been in MBA program and so as these programs gear up for what will perhaps to be a swell of new student applications, Mediasite and our technology should help them a great deal in meeting this.
Students are also starting to express their views and we’re conducting various surveys, we’re analyzing third party surveys and starting to gauge what sort of trends we’re seeing in the way the current student population is expecting to be taught and we actually performed an online survey with the University of Wisconsin here, locally in Madison, where we surveyed almost a little over 29,000 students and achieved to 25% response rate.
The respondents overwhelmingly indicated that they were willing to pay more for this benefit of online learning, blended learning, whatever the vernacular and they highlighted a lot of the benefits that they see and using this technology. The reason we point to this, is that this is now helping to drive some of the further demand that we see and ultimately we believe that this is becoming a necessity, it’s not luxury item any more and as students become more of the source that demands this technology and is asking for it, that of course puts more pressure on the administrators to purchase it.
Likewise, in conclusion to that summary, 82% of the undergraduates preferred a course that streams the content as a supplement to their in-class learning. It seems like a no brainier to us, it’s obvious it helps to improve learning outcomes, obviously benefits are all involved and so this sort of information is now making around within a wide swap of our customers.
One other research report just came out of its Form-C in November. We’re obviously keeping a keen pulse on what’s going on with online enrollments and such, and in fact their research indicates that they expect online enrollments, online education if you will to keep growing and maybe the most important data point is that their recent data demonstrates no signs of slowing. So, in fact we’re very encouraged by this and expect that this should keep our business growing comfortably.
Further data from that same report, over $3.9 million students were taking at least one online course during the fall. It’s a 12% increase over 2006 and 12.9% growth rate far exceeds the normal growth in student body if you will at 1.2%, and now over 20% of our U.S. higher education students were taking at least at least one online course in the fall of 2007. We obviously expect that this statistic will continue to grow substantially over the next foreseeable future.
So what we expect to see in terms of the education on the higher Ed side, we’re certainly going to start seeing a lot of debate on the state side, whether education budgets should be slashed. I think that there tends to be a very quick immediate reaction that we’re going to cut budgets, we’re going to stop everything and basically cut across the Board.
What we’re in fact seeing is when people reevaluate those decisions, Mediasite and our technology is continuing to be implemented, is continuing to be part of the budgeting cycle and it’s going to continue to help our own business even in the tough times that we’re seeing.
The other thing that’s I think important here is on the federal government side, the new administration coming in, whether republican or democrat, that’s sort of irrelevant. What we clearly are seeing is that education is going to be something that’s preserved and cherished in this country. As a result we expect that things like the tuition tax credit, $4,000 tax credit that’s being proposed during the campaign is going to find its way under consideration.
We expect that student loans, student aids, grants and such programs are going to find more and more sponsorship within the Congress and so this will certainly help elevate some of the strain and burden that students are facing. So all of this bodes well for our business going forward and we’re optimistic about what this may mean for our prospects in 2009.
So, with that data point I’ll pass it over to Ken, who’ll get into some of the more intricate detail on the quarter.
Thank you Rimas and of course some of these points will be repetitive since we dealt with some of these in the highlight section earlier, but as we mentioned, we did increased billings $300,000 year-over-year, about 6%.
Now, despite the billings growth, revenues were down $675,000 or 14% and again as we mentioned that it has to do with a greater contribution of billings coming from the services, which of course are deferred than over the contract period for revenue recognition purposes. It also includes $500,000 of product billings that were deferred until those products were installed.
Now, what we believe that this will be the only period that will be deferring product revenues associated with installation. So, we expect all of this revenue will flip right from Q4 into Q1, so it should have a direct impact on Q1 results.
In terms of gross margins on this page, gross margins are pretty constant at 72% versus 74% a year ago. An increase in multi unit transactions was part of the impact and we’re signing more and more larger transactions. We’re also seeing more and more discounted transactions for end of the life upgrades. As customers are migrating from products that are three and four years old, they are often upgrading to a more current version, particularly as the new version was released in June.
