Sonic Foundry's (SOFO) CEO Gary Weis on Q4 2014 Results -- Earnings Call Transcript

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Sonic Foundry, Inc (NASDAQ:SOFO) Q4 2014 Earnings Conference December 11, 2014 4:30 PM ET


Ken Minor - CFO

Gary Weis – CEO


Marco Rodriguez – Stonegate Securities

Howard Halpern - Taglich Brothers


Welcome to Sonic Foundry's 2014 fiscal year-end presentation. I'm Tammie 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 Streets and investors of our current and past results, financial projections or any material non-public information during those meetings.

Sonic Foundry’s disclosure policy defines the period beginning on the 15th day of the third month of each fiscal quarter and ending on the day we publicly release the results of that quarter as a quiet period. During such quiet periods, we will not make any comments about 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-Q, 10-K and other filings with the SEC. These filings can be accessed online at 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 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 for 90 days.

And now, Ken Minor will begin today’s presentation.

Ken Minor

Thank you, Tammie. Thank you everyone for joining us today and good afternoon. I will start by going through a few of the financial highlights. On our consolidated billings the increase year-over-year was primarily a result of our acquisitions but were below expectations for the quarter for both our core business as well as Japan on approximately equal basis. The Sonic only product billings were essentially flat over the prior year which were partially offset by significantly growth in our events business. The billings in Japan and in Europe were negatively affected by the strong dollar. The yen and the dollar has changed from roughly a 100 a year ago to 120 now.

Our operations in Asia and Japan were also impacted by construction delays as result of significant shortage of construction labor. The combined impact of significant construction projects to replace property that was damaged in the earthquake a few years ago as well as the upcoming Olympics in Tokyo has made it difficult for university customers to get new expansions completed. As a result one particular project we expect to get this year for approximately ¥139 million was delayed from late this year to late next year.

In terms of the other financial highlights for the quarter, our revenue is typically lower than billings in the fourth fiscal quarter but we had two transactions this quarter that had much more significant effect and it caused the difference between our revenues and our billings could be much greater than it's typical. The Sonic Foundry billings were 7.7 million for the fourth quarter and that compares to 6.8 million in revenue meaning that there is a $900,000 difference and while we built for and will collect in the near term compared to what was recognized for revenue, obviously recording additional 900,000 of revenue would have significantly improved the results for the fourth quarter and two transactions as we mentioned in our press release add significant effect for the quarter in particular. Those totaled a little over $600,000 and were a key component of the increase in the deferral.

One of those is an events capture that happened in Q1 and that has now already being recognized as revenue in Q1. The other one was a transaction in the Middle-East that initially didn’t meet the revenue recognition criteria for Q4 but now has and so we have recognized that revenue in December. As I mentioned my remarks in the quarter slide, the currency rate changes made a significant difference in our results. Had the currency changed since last fall we would have reported billings of approximately $400,000 higher this year which would have been about a 4 point [ph] of margin.

The dollar continue to get stronger even after year-end against both the Europe and against the yen. Our operating results were up over the prior year primarily result of the acquisitions and approximately as expected, that’s the operating expenses. For the full fiscal year, on a year-to-date basis the Sonic only revenues increased 10% over the prior year with billings being about 12%. Obviously the consolidated billings and revenues were impacted by the acquisitions.

The increase of billings over revenue this year of 2.9 million compares to about a 1.5 million last year and again as I mentioned in the earlier slide that’s a significant change from what we have seen. So billings are a better measure of cash coming in since we bill for and typically collect within 60 to 75 days or so after the end of the quarter. So it's a significant impact on the business and has a significant impact on revenue and a significant impact on earnings.

Our margins were pretty consistent with Sonic level but we’re slightly negatively impacted on a consolidated basis due primarily the significant currency swings that I mentioned earlier and particular in Japan but as well as the euro in Europe which of course then results in a lesser amount of revenue being recorded since most of the cost are denominated in U.S. dollars, the cost are not impacted which of course is impacting that margin then.

We’re adding additional disclosure of the adjusted EBITDA number, that’s something we have added in the press release as well as here. So it's kind of a metric that I think investors commonly understand, it's well defined and I think it's a pretty good measure of what the cash is throwing off in the business. I think particularly coupled with the change in deferred revenue. So if you look at the slide we obtained 1.2 million in adjusted EBITDA for the quarter -- for the full year rather and combined with a 2.9 million increase in deferred revenue means that from a cash basis you can look at that we generated about $4 million worth of cash.

