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Executives

Tammy Jackson

Kenneth A. Minor - Chief Financial Officer, Chief Accounting Officer and Secretary

Gary R. Weis - Chief Executive Officer, Chief Technology Officer and Director

Analysts

Marco Rodriguez - Stonegate Securities Inc., Research Division

Howard Halpern - Taglich Brothers, Inc., Research Division

Mike Niehuser - Beacon Rock Research, LLC

Sonic Foundry (SOFO) Q1 2014 Earnings Call February 6, 2014 4:30 PM ET

Tammy Jackson

Good afternoon, and welcome to Sonic Foundry's Fiscal Q1 2014 Earnings Presentation. I'm Tammy Jackson, and I will be moderating today's webcast. [Operator Instructions] We'll begin with the Safe Harbor statements and take Q&A 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 today, as the principle means of informing the Street and investors of our current and past results, financial projections, or any material non-public information during those meetings.

Sonic Foundry's fair 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 their 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.

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 subject 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 of the risk factors disclosed in our periodic Forms 10-K, 10-Q 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.

All of the information and disclosures we make today regarding our business, including any forward-looking guidance, are as 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, Ken Minor will begin today's presentation.

Kenneth A. Minor

Thank you, Tammy. Welcome, everyone, and thank you for joining us today. I'll begin, as always, by going through a few of our quarterly financial highlights.

Our billings grew by 3% to $7.1 million over the prior year's $6.9 million. Revenue grew 10% to $7.2 million, and that's the one where our Q1 2013 number of $6.6 million, that's primarily due to an increase in our events business [ph]. The product and other revenue were consistent at $2.9 million in both periods.

Our GAAP net loss was $690,000, that compares to $139,000 last year and the Q1 2014 results were, obviously, impacted by the $450,000 of transaction cost related to the acquisitions of both MediaMission and Mediasite KK. Nearly all the acquisition-related costs that we did incur were recognized in Q1 of 2014. The GAAP EPS loss was $0.17 per share and that compares to $0.04 per share last year.

We achieved non-GAAP income of $275,000 in Q1 of 2014 at $0.07 per share and that compares to $685,000 or $0.18 per share last year. Our gross margins were improved. We ended up with $5.4 million, which was 75% gross margins, and that compares to last year's numbers of $4.9 million or 74%. And our unearned revenue was at $7 million, that's up from $4 million from the same quarter a year ago, which is a 17% increase over Q1 of last year. And our cash balance now is sitting at $3.1 million at 12/31, 2013.

Going through the billings, our product billings were up $98,000, that's about 3% increase over the prior year. Similarly, our service billings were up $100,000 over the prior period, which was also 3%, and reflects, actually, a 44% increase in our events billings, which were partially offset by a 12% decrease in our support billings. As you may remember, our support billings in Q1 of 2013 were unusually high. That's due to several large support contracts that were due to be renewed in the fourth quarter of 2012, which were instead renewed in Q1 of 2013, creating that [indiscernible] anomaly.

In terms of the statement of operations, I'll go through some of the items that make up revenue. First of all, our average selling price decreased from $9,700 to $8,800 this year. We did have total refresh units that were pretty consistent while [indiscernible] 105 of refresh units this quarter compared to 116 last year. The high-volume international transaction that we recorded during this year, as well as that [indiscernible] switch in the mix of the recorders to more [indiscernible], which are a lower selling price, contributed to the change. So that's not something we expect to see continue. The number of recorders shipped increased from 270 recorders in Q1 of last year to 301 this year. The gross margin, as I said, was up over last year. In the operating expenses, we did see an increase of $1 million from $5 million in Q1 of 2013 to $6 million this year.

The components of that were, first of all, selling and marketing increased $369,000 or 12% in Q1. That's resulting partly from higher salary, certain compensation and benefit costs that were due to slightly higher staff levels compared to last year. There was also an increase in our travel trade show attendance activities, which were associated with the introduction of new products, as well as the attendance at shows that are focused on vertical markets that we had normally invested in and launched [ph] in the past.

In terms of G&A, our G&A increased by $145,000 or 18% over the prior year, that's partially [indiscernible] to a slight increase, again, in compensation benefits, but also to the increase in our professional services related to the new cost. Our product development increased $59,000 or 5%, that's primarily due to an increase in allocated costs driven by a higher stock compensation under incentive compensation, as well as an increase [indiscernible] labor [ph].

So during the first quarter, as I mentioned, we did substantially all of the work towards completing the acquisitions of both transactions. We did complete MediaMission in December, and we closed on the Mediasite KK transaction in mid-January. And like I said, the vast majority of those transaction costs were incurred and recorded in Q1.