Now, some of that is offset by higher margin service revenue, but given the nature of service billings, as I mentioned those are deferred, so they have a lag effects. So, a lot of the benefit from the margin perspective from this increased billing that we saw in fiscal ’08 will be deferred from a GAAP, and revenue, and margin perspective until fiscal ’09.
In terms of operating expenses, some pretty significant impact from the cost reduction efforts that we began in January of ’08. So, operating expenses were down $818,000 or 16% from last year and may be more importantly from the quarter immediately preceding our cost reduction efforts in Q1 of this year, fiscal 2008, were down $1.3 million or 25%, so some pretty significant changes.
So, the GAAP loss ends up with $1.2 million loss or $0.03 a share versus $1.4 million, $0.04 a year ago, but we saw some pretty significant changes in the adjustments to reconcile the GAAP loss to the non-GAAP loss. The non-cash rather depreciation, amortization and stock comp were pretty consistent at $34,000 this year, compared to $374,000 a year ago in 2007. However, the current billings exceeded revenues by $1.2 million in Q4 of ’08 versus just $248,000 in Q4 of ’07. So, pretty sizable increase in the portion of billings that are deferred for our revenue recognition standpoint.
Now we adjust non-GAAP reporting for billings. Since billings deferred for revenue purposes, are collected in the same manner that are recorded for revenue and the cost of providing that service is pretty minimal in the future. So we believe it’s a much better indicator of the actual cash flow that’s been achieved. So, after planning these adjustments we end up with non-GAAP earnings of $298,000 or $0.001 a share in Q4 of ’08 versus a loss of $817,000 and $0.02 a share in the same period a year ago.
In terms of the details, product revenues decreased $1 million from Q4 in ‘07 to Q3 in ’08. Approximately half of that reduction is a result of the $500,000 deferral I mentioned a minute ago, until installation again, that’s just the timing issue. Results also include some migration of corporate customers from purchasing server license to purchasing our service content hosting tuition, as well as a modest 5% decrease in unit shipments and a greater percentage of discount at high volume transactions and the end-of-life hardware transactions upgrades as I mentioned movement ago.
Now, in terms of services, we had some significant increase in demand for really all of our service offerings, particularly for our content, hosting and event services. We are also seeing continued strong supported renewal rates in excess of 80%. So, that bodes wells for customer satisfaction and the future for us, I believe.
Q4 service billings likewise saw greater deferral for revenue recognition purposes due to timing of certain very large events. In fact we’ve got a very large event going on this week with our events team and so a lot of those events will take place in Q1 and again it will result in some flip of service revenues from Q4 and Q1 of ’09.
Operating expenses, also again as I mentioned some pretty significant changes. A good lion’s share of that is in the selling and marketing areas. So, selling and marketing decreased $600,000 or 18% from Q4 of ’07; G&A decreased $260,000 or 30% from the prior year and product developments basically flat with a 5% increase.
On the balance sheet, cash included current assets in the current assets component that includes cash of $3.6 million that compares to $3.3 million in the immediately preceding quarter, the June 2008 quarter; that’s an increase in cash of $217,000.
It’s the improved operating results that are clearly driving that improved cash performance with the increase in the non-GAAP earnings to a positive number in Q4 of ’08. It also include some favorable collections, AR days billings outstanding were reduced by about the fourth quarter for the same number that we experienced in Q4 of ’07.
Now, the majority of current liabilities represent billings and cash that received an advance in service offerings and that number has now grown to $4.7 million. That’s well in excess of the $4 million number that we had given as guidance just last quarter, so again some favorable trends there.
In terms of the billings mix, as I mentioned earlier a mix of product sales and a slight decrease of unit shipments led to a decrease of 14% and there were quarter billings; server license billings likewise were down year-over-year and again that’s recognizing some migration of corporate customers moving more towards the service model for hosting of their content.