In terms of the consolidating income statements, MSKK, MediaMission generate about $3.7 million of additional gross margin and these charts are netting the company amount of what we sold at the Sonic level against the amounts that are reported from MSKK, MediaMission. So the [indiscernible] column is comparable to what would've been the case in the prior periods.

As mentioned earlier the results were impacted by construction delays and the currency translation charges during the year, the margins would have been about $300,000 greater had the currency exchange rate not happen in the consistent with last fall.

The acquisitions also impacted results by increasing the amortization of intangibles and limiting the non-cash equity income we had previously recorded on MSKK due to the prior 25% roughly ownership that we used to have, as well as the interest that was incurred as a result of the acquisitions. So the net impact of all three of these is about three points of revenue and is in part why you're seeing our fiscal '15 guidance is going to be less than the number that we had looked at in the past because of these structural changes are having an impact on that and it's about 3% and it's all non-cash.

In addition to the 3% I mentioned the currency of course, the number of times already, that had an impact on physical '14, it's going to have a greater impact on fiscal '15 because the change happened late in fiscal '14 and the dollar continue to get stronger even in the first quarter of fiscal '15. So I expect that coupled with the three points of margin impact on the structural components of the acquisition of these two companies the currency change is having another couple points impact on our results for fiscal '15.

In terms of some other data that we typically report, our ASP increase primarily resulted increase margin from reselling our recorders in our new subsidiaries, that's not included in fiscal '13 results of course because the acquisitions happened this year. The impact in the greater margin was partially offset due to the change in the yen and euro as I mentioned, as well as a significant increase in refresh units that were sold over the prior year. We know there is a significant difference from last year.

The selling and marketing increase was 988,000 over last year, 733,000 of that increase was due to the acquisition or the addition of MSKK and MediaMission results. The remainder was due primarily to an allocation of G&A facility cost.

G&A increased $460,000 over the prior-year, $312,000 of that increase is due to the addition of MSKK, MediaMission, the remainder was due primarily the higher wage cost and benefit expenses compared to the prior year.

The product development costs likewise increased, it was an increase of 307,000 over the prior-year, 92,000 of that was an increase due to the MSKK and MediaMission and the 140,000 was due to higher wage and benefit expenses.

For the full year in the same data, the ASP was down slightly due to an increase in large discounted deal to one international customer during the year and that was partially offset by recorders sold to Mediasite KK and to MediaMission and the impact of that is actually the transaction that we recorded in the Middle East and so we are averaging our average selling price for what we've built for as opposed to what's in the revenue. So that the impact of the transaction, there was a large transaction in mid-east that was deferred in fiscal '14 and Q4 is having an impact on the ASP.

The course is partially offset then by the additional margins that we get from reselling of our recorders in Mediasite KK in Japan and in the Netherlands. Selling and marketing, the increase was 3.5 million over the prior year, salaries, incentive compensation and benefits increased 475,000 over the prior year and it's partly due to increase staff levels in base compensation over the prior period.

The cost allocated from G&A contributed 662,000 of the increase and selling and marketing expenses from MediaMission and MSKK accounted for 290,000 from MediaMission and 2.1 million respectively than from MSKK.

The G&A increased 2.3 million over the prior year, professional services, this has been certainly pointed out in the past, but our legal services primarily had a significant increase over the prior year related to the Astute litigation that we’re involved in. We settled that as you may recall in June of 2014 so there is about a $1 million impact from professional fees that were in the $2.3 million increase, obviously that’s behind us now.

The impact from G&A expenses for MediaMission and for MSKK was 246,000 and 785,000 respectively then. For product development the increase over the prior year was 1.3 million, an increase in comp and benefits of 600,000 was a significant contributor a slightly higher headcount in typical annual base wage changes accounted for 347,000 of that impact and most of the remaining 269,000 was due to capitalize software development that we incurred in the prior year when we capitalized some labor costs associated with the product that we developed. And then finally the impact from MediaMission and MSKK was 262,000 and 75,000 respectively.