So in terms of the reconciliation between GAAP and non-GAAP, our non-GAAP results were, when we adjust that, we adjust it for non-cash. We had non-recurring expenses, as well as the cash impact [indiscernible] we don't record as revenue. So when you take those adjusting items, you include the non-cash depreciation and amortization, which increased slightly from $258,000 last year to $301,000 this year. Our stock compensation cost increased to $277,000 this year compared to $183,000 last year, certainly more than a smaller [ph] increase, but that's due to adjustment for the forfeitures that was required this year -- or this quarter. That's not something that's reflected in what we expect to see next quarter and the quarter after that.

The revenues exceeded billings by $133,000 this year in Q1 versus the other way around, where billings -- I'm sorry, revenue -- billings exceeded revenues by $323,000 last year. Our tax expense was $70,000 in Q1 of 2014, and that compares to $60,000 last year. $60,000 has been a recurring number for many quarters now, which represents the amortization of our [indiscernible] for tax purposes. We will start to see that number go up. And so that the slight increase this year is the taxable expense related to the income that MediaMission incurred for that last 2 weeks of December. Neither MediaMission nor Mediasite KK have net operating loss carryforwards with which to offset losses, so we will start seeing the tax expense increase [indiscernible].

I mentioned that we incurred transaction costs and that we eliminate non-recurring items, unusual items or non-GAAP adjustments. So we did adjust the $450,000 for the transaction costs out of that number. So after you apply all those adjustments, you end up with the Q1 2014 numbers, so for non-GAAP income of $275,000, this is in comparison [ph] to $685,000 last year.

In the balance sheet, our current assets increased from $12.6 million last year to $12.9 million this year. The increase is largely due to an increase of prepaid expenses of inventories, that was partially offset by a decrease in cash, which was primarily the result of the cash component of the purchasing price for MediaMission. The other significant components of the balance sheet include goodwill and other intangible assets, which did also increase from $8.4 million at the last year-end to $9.7 million at this point, and that relates entirely to the excess [ph] purchase price of MediaMission over the net assets [indiscernible] company, so it's approximately $1.3 million.

The current and long-term liabilities increased from $13.6 million last year to $15.1 million, and again, that's almost entirely related to MediaMission, approximately half of that is due to subordinated notes that's due to sellers of MediaMission, which is part of the purchase price. The remaining $911,000 impact was due to liabilities that are on MediaMission's balance sheet that we now assume and are included in our consolidated results. The liabilities are, in total, do still include 2 significant noncash elements. And it's pretty consistent with what we reported in the past. About 2/3 of our liabilities are noncash, $7.0 million of that is due to unearned revenue and $2.3 million of that is due to different [ph] taxes, so [indiscernible] components.

We did have $600,000 of notes payable to Silicon Valley Bank that is reflected in these numbers. We also have, as you may probably remember, involvement in [ph] credit with Silicon Valley Bank, that has a maximum balance of $3 million. We had an availability of about [ph] $2.6 million, and we were not borrowing anything under that line as of 12/31, in fact, hadn't at all during the quarter.

There is no outstanding balance [indiscernible] mentioned, we refinanced the term loan in January. So we bumped up the term loan balance from $600,000 to $2.5 million, and we used the proceeds of that -- the excess $1.9 million to finance the cash component of the purchase price for Mediasite KK, which as I mentioned, happened in January.

We continue to believe our cash and debt availability is more than adequate to accomplish our business plans. We do plan to file a registration statement in the near future to register the shares related to the purchase price of both MediaMission and Mediasite KK. We issued a little over 200,000 shares on a combined basis for both of those entities and so, like I said, we'll be registering those. But we do have no plans at this point to raise additional equity or debt at this time. So at this point then, I will turn the presentation over to Gary, who will run us through a few of the business trends.

Gary R. Weis

Thank you, Ken. Go forward here, the first few slides of the sequence will be the same ones you're used to seeing, they just characterize some of the parameters of the business and what drives it. First thing you can see, again, in the first quarter of 2014, we tend to achieve our billings numbers by a lot of smaller deals as opposed to any very large deals. And so, last quarter, we had a couple of larger ones. This quarter, it's really looks like a typical Q1.

We keep this chart in the deck, although, in this particular period, we don't update it because it's the middle quarter in a half year. You can anticipate the trend being a little bit different next quarter because of the announcements that we made today about University of Leeds. So we anticipate we will have a large deal begin to ship in the second quarter. So obviously, we'll update this chart next time around, entering the results of that.

In looking at new versus existing, the pattern in terms of percentage distributions continues to be pretty much the same. We, obviously, will see this balance itself out as we either add large customers or are more effective at selling more products to existing customers but, by and large, we expect to see the numbers stay roughly in the same ranges.