Our service offerings, is where again that migrate too. We saw some significant improvement in the service billings and an increase of $1 million. Now, half of that service increased as a result of growing customer support contracts and the other half represents the newer and growing content hosting and events business. Forty-seven percent now of our total billings in Q4 of ’08 represents service just compared to 30% a year-ago. So, again a pretty significant change and the mix of the business which is a positive for us since the service billings tend to be a much higher margin for us.
In terms of units, our recorded shipments totaled 216 during the quarter, 1.6 mobiles for every rack; that compares with 227 in the same period a year ago, a 0.6. Now the change in mix is largely due to reduced channel needs with the rack unit in Q4, following its introduction in Q3 of ’08. We believe that ratio of greater racks to mobiles will reoccur; in fact we believe that it will occur in this current quarter in the Q1 of ’09.
In terms of guidance for fiscal ’09, GAAP revenue is expected to continue to grow over the past periods and grow by 15% or more in fiscal 2009. Improving gross margins, again we expected those billings that have increased in the service category in ’08 will need to higher revenues in ’09 and drive higher margins.
We expect that operating expenses will remain flat and that full year will achieve Pro Forma net income profitability, as opposed to just the last few quarters that we reported in 2008. Again the concept of achieving greater billings, in advance of recognition of those service revenues will lead to improved cash flow results.
And then at this point, I’ll turn the presentation back to Rimas for a few concluding remarks.
Thanks Ken and so 2008 Q4 was actually the last quarter, where we had still the anomaly I think of the corporate sales that we saw and then the fall-off subsequently that we saw in Q1 2008. So, we’re actually entering the quarter, where we actually finally have some true comparisons to be able to move forward in terms of the education and the webcasting as a service business.
I believe that there’s a better, greater sense of urgency now taking shape with our customers; obviously the awareness of webcasting and being able to put online lectures and build e-learning programs out there is growing and I think coupled with the economic forces that we’re seeing, they seems to be a greater urgency for our customers to deploy sooner than later.
As a result, we are actually seeing pretty good demand here in what is typically a very slow quarter for us. So, we’re expecting that some people will be deploying in the January period, which in some cases they might have differed to the summer period itself.
Likewise, we are seeing international influence and are starting to see the first orders coming in for some significant orders internationally. Likewise, we expect that the event services business; Ken mention that we have a significant event this week. We see a lot of activity in the fall period. So, we’re actually feeling pretty good about how the quarter is starting to shape up for us.
Deferred revenue recognition, of course is also going to help. So, some the deferred installation issues, the $500,000 or so will be recognize this quarter and so we’re going to start seeing more of a buffering I think in the business model.
Looking ahead, we’re starting to really focus in on I think what is our core strength and that is the education piece as well as adapting our offerings in the best way to the corporate side and really providing webcasting as a service event focus and primarily on the learning and training side of the equation. So, definitely it fits the bill if you will in terms of this education and training component that we’ve spoken about.
We’re also starting to see that while other programs and things are being cut, there is staffing cuts or at least holding a line on new hires and things; there is a continuing to be a focus on online and blended learning and figuring out ways to do this in a more of a modern approach if you will.
We expect that there is going to be some sweeping changes legislatively to provide some relief for people that are trying to see higher education and that obviously will impact us indirectly in terms of overall demand and trends that we see. We believe we’re starting to see the same impacts internationally as we’re seeing here. So, while the U.S. were facing a lot of hard times here, of course the same thing is happening internationally and same aspects are going on; more students going back to school, students gaining education and seeking to do this in an electronic means.
Then one other benchmark to take note of is that we’ve also tracked the four profit institutions, the Apollo groups, the DeVry’s, the Seacoast, companies like this that are in the business of providing education and doing it for profit as conversely to a public institution and generally they’re seeing very strong growth. This I think confirms some of the same things we’re seeing trend wise; that it doesn’t seem to be a fall off in activity on the education front that they’re certainly building a horizon out there going into 2009.