In terms of the balance sheet, the last chart I'm going to go through, our current assets increased year-over-year by 3.5 million that’s due primarily to approximately 2.4 million in cash and accounts receivable which were largely related to the acquisitions. Likewise, goodwill and other intangibles increased by $7 million over the prior year and that's due to 6.3 million for the acquisitions and 600,000 due to product rights associated with the license agreement that we ended up with Astute technology. Our current liabilities increased 6 million, it's due primarily to 2.1 million in subordinated notes that are due to the sellers of MSKK and to MediaMission and about 2.6 million was other [ph] revenue in that same number.

Long term liabilities increased 3.7 million due primarily to an increase of 2.2 million in deferred taxes and again that was largely related to the acquisition and 1.0 million for an increase on notes payable to Silicon Valley bank. We’ve approximately 2 million in principle and interest due to sellers of MediaMission and MSKK which is largely due, mostly due in January of this next year. We plan to utilize cash in Japan, pay approximately half of it and we have entered into subscription agreements with two existing shareholders for 500,000 in stock which will be sold at an average market price in December, so we expect to close that in the next week to two weeks.

We've also entered into discussions with our bank to negotiate our credit facility and that due to primarily the fact that it's ending late next year and so we’re going to start working on that process soon and I think the expectation I’ve is that the term note with Silicon Valley Bank will --- we will get some additional funding from them, and as a result we will increase that note by about 800,000 to $1 million during Q2 of this current fiscal year.

So at this point then I'm going to turn the presentation over to Gary and he will walk us through a few of the business trends.

Gary Weis

Thanks, Ken. Good afternoon everyone. Let me begin before I get into the slides; make a couple of comments here about 2014. Clearly it was a complex year as you obviously would observe from Ken's comments. We had two major acquisitions which we plan for the beginning of the year. Obviously those acquisitions were impacted by things like the Japan currency fluctuations and the construction delays in Japan which affected one of the larger deals that we would have expected to get in 2014 from MSKK in Japan.

The other thing that was complicated was the Astute of law suit and the settlement that was something we had not anticipated and as a result of all of that the communication and setting of guidance was not only complex, but it was problematic in terms of how we communicated it to you.

So our objective for 2015 is to make our guidance simpler and easier to update every quarter, you'll see that at the end of my remarks. The other comment I'll make is that in terms of both of the acquisitions we are -- obviously track goes against our original financial and business objectives. Our view of those transactions is over this coming year, they will be back on performance that we expected, so we are very pleased with those transactions and we’re very pleased with the teams that we’ve in the Netherlands and in Japan and we look forward to growing those businesses in 2015 and beyond.

So let's talk first about the top five enterprise deals in terms of billings, you'll notice that Q2 and Q3 had very large deals, two very large deals, the Leeds and the NYU deal. And you will notice by comparison that the deal in -- the big deals -- the top five deals in the fourth quarter are much more anemic. In fact, the largest of these was the one that Ken discussed when he said that we did not recognize revenue from the deal during the fourth quarter but we have now cleared that and will recognize the revenue for that deal in the first quarter of 2015. The comment I will make on this slide just to get it communicated now is that we continue to work on several large deals in the Mideast and we actually have very positive news on two of those deals. We have now reached the stage in both of those deals where we’re finalizing the terms of letters of credit and the conditions around purchase orders. So I look forward to those deals happening partially in the current quarter, the first quarter for one of them. We will actually ship product for one of them in the first quarter of this year and the second one in the second quarter of this year.

So I like the past where we would make comments about they are still in the works and so forth. This time around two of those deals have now reached a state of maturity that allow us to predict with confidence that we were going to begin shipping product in the first quarter and the major shipments in the second quarter.

Let's talk about the billings and non-GAAP income being seasonal. This chart is the same format that we always use, one of the things that you will notice is that just for simplicity of both guidance and communications we have moved off non-GAAP as a major way to talk about the business going forward and we will use adjusted EBIT and comment on deferred billings and revenue, but historically we've used this chart so will continue to use it for this presentation, couple of comments I will make is that you see the continued growth in both billings and revenue for the combined combination of the third and fourth quarter. You will also notice that non-GAAP net income has remained positive in spite of the gap losses that we've achieved during the year and the non-GAAP net income does take advantage of the revenue deferral, the non-recognized revenue in the periods, but it is a very good indication of the cash performance of the business. And from our perspective not only is the business position to grow at a better rate in the future, but it's also very well positioned from the standpoint of both cash generation and income generation in 2015.