Breakdown by sector. Typically, in the first quarter, we have stronger performance in corporate, just because of the way the seasonality works out relative to higher education. And that, obviously, came true this quarter as well. And again, domestic versus international, you can see pretty much the consistent -- the same trend that we're used to seeing.

So let's go on now to some of the things that we are seeing evolve as we become a more global business. Clearly, with the acquisitions, we now have stronger resources in Europe and direct ownership of resources in Japan, whereas before, MS -- Mediasite KK was, in reality, a partner, now they're a part directly of Sonic Foundry. Both of those acquisitions are closed. In the past month, we've had several meetings with the teams, the combined teams now of Sonic Foundry, that include the MSKK team and the MediaMission's team with our core team. We're looking to manage projects to get synergies from the acquisitions. We see -- we feel very positive about what we've planned out thus far, and we'll update you on those evolutions as they take place.

As a reflection of our presence in Europe, we held a European forum, which is, I guess, probably the best way to characterize this is kind of a mini version of what we do here in the United States in May with UNLEASH. A very active participation, lots of customers all congregating in Amsterdam. We got very, very many positive feedbacks from that group about the steps that we took with MediaMission and about some of the things that we're planning to do to expand support coverage of our customers in Europe.

Let's talk now about what we think is a very major new win. We're very proud to have the University of Leeds, which is one of the world's top 100 universities, select Mediasite technology to accomplish its strategic efforts around its students. Probably, this represents a validation of the strategy that we put in place almost 2 years ago. This was a competitive opportunity. It was won through RFPs for 2 separate projects. The first was lecture capture, which we traditionally have had our strength in. We won that over Panopto and Echo360. So we will be installing a significant number of rooms in Leeds over the next couple of quarters. We are very involved in planning that deployment with the customer and we'll put resources on-site to support the customer. And we think it will be a very rapid rollout to meet the customer's objectives.

The second thing though, and very important to us, is that we beat out Kaltura in offering and responding to the University of Leeds' RFP for enterprise-wide video. You may recall, over the last 2 years, we've been talking about investing in evolving our server software into a video content management system. I'll talk a little bit more and show you some examples of that in a few minutes. But this, to me, is a very strong indication that we are now fully competitive in this space. And we look forward to other wins and opportunities in the similar space going forward.

We expect, clearly, more than $1 million in billings in fiscal 2014. And as I said, the university is very aggressive about their deployment schedule, so we totally expect to begin shipping a significant number of recorders in the second quarter. And we've had a number of other customer wins and expansions in higher education. In Stanford School of Medicine, we furbished or replaced capture technology in 20 of their classrooms. Clearly, we see this as an opportunity for us to continue to grow in Stanford in total. Ohio State University, similarly, basically, evaluating technology for a campus-wide standard and selected Mediasite for that. And Massey University in New Zealand, same thing, expansion to 25 additional classrooms.

These 3 examples bring home what we've talked about on previous calls about our refocusing of our sales effort to grow business within existing customers. And again, we feel very successful and very proud of the work that our team is doing to achieve that objective.

In corporate, again, similarly, very strong presence in Dell. We see a significant growth there in video use, using something that you are familiar with now on these calls, of My Mediasite, which permits Dell employees to create content outside of a conference room. LG Electronics, again, using video to standardize training in the learning and communications using Mediasite. And similarly, Home Depot in Mexico, again, for a training application. So you can see the balance here that we're growing Mediasite presence in both higher education and corporate, with some very important customers and very significant wins.

Our events business continues to roll along. This quarter was the -- the first quarter was the strongest quarter in our history with Greenforce, a huge event, where we basically captured over a terabyte of data. And when we do these captures, our teams edit and compose that material and push it into the Mediasite servers for the attendees to view on-demand.

We really exceeded our expectations in terms of getting the content available in Mediasite in less than 24 hours. Again, with the American Society of Hematology, this is one of our partners, LDI, that we worked with, to again host a very large, important event in the medical space.

The next slide starts to talk about our video platform, enterprise video platform. You see these 3 analysts, who all have made statements about our validity as participating in that market and how we are emerging as a strong player in the market. We work closely with these analysts to make sure they understand what our direction is and what we are doing. And the attention that they are bringing to our products and our capabilities is helping us close business with real customers.

Video is increasingly becoming a very, very strong element across many websites and across many uses. We -- by looking at what various people have said out in the market, this one happens to be from Cisco. There's going to be, in 2017, consumer Internet traffic will have a huge video content of over 5 million viewers of video viewing, okay, each month. And so, video and, in this case, we're talking about simple video, is really growing in demand and use across the Internet and across customers who both reach consumers and employees and business to business.