So with that, we’ll open it up to any questions you have. I think we’ll take any questions first from the operator and then anything online we have.
(Operator Instructions) Your first question comes from Mike Niehuser - Beacon Rock Research.
Mike Niehuser - Beacon Rock Research
Could you expand a little bit more on deal size? It seemed to be something that we’ve been watching for the last the last year, a couple of years now and could you talk about numbers, if there you’re still seeing a continuous flow of deals or if they’re increasing in number?
Yes, I actually don’t have the current number per say and what the deal size is as it gets a little cloudy when we include service and support contracts that are renewable, but I can say that certainly we’re actually now transacting some of the largest deals that we’ve ever had.
So, in one instance we’re anticipating actually orders and magnitude of over 100 type of rooms being installed and so this represents perhaps the largest transaction that we’ll be facing in our history and so it’s a continuous trend that we’re seeing, that there is greater deployment, greater expansion within universities, but generally what we continue to see is a continual installation at the same account.
So we’re doing a lot of account focus, existing customers are continuing to expand. So it’s not typical that you will see a 100-unit type of an order, albeit we are starting to see some of that also bubbling up. What we see is a 10, 20, 30 type of installations done on a seasonal basis as they expand our infrastructure and that basically expands the existing footprint of a given customer out there.
Mike Niehuser - Beacon Rock Research
Well following-up on that, you mentioned that you’re seeing some significant December and January installment; are those new, are those larger, are those continuations of existing clients?
It’s actually both, we have some new ones and we have some old ones. We are particularly one international deal that may turnout to be the largest customer right out of the box for us as compared to anything here in the U.S.
Mike Niehuser - Beacon Rock Research
Was all those four items you mentioned and whether this is a comparable quarter or not? Are we starting to see a smoothing of earnings do you think to eliminate or soften the prior seasonal effects in kind of challenging to follow?
Yes, well certainly been challenging from the standpoint of getting blind sighted I think often with some of the economic situations and things like that, as we were positioning our sales forces a year ago, to really take advantage of maybe some things going on in Wall Street, the financial community, obviously the rug was pulled out of that whole world and there is absolutely no IT spending going on there.
As a matter of fact, I would probably say that companies like Cisco are struggling and aren’t providing decent guidance for that reason. They relied on that market to such a great extent that now it’s harder for them to forecast, whereas in our particular case really cultivating education customers and building an account were there is clearly a need for this new technology is giving us greater confidence going forward.
So, we’re much more vertically focused, we’ve selected I think a couple of the key markets that are responding to our technology and continuing to grow and I think that will give us greater confidence going forward in terms of smoothing out some of the rough edges that we’ve seen in the past.
Mike Niehuser - Beacon Rock Research
Did I understand you correctly that you are saying that we’re going to have a positive cash flow in each quarter next year?
I think the guidance was for overall.
Right, what we’ve said is we would have non-GAAP profitability for the full year.
Mike Niehuser - Beacon Rock Research
Okay and last question if I could and I’ll jump off the call. Could you expand a little bit on international, because there seem to be a little more emphasis on this call with that area; is that located in particular area like Japan or is that a fast growing segment? Thank you for taking my questions.
We’re actually looking at, some activity in the Middle East that’s significant, so basically there’s a lot of education, infrastructure expansion going on in the Middle East, but we’re also seeing equal demand in Europe and Japan, but in particular some of the larger orders are now coming out of the Middle East.
(Operator Instructions) Your next question comes from Richard Fetyko - MCF.
Richard Fetyko - MCF
Just a clarification; that $500,000 that was from the product sales that was deferred was that part of the billings there right?
That’s correct, it was part of the billings, it just wasn’t recorded as revenue in Q4, but as we indicated we expect all that to be installed in revenue in Q1.