From the standpoint of where the business comes from in terms of new versus existing customers. Again, this chart is for Sonic only, the business has it existed before the acquisitions. You will see that the behavior in the second quarter showed a higher percentage for new customers due to the large deals at Leeds and NYU. However, the pattern is now back in the fourth quarter to more typical with 83% of the business coming from existing customers

By sector, a similar story strongly influenced by Leeds in Q1 and Q2 or Q2 I should say, but the education business continues the education segment sector still continues to be a major source of business for us. I will comment a little later about our named account process for selling to higher education at least they top accounts and higher education and the successes that we’re having there.

And finally domestic versus international, again in Q2, the strong effective leads caused the international balance to jump a bit. We would expect on average the international business still to continue to perform very strongly. So the trend will continue in the same direction that it has from the past year

Slide shift now to talk about what we really focused on in 2014 and what we will be focusing on in 2015. For 2014, we clearly had a major effort in terms of assimilating the two acquisitions and integrating those businesses into the core Sonic Foundry business. I'm happy to report that that integration effort and that building of a single global team has gone very well. Clearly we expect to demonstrate that in 2015 and beyond by increased billings and increased performance in terms of net income and EBITDA but the work that has been done in 2014 to integrate the teams and install common processes across all of those businesses to make them more manageable from a Sonic Foundry perspective went very well.

One of the things that we said we were doing in 2014 is we would leverage development that we had already accomplished to allow us to focus on what we call the Mediasite enterprise video platform. What this means is that over the past three or four years we’ve developed a large portfolio of functional capability. Some of it for higher education, some of it for corporate businesses. We wanted to ensure that we could reach broader markets by leveraging that development capability more broadly in the marketplace. We continue to work toward that end we've clearly seen that our Room-Based Lecture Capture business has grown with accounts like Leeds and NYU and Ohio State and so forth where automated Room-Based Lecture Capture is still a major selling point of our products. However, we've also seen an uptick in Mediasite licenses for educators who want to create their own content. We've seen some very exciting developments around what we call Mediasite showcase where we now have a far improved way of allowing the authors of content to present and deliver that content of the audiences they want to reach outside of their student-based academic community within the University.

So we’re very pleased with the work we've done in better leveraging our base product investment and we would look for continued leveraging of that as we go forward in 2015. One of the things that we obviously focused on is global growth and an interesting statistic if you sort out the growth in international billings, it's up 62% year-over-year, now clearly a big portion of that is due to the fact that we have our two new partners in MediaMission and MSKK, that we’re now counting billions in revenue for -- in their own geographies, but a lot of other customers like Leeds are developing in the UK, in Germany, in other European geographies. So we’re very convinced that from an international perspective, we've got the processes and products in place to continue to expand internationally. I'm going to talk a little bit about some of our partnerships in that regard as well.

In Japan we see the same trend really developing that we see in your -- there are more and more customers who are now focused on providing value to their students in a brick and mortar educational environment for capturing electronically the material that’s presented to the student. There has been a lot of talk, a lot of publicity around loops and [indiscernible] and other for profit online educational activities, but the brick and mortar schools really need tools to help them leverage their content that they generate within the walls of their educational institution and to present that to students in the same electronic form that the other venues use.

It's competition for students and that's one of the motivating factors that led to Leeds, making the investment it did in room-based automated lecture capture. In Japan, University called Teikyo is another example and I'm going to show you some statistics in a minute about how they've leveraged our product set to capture content and make it available to their students.

So we see that trend continuing to develop. Now in China, we have been very pleased with the two partners that we have in China. one is OneZero, the other is Neusoft. Neusoft is very much of a systems company, they have a very conglomerate set of products and services but in information technology they have a large information technology outsourcing and system services business. We are working with them to integrate Mediasite product into that business, and we’re very pleased with the progress of that. We would anticipate some revenue generation from that in 2015. OneZero is much more like the kind of partner we work with in the U.S. and Europe. They are a partner that does integration of room-based technology as well as all things, and they are attacking the market in a different way in China. They have a presence throughout most of China just like Neusoft does and so we found that both of those companies are excellent partners for us to work with.

We I think I’ve said in the past, one of the tasks we had on our plate to be successful in China was to provide localization in the Chinese language of our products, that's now been completed for the base release of product in China. We've also determined from our partners some of the unique market needs from a recorder perspective in China and we will be making product available that meets those requirements in January and February of this year.