We've indicated in the past couple of calls that we are beginning to compile statistics on our customers' use of Mediasite in their institutions. And in December, we pushed out a survey to our higher education customers that asked them to provide us with 3 important statistics for 2012 and 2013, so that we could start to measure the increased usage of video in these institutions that use Mediasite technology. So the 3 statistics we asked for were number of courses captured, which is basically just a count of the number of video sessions in classrooms that were recorded; number of student views of those courses; and hours of content recorded.

We found something very interesting out of this study. Number one, in this study, and using this study as a base to forecast to the entire Mediasite population, we, through Mediasite technology, captured 2 million hours, and that's the equivalent of 228 years of video, which is up 49%, 2013 over 2012. That simply says that customers continue to deploy Mediasite into more capture situations and they are creating more and more content. With the advent of My Mediasite, we think that will accelerate at a even greater pace because content will no longer be captured just in classrooms, it will also be, in large numbers, captured at the desktop of an educator's composition.

Similarly, students are spending more time and viewing more of this course material. We found -- and again, the growth year-over-year was 89% in terms of the number of student views. That's over 30 million. That number is larger than some of our competitors advertise having done for their entire lifetime. So we are extremely gratified to see that our customers continue to use our technology very effectively in their higher education institutions. The neat thing about the Mediasite platform is that it totally secures and manages and displays this content. And the content that we capture is rich media content, which simply means that unlike simple video in YouTube, where you have to switch back and forth between slides and video, we can get total high definition fidelity for both the video and the slides.

So from the survey, and I won't read through all these quotes, these are some anecdotal quotes from the individual respondents to the surveys. And very impressive numbers. And you look at the comments, again you see My Mediasite laced in here and you see a number of other things that -- is a very positive view of the use of Mediasite technology in these institutions.

Now the evolution of the product supports our customer growth. So if you go back 4 years ago, we were a room-based lecture capture company. Had we stayed there and had we not made the investments that we made over the last several years, we would find ourselves participating in a smaller demand market just for room-based lecture capture. Because the education paradigm is changing, because people's use of video is changing, customers want more and we have now implemented that with Mediasite 7.0, which was generally made available in January.

So let me talk a little bit about what we are -- what are some of the major things that we've done in Mediasite. So the first thing is something we are calling video showcase. And what this provides with the viewer of Mediasite, or for the viewer of Mediasite content, is a very user-friendly presentation of that content. Again, if you go back 4 years ago, and you looked at how we provided interface to the catalog of content in Mediasite, it was very much for the technician's interface. We reengineered that and the interfaces you see here are very much state-of-the-art in terms of what the industry is doing to index and provide access to video content. It is also able to be shared in social media. It is -- the navigation tools to view and get to the content are provided in multiple ways. We've introduced a channel concept. So this capability is partly what led to Leeds awarding us the business in terms of the video content management system.

Now in parallel to that, we continue to get input from our customers that they not only want to expand the number of hours of video that they capture, they also want to use video in a different way. And on this slide, you see the multiple video examples focused around medical. It is clear to us that the medical simulation industry and the medical teaching industry really want to have time-synchronized, high-definition video for 3 or 4 or 5 concurrent video streams. Now, we'll continue to expand this capability.

Today, we do 3-plus slides and audio very effectively, and we'll continue to work with customers in this market to figure out what we need to do to continue to expand this capability.

We've talked in the past about the flipped classroom. And there is no question that as faculties evolve their teaching paradigms, more and more educators want to teach their students in a way that composes material before the students show up in the classroom and then uses the classroom time for things other than giving a performance of the educator to give the lecture. Again, we realized this trend a couple of years ago, and that's what led to us providing My Mediasite to particularly support those educators who want to use the flipped classroom paradigm. The feedback we've gotten from customers is outstanding. In reality, it has been a double benefit for us, because a typical large customer today that's made an investment in deploying Mediasite in classrooms now has a complementary way for flipped classroom methodology educators to use the same server and presentation technology. And as a result, they're expanding the number of classrooms with their equipment. It goes in parallel. It is not one or the other.

