Sonic Foundry: Leadership in Long Distance Education

| About: Sonic Foundry, (SOFO)

We consider Sonic Foundry Inc.’s (NasdaqNM: SOFO) suite of Mediasite Internet recording products to be the most effective manner to communicate “serious” content on the Internet. Our opinion is based on our personal experience using the product in both education and in corporate communications. The product excels when the source of serious content has an earnest and important message to share with an audience equally anxious to fully understand and make good use of the message. The more competent and confident the source, and the more willing the audience, the more effective are Sonic Foundry’s products in conveying an important message.

Our Case for the Best Use of Sonic Foundry Products and Services

Few sources can equal the self assuredness of a message than by a university professor. Nobody understands a subject and is more confident of course content than a PhD. The instructor is focused on the goal of imparting the wisdom of the message and is intolerant of friction or disruption in conveying the lesson. On the receiving end of the message, nobody is more earnest and intent on grasping the core content than a struggling student hanging on each morsel of information. The more complex the content, and competitive the learning environment, the more welcome is Sonic Foundry’s solution. We find the types of courses most suited to Sonic Foundry’s products are medical, engineering, and financial courses.

Second only to the university professor in command of a message is a company’s Chief Executive Officer. A CEO is solely responsible for understanding the operations and vision of their company, and equally responsible for sharing both competently and completely to investors. If the company has a good story to tell, Sonic Foundry’s product is possibly the most effective way it can be shared to the widest audience. Just as with a university professor, a CEO should be intolerant of friction or disruption in conveying the company’s vision and story (incidentally, most CEO’s lack tenure and his/her salary depends upon it). On the receiving end, clearly nobody is more intent on understanding a company’s story than an investor.

Our Experience in Education

We have used Sonic Foundry’s products for the last three years offering a long distance education component to the Pacific Coast Banking School, considered to be the premier professional banking school, conducted at the University of Washington. The school is a catalyst to accomplished professional bankers midway in their careers to assume executive level achievement. Counting the number of students, number of lectures, and hours of lecture time, we provided 37,000 student-lecture-hours for PCBS students. The robust product offering was best explained by Dr. Jim Owens, PCBS instructor, and Head of the Department of Accounting, Economics and Finance in the College of Business at West Texas A & M University, explaining the product offering during the 2006 session.

Dave Enger, the Pacific Coast Banking School’s CEO stated, "Bank executives participating in the Pacific Coast Banking School have widely diverse backgrounds, and the PCBS curriculum is designed to challenge participants. Returning to their demanding careers and lives following the intense 2-week school session, participants found that access to the video recordings of their classes provided an opportunity to maximize their learning, and particularly invaluable in completing their assignments over the intervening year, that require them to apply the concepts learned in class to their own institutions."

Students come from disparate silos of expertise, ranging from retail or commercial banking, to human resources, auditing, or information technology. Some students are outside banking, such as bank examiners, bank associations, and credit unions. Having attended the school in the late 1990’s, we witnessed the debilitating effect of fear imposed on professionals straining to learn subjects outside their specialty.

A good example is Steve Turkiewitcz, CEO of the Montana Bankers Association, who said "As a non-bank professional, the internet access to the PCBS lectures provided me the flexibility to review the complex finance concepts presented by the PCBS instructors on my schedule. This resource enhanced the value of the PCBS experience." Off the record, Steve confessed the availability of rich media recordings “were a life saver.”

Some students geographically lack the benefit of working with other students while completing their assignments following the summer session. Lee Francis of the Bank of Saipan, said “I really appreciate the availability of the video presentations. It helped me so much to understand what the subjects really are all about. It's something that's really hard to do during the two hectic weeks stay at the University of Washington. I would probably be lost without the help of the video presentations.”

There was abundant anecdotal evidence affirming the effectiveness of the Sonic Foundry recordings. Following the first year we were consistently stopped by now upper class students and thanked repeatedly for the “life saving” help provided. We also took the opportunity to address classrooms and poll students as to its effectiveness. Nearly all the students utilized the recordings, and most were very satisfied.

Our Experience in Corporate Communications

We have first hand experience utilizing Sonic Foundry’s product solution to supplement our research in the mining sector. We have found the mining industry, an unfamiliar industry to most investors in the lower 48 states, to be particularly appreciative of the product’s educational characteristics. Interestingly, the mining industry has a unique combination of science, engineering, and financial aspects that appear perfectly suited for Sonic Foundry’s products. CEO’s are provided an excellent platform to personally discuss their company’s progress, competitive position, and value proposition.

Our initial demonstration of the versatility of the product was for our virtual investment conference conducted at Skamania Lodge near Beacon Rock in Washington State on October 31, 2005. We have subsequently recorded corporate presentations at other conferences and by visiting companies at their corporate headquarters, demonstrating the flexibility and ability to provide low-cost effective communications.

We believe that Sonic Foundry’s Internet recorders are a destructive product challenging the monopolistic manner in which information is conveyed by opinion makers in the financial industry. Sonic Foundry’s products allow companies to communicate directly with investors to make their own informed decisions, effectively bypassing salespeople, analysts, business publications, and newsletter writers. Exeter Resources Corporation’s CEO Yale Simpson hailed the ability to directly communicate with investor s as “brilliant.” The link to Exeter’s corporate presentation is a good example. Sonic Foundry’s product has allowed us the uncommon ability to understand, analyze and communicate investment opportunities.

Concluding Comments

We have heard the elegance of Sonic Foundry’s products referred to as the “Rolls Royce” of rich media communications over the Internet. Having provided research coverage on Sonic Foundry for several years, we have not found serious competition for the niche their product occupies. Given the consistent sales penetration with existing customers, we see their products resemble the reliability and dependability of a HP 12-C financial calculator, a cornerstone among financial professionals for decades.

Sonic Foundry’s stock is currently trading near levels when we initiated coverage on March 15, 2005. The Company has methodically improved its product offering, increased revenues, and diversified revenue sources. At the current price level, Sonic Foundry’s shares trade at about 3.1x trailing four quarter revenues, having averaged between 4.3 and 7.7 times trailing revenues over the prior two years. With the strong likelihood of higher revenues and potentially breaking even, we consider the purchase of shares of Sonic Foundry following a period of tax-loss selling to be even more attractive.

Disclosure: The author has faculty status at the Pacific Coast Banking School. The author is long SOFO. An affiliate of the author's employer provides corporate advisory services to SOFO.

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