The focus in China tends to be a little bit different than in the United States, it's more of the K12 segment of education and both of our partners understand that and have targeted customers that are in that sweet spot inside China in terms of market potential. We have added a person in China, we've actually added nine U.S. basis, we have had a couple of people to help develop markets but in particular a Chinese National in China to work with these two partners within the time zone and within the language to make us more effective at dealing with our partner.

In Europe and the UK, the Leeds experience for us was extremely valuable in two ways. The first is it gave us a real customer environment to ensure the applicability and efficiency and effectiveness of our products to do a much more automated room-based lecture capture than we've seen in any other institution. We have large customers in the United States; we’ve customers in the United States with an aggregate of over 200 recorders. However, they use the product very differently; they use it school by school within the University. For Leeds, and I'll talk a little bit about this later, they had a sponsor to implement automated lecture capture in all of their rooms across the entire University and we see other customers in Europe, in the UK especially that are following that model. We have a very happy customer, very satisfied customer and they're not all bashful about telling people how successful they have been with lecture capture.

The other key element of this not just in Europe, but in the United States as well is our cloud offering. We're finding that even large University customers are a little bit distracted in terms of their own internal IT requirements and they just don’t want to deal with adding another complex solution like Mediasite and so they are looking for us to provide that on an outsourced basis through our cloud service. And obviously with Mediasite events which we will again talk about a little bit more here in a minute, we see growth in the use of the event services that we have for the same kind of outsourced capture of off-site events.

So what is the consulting community's report on us? I won't go through and read all the quotes but Frost & Sullivan, Aragon and Gartner all have seen us as a very strong leader in different spaces, Frost & Sullivan focuses on lecture capture and they have named us for the 7th year in a row, the leader in global lecture capture. Gartner, the important thing about Gartner is that that they have picked up on our content management services and have now named us as a challenger in that business and again if you hearken back to other presentations that we have had we have been clear to say this is a new space for us.

Education is our core world that we've been in for five or six or seven years for enterprise video content management, that’s a new space we’re moving into and to have us acknowledged by Gartner, and Aragon as a player in that spaces is a positive indication that we’re doing the right thing. And finally the quote from On the Radar from Ovum is really an important point. We know how to support customers in a remote environment and do a better job of installing our products and supporting our products on a long term basis than any other vendor out there.

We’re not a vendor who simply walks in and sells the product and leaves it to the customer to make it work. We work with the customer to make sure our products and services are doing what the customer wants, that breeds customer loyalty.

As I’ve said before we are in all aspects of video. The core thing that we have is our enterprise video platform, that's where the content is captured, stored, managed, presented and secured. We have an excellent automated system that’s based on recorder technology better than anybody else in the industry with my Mediasite we've broadened that to allow educators who want to teach in a different paradigm to be able to do so. We've offered customers the ability to not just do it on premise but also have us do it for them to host the enterprise video platform in our own cloud and finally, we've expanded our recording options to allows us to do multi-view and something that you will see us begin to talk about in the future called Mediasite Join [ph] which is our videoconferencing capture service. So we continue to look for new ways to tailor our products to what our customers want us to do

Couple of customer examples, New York University, the law school at New York University had been a longtime Mediasite user for a number of years. We were selected last year to be kind of their default lecture capture provider. You can see in the Stern School we displaced Echo360, one of their -- outside of the United States campuses in Abu Dhabi we are fitting up their new construction buildings there and we’re also doing the School of Dentistry which is a renovation project.

This is an example of a large university that choose to use our cloud service and that just simply makes it easier for them to move more quickly to adopt the solution. I will make a point, though that getting established as the default or chosen standard lecture capture provider is important, but it doesn't mean you instantly get multimillion dollar deals because the funding of each one of those implementations that you see listed here is done locally at a school level.

So one of the advantages of our named account approach to selling to these customers is we have the knowledge of and the relationship with the various schools in the customer and being elected is a standard means that you don’t get into a debate about selecting technology when they do have money to fund a project, you just implement and facilitate the project.

In Teikyo University, the initial implementation at Teikyo is sold by MSKK, it was for basically 42 classrooms in their medical school at Itabashi campus, that has been in production now for well over a year and when I say in production I mean the equipment has been installed.