So I'll talk a minute about 2014 guidance. We feel extremely good about making our 13% growth in the consolidated pro forma business, meaning the -- taking into account the consolidation of My Mediasite -- or Mediasite KK and MediaMission. This is the core business. This is exclusive of large opportunities. And so adjusted for the partial-year impact of the acquisition, particularly Mediasite KK, we will reach approximately $39 million of billings in guidance for the full year of 2014 -- fiscal 2014. Obviously, we just told you about Leeds. We had set a range of expectation in terms of what we expected to get from the large deals, and clearly, Leeds is in the category of a large deal. So we're upping the guidance there. I think we said something like 1% to 8%, but just turning that into numbers, we now fully expect the large-deal component to be between $1 million and $2 million for fiscal 2014. The bottom line in results are interesting because, obviously, we have the transaction cost, but we also have a non-cash gain of $1.3 million in the second quarter of 2014, which will, in fact, go to the pretax earnings line. And as a result, we're upping our pretax earnings guidance to 7% to 9% in consolidated revenues. So all in all, we see a very positive 2014. We are still working a number of large international deals. We are very encouraged by the signs that we see, and so that's over and above Leeds. And so we are -- we think there is an upside, and we're very aggressive and very, I will say, motivated by the successes that we've had and that we're anticipating.

So that concludes our prepared remarks. Ken, I will turn it back to you.

Kenneth A. Minor

Okay. So we're going to start, first of all, by taking questions from our analysts who are on the phone. So operator, can you secure that?

Question-and-Answer Session

Operator

[Operator Instructions] We'll start first with Marco Rodriguez.

Marco Rodriguez - Stonegate Securities Inc., Research Division

I was wondering if you can first talk a little bit about the product revenues. I wasn't sure if I caught the ASP for the quarter. Was that $8,500?

Kenneth A. Minor

It was $8,800.

Marco Rodriguez - Stonegate Securities Inc., Research Division

$8,800. Then can you talk a little bit -- and the unit's over 301, correct?

Kenneth A. Minor

That's right.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Okay. And can you talk a little bit then as far as what happened to the ASPs? I mean, you had some nice growth there on the units sold, but with the year-over-year drop in ASP, revenues were dropping as well.

Kenneth A. Minor

Yes, there is 2 big components to that. I mean, first of all, if you compare it to last year's first quarter, we had about a 1:1 relationship of mobile units to rack units. And the mobile units are more expensive than rack units. In Q1 of this year, we had a 2:1 ratio. So we had twice as many rack units sold during the quarter as mobile units. And that does tend to flip around quite a bit. So that's certainly has an impact on that. The other thing we did is -- we mentioned during the presentation that there were 2 or 3 fairly concise transactions and -- international transactions that had higher volumes, and those had some lower selling prices. So we did have a couple of those that had ended up having an impact on the ASP as well.

Gary R. Weis

I would add quickly that, that is really a mix issue. That is not us lowering prices on individual units per se. That is more of a mix situation.

Kenneth A. Minor

That's right.

Gary R. Weis

And we keep very close track of opportunities to reduce cost. So you notice the margins actually increased by a percentage point. So we feel extremely positive that we know how to manage the evolution of our product over time, by both lowering the cost of the recorder technology and, at the same time, dealing with the mix. The mix is the mix. If we have a given quarter where we happen to get a large mobile deal, then the numbers would go the other way.

Kenneth A. Minor

And we've seen it happen many, many times, and that's partly why I -- we tend to get the same question regarding inventory in every quarter because we've gone from 2 recorder versions that we had just, I think, 1.5 years or 2 years ago, and so now we have 8. And we've got more in the pipeline that are coming pretty soon. So since we have these pretty dramatic changes in the mix between those 8 different versions of recorders, we stock up pretty heavily on each of those 8 different versions. And it's -- I wish I can pinpoint a pretty constant trend because it would allow me to get inventories down, but it does tend to flip back and forth pretty dramatically.

Marco Rodriguez - Stonegate Securities Inc., Research Division

All right. And then maybe, I did my math wrong here, but I'm seeing the gross margin in the products declining year-over-year.

Kenneth A. Minor

Well, the product and the product margin did decline as a result of the lower ASP, and the big increase in service offset that. But I -- we do expect to see that to flip back around. I mean, the rack to mobile unit won't always be a 2:1 ratio. And we want always to have large transactions in a quarter.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Got it, okay. And then on the services side, I saw some really nice growth there. It looks like maybe a lot of that was due to the events and hostings. Were there any sort of activities there on a year-over-year basis that kind of drove this large gain there? Or is this kind of like a new level that you'll be expecting through the year?

Kenneth A. Minor

Well, we certainly had some very large transactions. I mean, Gary mentioned Dreamforce during his portion of the presentation. That's a very significant event for us, and that event was larger than we've seen in past years. And I think, yes, the events business is definitely growing. I think we've made a number of changes in how we manage the events team over the last year, and I think that's certainly having some positive impacts. We've consolidated the sales group, so that there is a different sort of focus on how we manage those large events, and I think, as a result, we'll start to see more and more of those larger deals happen.