Richard Fetyko - MCF
Okay, and then you also indicated in your press release that about $2.2 million of the differed revenue should be recognized in the first quarter and that includes the $500,000?
That’s correct, it does. Yes.
Richard Fetyko - MCF
Okay and then were the product or I guess recorded shipment billings down year-over-year?
The recorded billings were down year-over-year partly due to as we said some migration of some product revenue towards service offerings event business, as well as the server license revenues have been impacted by migration towards hosting business. We’ve also seen a fair amount of larger transactions that even though the unit count is strong we’re providing some discount pricing for some of those transactions and I expect that we’ll see more and more of those larger transactions going forward.
Richard Fetyko - MCF
And then for ’09 again I think you were breaking up a little or maybe it’s just my phone, but you projected 15% revenue growth in ’09?
Fifteen percent plus, that’s right.
Richard Fetyko - MCF
And would you expect the billings to grow faster than that?
I think we’ll see some fairly similar numbers between revenues and billings, but I think we’ll expect both of those to grow by 15% or more.
Richard Fetyko - MCF
At this point, I guess the corporate as it used to be, sort of the enterprise segment what is it; as a percentage of revenue it’s like 5% or so?
Well I think that’s certainly more than 5%.
Yes, I’m not sure. I know that probably about 15% to 20% I think is a better estimate.
Richard Fetyko - MCF
Okay, so going forward, you expect to see majority of the growth to come from the education as well as I guess events as a service segments?
Yes, we are seeing about 65% of our pipeline is education oriented and then as we I think highlighted approaching 10% now is event based and we expected that will grow; that obviously grew significantly year-over-year, that was growing about 136%. So, that should be a bigger contribution. We’re not forecasting really much in the way of growth on the corporate license side. So, really the focus is the education licenses and the webcasting service business.
Richard Fetyko - MCF
With respect to the seasonality, I mean still expecting the first two quarters of the fiscal year to be slower and the last two quarters to be stronger and is this seasonality going to be even more pronounced because now you are more heavily weighted towards the education versus corporate licensing?
Yes, actually strangely I would say we’re going to see less seasonality and I think it has a lot to do with the deferred revenue component that we’re seeing coupled with the services contribution. So, as that comes off the balance sheet and gets recognized as revenue, it will help buffer more-and-more, some of the seasonality.
So, that’s I think a good phenomenon, but the ultimate installation aspects often times is maybe where the seasonality kicks in, but as the deals get larger and as you get more recurring revenue and as the service component builds, your subject less to those initial installation in the somewhere downtime periods and such that are subject to the education market.
(Operator Instructions) and we show no further question.
Okay, thanks then operator. Well, then at this time we’ll take some questions from the internet then as well. Our first question Rimas has to do with leverage of the Event Services business. They wonder if we’re using our partners in some capacity in that regard.
Yes, indeed, let’s say about at least half of our business is coming from partners and so what they end up doing is they actually run and manage and handle the events for us remotely and so we use them almost in the same vein as a reseller in terms of handling that.
So that’s were we get to scale out of the business. They obviously are using our technology if it turns out to be a live event or they require any sort of hosting component, they use our backend to go about and do that; so yes the partner side is very important to that business.
And our next question has to do with alternate revenue models. I think we may have commented a little bit on some of this in the past, but seeing more services offerings as a way of delivering some of the same kinds of products and wondering if we are seeing any traction with alternative revenue models.
Yes, we are actually starting to look at student fee models in such and getting some interest. A lot of this has to do with capital budgeting processes and so capital budgets are getting stressed and/or cut in some cases; they’re looking at alternatives and so we are starting to see some of the first, I guess contract negotiations for being able to incorporate this into student fees.
One slide I didn’t include, but something that sort of points to this is when we highlighted at the University of Wyoming as one of our customers, the students there have opted to incorporate technology fees, a higher assessment or a portion of their fees to installing to Mediasite and running this and that’s one common way to go about doing it.