The first semester, the two semesters that they have been using it happened over the last six months and you can see that they already have students doing over a hundred thousand views just in that six-month period. So very aggressive again at automating the capture of content in those 42 rooms. There is another campus which is focused on science and engineering which is beginning to implement our products, but the bigger opportunity is the Hachioji campus which is scheduled for a 2015 implementation to include active blooming classrooms.

This is an example though of the construction concerns in Japan. The campus is under construction and if you can't get construction labor it takes longer to build the campus, you’ve heard me say that same story in our Middle East deals. It's the reality that we deal with; we're in this for the long term and making sure that we're there to harvest the business when the customer is ready

University of Leeds, we’ve talked a little bit about this already but you can see the statistics up there. They fully automate the capture of lectures and classrooms through an interface of their automated classroom scheduling system. I want to -- rather than talk about the technical implementation, the gentleman who is highlighted on this through the twitter snapshot at the lower right, gentleman named Neil Morris was instrumental in getting this project implemented within Leeds and I think you've heard me say this before that we've got the product, we’re the best in the industry there is no question about that, but you have to find a champion and funding inside the customer to turn that product excellence into billions in revenue.

Neil made this project work, he and the University have gotten a lot of acknowledgment by the educational community in Europe and people are seeing not only the technology benefits of Mediasite, but they are seeing the benefits to the students of Leeds and Neil is very vocal about explaining why they could justify this application at the University. That will be very helpful for us going forward in the future.

Mediasite events has had an upsurge in growth this year, 22% in fiscal 2014. We have had a lot of acceptance on the excellence of how we not only have the technology that can do captures in the mainline sessions and the breakout rooms and publish that content and make it available to the customers of our customers but we also have gotten accolades for the human resource that we used to actually facilitate the captures and editing the content.

We will continue to look to expand on this business in 2015, the viewership of the content that we capture is growing at a rather rapid pace and that's where the end customer gets the value in using our service.

I will just stop for a minute before I talk about guidance and I'm going to try to take you through historically how we got to the point of setting some of the goals that we set 2.5 years ago when we start to communicate them. In the fall of 2012 working with the Board and with our management team, we set what we thought would be challenging goals for the fiscal year of 2015. The goals that we set which we started to communicate at the shareholder meeting in 2013 were to have billings in excess of $40 million. Pretax income of 15% which if you extrapolate that would've implied a number greater than $6 dollars and we never talked about EBITDA at the time but if you went back and calculated the EBITDA that went with that 15% pretax income it would have been around $8 million.

But we put that goal in place in late 2012; we frankly didn't know all the moving parts about how we would solution it. As it turns out a lot happened since we set that goal, the first thing that happened is that we decided to do two acquisitions and in fact those two acquisitions allowed us to substantially exceed the 40 million plus goal and then that's purely good news from the value of the acquisition, but with those acquisitions came complexity. One of the complexities is currency, since we didn't have a major set of billings outside of the U.S. we had the European billings but the EU is a much more stable relationship to the dollar, we really did get impacted as Ken pointed out about the current exchange rate difference between the yen and the dollar.

The acquisitions also changed the structure, the accounting structure of how we calculate net income and EBITDA. So the structure of the business changed a little bit, the Astute settlement also changed the accounting structure a bit. So as Ken pointed out in his remarks between 3% for structure and 2% for currency have a significant impact on that 15% goal. It's more like 10% than 15%, if you just keep score in a standard way.

So what we’re going to do going forward with guidance is we’re going to continue to have a billings guidance and the guidance for fiscal 2015 is $45 million. We’re not going through the complexity of talking about big deals and run-rate deals and the rest of the things that we thought were important to due in 2015, it's straight up $45 million in billings for the fiscal year.

We’re also going to set an adjusted EBIT in a range of $4.5 to $5.5 million and the projected net income that goes with that is between $1 million and $2 million. Now clearly the $1 million and $2 million range for net income is less than the $6 million that I talked to you about a minute ago but if you look at EBITDA, the EBITDA for that $4.5 million to $5.5 million range compares to the $8 million or so that I discussed in the strategic plan that we had in 2012.

So we feel very confident about delivering on these numbers. We think we have certainly arranged work in but we’re obviously committed to go to the high end of that range and exceed that range if it's all possible. We think that we now know a lot more about the acquisitions, we understand what we've got to work with, we’re quite confident that we factored in a fair amount of currency adjustment into these numbers and so the management team is committed to delivering on these results for 2015. So with that I will turn it over to questions. I think we're going to the analyst first, is that correct?