Gary R. Weis

And we really have initiatives to build more strong partnerships with large potential buyers. So that it's not 100 smaller events. It's more 2 or 3 or 4 strategic partners who can have us involved in large events.

Kenneth A. Minor

Right.

Marco Rodriguez - Stonegate Securities Inc., Research Division

Got it, okay. And then just in regard to the acquisitions that are creating a lot of moving parts here. I was wondering if you can kind of help us think through what your operating structure is going to look like come Q2.

Gary R. Weis

Let me start it out from a management perspective, and then Ken can add to it from the standpoint of financial data. I think I've said this before on the last call. My experience in running global businesses is that you need to keep the customer-focused efforts in Japan, focused in Japan. So our best and safest way to continue good results in Japan is to work with the existing management team, strengthen them from the standpoint of providing them greater support from the United States, but keep them laser-focused on the business in Japan. So that's what we're going to do. We're going to continue to, I think, have very nice growth in the Japanese business. And so that's the story in Japan. In MediaMission in Europe, it's a little different, because they offer -- the team we've gotten offer a couple of different synergistic kind of things that can help us to a great deal. Some of our product development in the past, actually, was done by MediaMission on an arm's length supplier relationship. And we now have that development resource directly applying to our business. So that's a good thing, and it will allow us to accelerate some things. In fact, in the Leeds win, having that resource available, I think, contributed to that win. Secondly, we now have an opportunity operationally to have a real, on-the-ground presence in Europe, in Mainland Europe, that will improve our ability to ship RMAs to customers, replacement units to customers. It will provide closer technical support. It will supply in-region help desk capabilities real time, in the time zone. So there are a number of synergistic examples from the MediaMission world. So we're managing those 2 separate integrations in a slightly different way. And Ken, you can talk a little bit about the financial integration.

Kenneth A. Minor

Sure. In terms of -- well, first of all, the $39 million of billings we provided for the full year takes into account the increase in billings and revenues that will start adding to our results right now. So as of 1/1, MediaMission is included; as of 1/14, Mediasite KK is included. In round numbers, we had talked about full year results for the 2 of them contributing -- it's about $6.5 million for Mediasite KK and about $1 million for MediaMission. So in other words, they're in that $7.5 million to $8 million. So in round numbers, you can be thinking about an addition of a couple million dollars on the top line for the quarter. Now in terms of what they'd look like, they look a lot like us in terms of what they sell and how they sell it. And so they resell recorders. So what you will see is an increase in the revenues from recorders. You won't see an increase in the units of recorders, because what they're doing is reselling units that we sold down [ph]. But they're able to get some pretty significant markups in their countries. And so it will result in an increase in recorder revenue. Similarly, we'll see that they have their own events business, they have their own hosting business, and they have their own support that they provide to their customers. So the mix will look something similar to what we've got here, even reporting [ph] [indiscernible].

Marco Rodriguez - Stonegate Securities Inc., Research Division

Okay. That's helpful. And then last quick question, and I'll jump back in queue. Your guidance on the pretax margin side. I'm assuming if I strip out the additional transaction cost in this quarter and that -- the gain that you'll be also -- the non-cash gain you'll be showing in Q2, the percentage -- the pretax percentage stays the same at 4% to 5%?

Kenneth A. Minor

Well, the 4% to 5% included the transaction cost initially. So that number's already in there. So if you strip out the $450,000, the number needs to go up. And, you're right. I mean, the -- most of the upward increase that we provided in the guidance was the result of the gain. So if you strip that out, then the number is similar, but we did put a higher number on the top end. The gain was a result of -- or has an impact of about 3% in round numbers. And so what we're saying is that we think that our top end range is likely to look a little stronger than the 5% we had before, as a result of getting some of those larger deals in.

Operator

And with that, we'll move on to our next caller. Howard Halpern is now in the queue and ready to speak.

Howard Halpern - Taglich Brothers, Inc., Research Division

In terms of -- I guess, how many additional professionals were hired in -- or came on board from the acquisition in Q1? And how many do you expect in Q2 to come on board?

Kenneth A. Minor

Well, in terms of the employee counts from both? I mean, when we acquired MediaMission, the total headcount, I think, is 5. I mean -- so it's a very small group in -- at MediaMission in the Netherlands. In terms of Mediasite KK in Japan, it's a little over 40. So the combined basis were in the upper 40s of additional 2 points [ph], our pre-existing headcount, which I think, we're at about 115-or-so. So we're getting the high 60 range now.

Howard Halpern - Taglich Brothers, Inc., Research Division

Okay. And with the win, in international win with Leeds, do you expect more of the international wins to include both the lecture capture and the enterprise as a combination?