So it ends up being something that’s very common among Universities, that $500 a year type of fee, where a portion of that goes to expansion of technology and now as online and lecture capture becomes a recognized value in Universities, they’re choosing the curve up the money to use that to basically fund it.
So those are the source of funding mechanisms that we expect will be used as an alternative to the normal capital budgeting process and it actually may help grow the business more rapidly given that it’s often times difficult to come up with new capital dollars.
We have a couple of questions about our pipeline. I know we didn’t put a chart in the presentation about pipeline growth, but maybe you just want to address where the trends that you’re seeing in pipeline over the last several quarters?
Yes, I want to emphasize the fact that it’s probably the quality of the pipeline as what’s maybe the most encouraging thing. So where we were highlighting maybe the size of it earlier, the size of it maybe became irrelevant from the standpoint that a lot of it was coming from corporate, a lot of it was coming from non-targeted accounts or in some cases places like City Councils and other people that all had a certain interesting webcasting, but it didn’t necessarily match up to the way we would want to target an account and scale of the business.
So from that standpoint, I think the way that we’re managing the pipeline right now, what we’ve seen is a consistency now where we’re usually about three to four times what our typical expectation is for billings for the quarters, which is a comfortable rate where we want been in. That is we identified $15 million to $20 million or so opportunity in the given quarter and we try to close roughly 30%, 40% of that if we can.
So the quality of that has been consistent over the last several quarters and we really haven’t seen that fall off and as a matter of fact it seems to be steadily increasing with the amount of billings that we’ve seen increase.
We had another question about expectations for average selling prices in fiscal 2009 and wonder whether we’re going to see further declines in 2009.
I believe that we will see some fairly constant activity from the hardware upgrade programs, which are obviously a good thing because these customers are coming back and purchasing more support contracts and more price that go with that. Now I think that we did see a little bit of bunching up of a fair number of those transactions in Q3, as we released our new RL products. So, I think the extent of that may not be quite as high as what we saw in Q3 in 2009.
Now, I think in terms of, volume pricing transactions, volume deals, as we mentioned we’re looking at transactions that are far higher than we’ve ever experienced before. So, I think we will see a continued pricing at that level for those larger transactions.
We’ve had several questions here that just popped in; let me go through it here quickly. We had a question about whether corporations and Universities as well are using our products more to store their lectures versus letting their own servers and that’s really dealing with our own hosting model and clearly we’re seeing more and more of those customers switching towards the hosting business.
We had a question about the cash balance and whether we’re comfortable with where we’re at right now and I can address that, but maybe Rimas, you can to add some comments about as well.
Just comfortable whether with the amount of cash and I’m sure the question really implies whether we’re looking for working for any financial raises in the upcoming quarters.
Yes, well I think that we were maybe a little bit concerned about how this current quarter was going to shape up given the sort of seasonality that we tend to see, but as it turns out, the collections have been great, the prepayments are great and so that has really helped alleviate any sort of fears that we have on the cash side.
The fact that we were able to increase cash in the last quarter, I think is a great sign. Receivables remained very solid. Typically you don’t get stiffed by universities and such, so that’s a pretty good source of revenue for us and so we typically have pretty good collection. Then as Ken mentioned, the days billing outstanding instead of DSOs we call them DBOs, has actually been falling over the last couple of quarters and so that also is helping.
We actually feel like we’re in a pretty good shape and likewise we do have a line of credit in which have gotten very good cooperation with Silicon Valley Bank and so we feel pretty comfortable with that relationship as well and that seems to be the greatest strain on our business going forward on the working capital side and basically funding receivables, such as we try to match shipments with payments to our manufacturers and collections.
We have got quite a few other questions, but I think most of those were all posted prior to us answering those questions, so I think we’ve really addressed all these. Is there anything else you want to address and I think we’ve probably covered the questions.
Okay, well thanks for tuning in and as always Ken and I remain available for you to do a discussion offline and so thanks for tuning in.
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