Ken Minor

That’s right; we’re going to take questions from the phone.

Question-And-Answer Session


[Operator Instructions]. We will start first with a call from Marco Rodriguez. Marco, your line is open. Go ahead please.

Marco Rodriguez

Real quick, just kind of wanted to talk a little bit more about the guidance for fiscal '15. I'm just trying to kind of bridge the gap between the original 15% pretax margin and what you guys are doing now and just kind of doing some back of the envelope math, you’re taking your adjusted EBITDA guidance and assuming that it's stock comp and D&A stays relatively the same in fiscal '15 compared to fiscal '14. I'm getting pretax margins plus cost in the 4% to 6% range and I know Ken, you mentioned there was a three point I believe hit on the gross margins and other couple of points from currency I'm not sure where. Can you kind of just help bridge the gap between these numbers?

Ken Minor

Sure. Your math is pretty close. Our expectation is that the 1 million to 2 million of bottom-line number that we provided as guidance really equates to about a $1.5 million to $2.5 million of pretax. There is particularly in the high end of the range that we expect that there will be about a $0.5 million of tax. So the 2.5 million on 45, you’re right it's in the middle fives or so and so it's pretty close to that 6% pretax number you quoted.

So Gary is not suggesting that by making the adjustments to the 15% that were there, we are not. We have some more work to do, we are making some pretty significant improvements in the business from fiscal '14 to fiscal '14 and we know that we have got more work to do after that but we’re confident that we can continue to grow the business in fiscal '16 and '17 and make further inroads on the 10% but I think it what we’re trying to convey here is that our near-term expectation is that the right goal is set, it's 10% and by near term I'm not talking about fiscal '15. I'm saying based on our structure today that that's the number that makes more sense to us and that we think we can get a pretty good chunk of the way there in fiscal '15 and we will continue to work on that in fiscal '16.

Gary Weis

One of the goals regarding this guidance is to have numbers that we have a high degree of confidence that we’re going to be in that range as the step to get where we think we should be and the 10% -- the conversation around 10% is recalibrating the 15% but this is clearly not the 10% but it's a major step toward it and clearly if you look at our results this year it's a major improvement over the 2014 results.

Ken Minor

That’s right. I mean our adjusted EBITDA for fiscal '14 is $1.2 million and so while we certainly would like to continue to improve upon the 4.5 million to 5.5 million of adjusted EBITDA that we’re projecting for fiscal '15 and fully expect to do that in '16 we’re making significant changes from the 1.2 million that we recorded in fiscal '14.

Marco Rodriguez

And one follow-up here if I may, you mentioned here that you guys have some work to do to get to that '15. Can you guys just put a little bit more color on there, I mean what are we talking about in terms of revenue top line to hit 15% and then structurally I mean is there work to be done on SG&A, any sort of color that can help us understand that?

Gary Weis

Let me start by -- I will turn it over to Ken to answer in detail to all your question, but the number we’re replacing 15 with is 10 just to be clear and we think that EBITDA plus deferred revenue is a better way to really think about this business but we will continue obviously report the net income percentages and so forth as well. So Ken, I will turn it over to you.

Ken Minor

That’s right, I mean in terms of the expenses of the business there isn't a significant part of expenses to make a big change to first of all. So often what happens in acquisitions is this is the risk, we have [ph] to cut and that’s not the case in this situation. So we're not looking to make significant changes in our operating expenses structure in fiscal '15 or fiscal '16 other than of course the fact that we don't we will not incur their legal defense costs that we incurred in fiscal '14, those are behind us. Likewise we won't incur the transaction cost and the patent charge that we incurred in fiscal '14.

However, rest of the business I think will continue to be at a small growth over fiscal '14 and certainly significantly less in fiscal '15. Going forward, I expect that that'll be the same. So when I'm referring to additional work to do I mean I'm expecting that fiscal '16 will look something similar where we will grow the topline, a number that's higher than the growth and expense line. So I think we'll do -- we’re clear focused on managing expenses.

I think we've -- other than the unusual onetime events that have popped up that it would been largely outside of our control. I think we’ve been able to manage our operating expenses pretty well and so I'm pretty confident that we can continue to do that and again get in fiscal '16 and '17 the improvement in that pretax number.