Gary R. Weis

Absolutely. We think that more universities will use the same rationale that Leeds used in selecting a major impetus beside -- behind lecture capture. So I get -- many times, I get questions from investors that say, "Why aren't universities more aggressively deploying lecture capture?" Well, it varies university by university. North Carolina State was a good example of one that we've worked with closely to expand the use of our product here in the United States. Leeds did the same kind of thing. They justified it based on student outcomes and student retention. So all of this takes time. And so yes, I anticipate not only continued larger wins in lecture capture, but I also believe we -- you will see continued wins in video content management, but they won't necessarily be together. In other words, some, especially corporate customers, may decide to invest in video content management and never really invest in capturing things inside their enterprise with our technology, which is fine, too. It's another source, another stream of billings and revenue for us.

Howard Halpern - Taglich Brothers, Inc., Research Division

Okay, all right. And is there anything on -- because I know you talked about in the fourth quarter call, maybe it's too soon in the year, but talked about the potential for some annual licensed products to be introduced in 2014? Any timing or insight that you can give?

Gary R. Weis

Well, that's exactly the plan for video content management. Obviously, in the case of a large deal like Leeds, we will choose to bundle things, and that's fine. But if a customer likes to do a video content management acquisition standalone, it will be most likely on an annual license basis.

Howard Halpern - Taglich Brothers, Inc., Research Division

Okay. And one final question, I guess, concerning unearned revenues. Is that $7 million going to stay roughly about the same? Or do you think it will bump up as the quarters go by?

Kenneth A. Minor

I think we'll continue to see it increase. I mean, I think it should continue to increase ratably as our billings and revenue increases.

Operator

And our last caller in the queue at the moment is Mike Niehuser.

Mike Niehuser - Beacon Rock Research, LLC

Just if I could kind of follow up on some of the questions on the first caller. The events and services were really impressive, and I am just wondering if you could comment on what degree this might be seasonality or actually growth in both support and maintenance and events and hosting, whether this is just large relative to products given the quarter that we're in, or whether we're seeing this becoming a larger percentage of the revenues and billings?

Gary R. Weis

Well, let me take a stab at that. The -- I think there are 2 countervailing things that you've got to take into account. One is that as we move in the direction of more annual licensed products, the annual licensed component will increase, and that will become a revenue deferral item, if you will, right. So it all depends on how you count. Secondly, I wouldn't, at this juncture, at all minimize the pure product side, meaning -- I think your question was, is this a trend where we're going to see a widening percentage of our total billings and revenue be driven by a services or events or hosting kind of world? I think it's premature to make that observation. And next quarter, in the following quarter, when you see the large number of rooms that Leeds will be adding, that will, again, swing the pendulum back the other way. So no, I don't think that there's a wholesale change.

Kenneth A. Minor

As a further comment to seasonality, every year, for the last -- I think I looked 10 years now, we've seen our fiscal first quarter be down from the fiscal fourth quarter. Last year, that wasn't the case. And if you remember, we had a number of large transactions both from a products' standpoint, as well as a support standpoint, that didn't close in the September quarter and did close in the December quarter. And so as a result, I believe that what we're seeing here, Q4 to Q1 expectations. I mean, I think this is a typical seasonality. The comparison of Q1 this year to last year Q1 is atypical because last year was unusual. And so I think it's actually minimizing the amount of growth that we had, and we clearly didn't see a drop-off in support. But if you compare strictly Q1 billings to Q1 billings, it looks that way because we just had a bunch, bunch up in Q1 of last year.

Mike Niehuser - Beacon Rock Research, LLC

Well, it just feels positive no matter how you look at it that margins are up a little bit, and it's very consistent performing in what historically seemed to be a tough time of the year. So I just wanted to get your thoughts on that. Also, with the acquisition you're making in Europe that's promising -- and that's a little different than having been established in Japan, can you -- is there a sense that there might be some consolidation in lecture capture, industry-wide, given what appears to be the sort of leaps and bounds you're making in terms of improving both lecture capture and My Mediasite and the other things that you're working on in the medical customer base?

Gary R. Weis

Well, we feel very, very good about the technology base we've got and our ability to continue to accelerate wins. We also see -- in a number of accounts, we see the opportunity to displace other vendors' technology. So commenting about consolidation, I'm just not in a position to make any direct observation, but we're out there every day, doing the blocking and tackling that lets us win more against our competition.

Mike Niehuser - Beacon Rock Research, LLC

Well, it certainly looks like you're earning the right to be up front, and that's great. I appreciate you mentioning earlier about the difference between the business in Japan, being focused in Europe. I am just wondering, are -- is the university, as a client base, not the structure of your distribution channel, but is the -- is it -- do the customers actually -- are they just identical to the North American client base of universities? Or do they -- are there little idiosyncrasies that are worth passing along that you've learned over the last several quarters or years in looking at the customer preferences in Europe and how that might lead to that becoming maybe more or less wanting to adopt your technologies?

Gary R. Weis

Well, let me take and answer it slightly different for Japan and Europe. I've run businesses in Japan for a lot of years, and Japan, universally, always is different. The culture is different. The buying requirements are different. It's just plain different. And as I said earlier, you need a team on the ground that understands that. That feeds back product requirements to us, that does localization -- because in Japan, you have to have a localized version of the software. And so it's tremendously important to have people on the ground in Japan who understand all of that. Now we do have several large university customers in Japan. The core technology that we have fits in very nicely. Does it need a little adjustment around the edges? Of course. But having MSKK now as part of the team makes it easier for us to get those requirements and easiest -- easier for us to react to those requirements. In Europe -- again, I would say my observation is that in Europe, it's much easier to sell a product that's an English-language product. So localization is not an issue, but you will always find some regional requirements that are a little bit different. And frankly, one of the things that we're set up to do in 2014 is to start to focus more on feature-oriented releases rather than a once-a-year major release of the platform. So if we need to, I think we now have the flexibility in our development environment to, in fact, personalize product if those requirements get to be significant.

Mike Niehuser - Beacon Rock Research, LLC

Well, that kind of goes to the question I had about preferences. And it sounds like customers are moving up the learning curve and demanding more flexibility of providers, and that touches on the consolidation or beating out the competition. There was no mention of the Middle East on the call. Is that still something that's an initiative that you're working on or could we still hear something during the year about that?

Gary R. Weis

Absolutely. We -- when I just talked earlier about international, large international transactions, the point was not to denigrate the Middle East. It was to say international means other than the Middle East, in addition. So it's a very strong situation internationally. The Middle East deals all continue to work along like they have been working along. But frankly, we're going to get orders when the customer is ready to take the equipment, same story I've told you in the past, but nothing has changed there.

Kenneth A. Minor

Well, I think at this point, we have a few minutes. We can take some questions over the Internet then as well.

Tammy Jackson

First question, what are your growth expectations for the Mediasite enterprise video platform this year and over the next several years? And will it become a meaningful portion of the total revenue over time?

Gary R. Weis

We -- because we're so early in the product cycle, I don't have any individual product line forecast that I'm prepared to share. I will tell you that we believe, and our analyst community out there that advises us believes that our participation in that space is going to open up a wider directly addressable market for us, and that should imply more growth. But again, I'm not going to get into specifics to try to set guidance for what will happen in just that one product tier.

Kenneth A. Minor

And the success we had with Leeds is a great indication...

Gary R. Weis

Absolutely.

Kenneth A. Minor

Of our early success in that market.

Tammy Jackson

Is Mediasite starting to pull away from the competition with its product features?

Gary R. Weis

We, around here, certainly believe that's the case. The richness of the features, and the divergence from just focused on lecture capture, is all, I think, an indication of our investments over the last couple of years to, again, provide feature-oriented releases that are going to deal with a particular competitive environment in each one of the market segments we're trying to address.

Tammy Jackson

The customer usage data is fantastic. Are the high year-over-year growth figures consistent across a large section of customers? Which types of schools are seeing the highest growth?

Gary R. Weis

Number one, the -- we're confident of the data source here to say, yes, they're consistent over higher education. I'd point you back to the fact they are higher education statistics. They don't deal with corporate customers. The -- I'm sorry, I blew it [ph].

Tammy Jackson

Which types of schools are seeing the highest growth?

Gary R. Weis

It's across the board. I mean, I will tell you that when we saw the survey data and -- we were kind of expecting that it might be oriented to particular types of schools, but frankly, that's not what we saw. It does require the institution to have a focused deployment program around incenting its faculty to use Mediasite. And so again, our named account strategy of working with large accounts to get them support and help in figuring out how to be successful at implementing their programs, I think, is an element that will help us to continue to grow the usage statistics. And I'd point out that there's nothing that's skewed in those statistics that would say that the 2013 growth over 2012 is anomalous. Those -- the responses in that survey are pretty typical and indicative of what we expect to see happening in the future.

Tammy Jackson

There are no more questions.

Gary R. Weis

Okay, very good. Well, thank you very much. We -- I think you can see that our team is very much energized by the Leeds win. And as I pointed out, we've got a lot of other large opportunities in the pipeline. And so we look forward to seeing you again next quarter and being able to report on our rollout status with Leeds.

Kenneth A. Minor

Thank you.

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