Gary Weis

And I would add Marco just to add a couple of bits of detail on top of what Ken said. We’re always looking for ways to improve our gross margin. There is I think a couple of ways that you can focus on to do that, one is to lower your hardware cost which every year we have a track record of doing to different degrees and secondly is to come up with more software-based product that sold on an annual license basis because obviously the cost of delivery of that software is just a support expense that comes with it.

So that’s two things at the gross margin level that we will continue to work on. And secondly, many have pointed out to me that we made investments in product capability over the last two years, not last year somewhat the two years before that and we’re now in a position where we think we can leverage that base without additional development investments. So more the margin goes to the bottom line, and we certainly don't see any drivers to cause us to increase development expense or G&A, the only driver we do see is that as commissions continue to be paid out for greater amounts of revenue, you will have that effect on the sales and marketing side.


And with that we will move on to our next analyst, Howard Halpern. That line is open for your question and follow-up. Go ahead, please.

Howard Halpern

In terms of I guess potential new products or new offerings and ways I guess to leverage the business, now that you really video content management, do you’ve in the pipeline anything new on like certain capabilities that could almost be considered transactional base since you’re going to have -- offer cloud services each time somebody does search you might get compensated for that?

Gary Weis

We continue to look at different ways to provide added value around the video content we have helped our customers capture. Let me give you a couple of examples, the case that you mentioned doing kind of the pay-per-view search capability; we have not found examples of that where there is strong customer demand. You might recall that we talked about voice search, a couple of years ago and while we developed that capability with a partner. I've got to be honest with you the uptake of that has not been large and it is a paper view kind of capability, but you do things that customers are willing to buy and in that particular case we didn't get a groundswell of customers coming forward and saying they wanted to pay for that capability. That doesn’t mean we’re not trying some other novel things.

We have a capability called Showcase, which is essentially a much improved user-interface for how we present our content to the end customer, the end viewer of content. We’re looking at ways to license capability that extend Showcase in particular ways that would allow us to get additional license revenue, but that is not transactional just to caution you on that.

We’re looking for other kinds of service products that live around the edge of the content, one example; we now can capture video conferencing sessions through use of the videoconferencing bridge by us becoming a joint partner to the videoconferencing bridge. We're beginning to market that capability; it's available now in December on a G&A basis. It will be sold as a service and I believe we’re going to be calling it Media Site Join [ph] which is comes from the idea of joining two collaboration session served that are going on between customer.

So those are just couple of examples. We continue to look for other ways to have a lower entry price in video content management, that's a self-service model. We’re looking at that for 2015 as well.

Howard Halpern

And one more in terms of the events business, I know you had nice growth year-over-year but how do you drive further growth in that business in the years to come?

Gary Weis

We are looking at doing a little swizzle on our sales model for events. We've had some very productive sales efforts in that area and we’re looking at integrating that in with corporate sales in general which would give us a better leverage we think to get into corporate customers. I think we've said in past calls that for higher education we have a fairly large named account salesforce that sells directly to the customer. In events we have a sales force that sells directly to the customer. In corporate, we have largely sold through partners and so one of the things we’re looking at doing is leveraging our event sales activity and broadening it a bit to also sell other products and services to corporation.


In the room now.

Unidentified Analyst

Can you give us more detail -- any more detail on your progress in the Middle East?

Gary Weis

I’ve told you basically so far that we’re in the final stages of negotiation to -- I will say get the paperwork done to allow us to ship product. It is very important in all of our international businesses to make sure that you have the right letters of credit and other things in place to allow you to ship product, that’s the level of discussion that we’re now at. So it's no longer -- are we selected technology? Yes we’re. It's no longer has the dealer selected us for implementation? Yes, he has or she has. It's now on, how do we get it done? How do we get the equipment shipped? How do we make sure we get paid, how do we make sure that the support terms and conditions are right, that’s where we’re at two deals in the Middle East, both of which will ship in excess of 200 recorders, each one will ship in excess of 200 recorders.

Unidentified Analyst

You gave a detailed update on China; can you give us any more color on the prospects, sales or customer base there?

Gary Weis

I can probably do that a little bit by reference and this is an example of a customer that we already have and I will look to -- what is the name of the school? [Indiscernible] it's a school in Macau. It's actually a Catholic private girl's school in Macau. We closed that deal several years ago and our Chinese partners were extremely interested in that because it's in their world and it's on K-12, which is really the prevalent market there for our technology, we believe and they believe and so one of our partners actually brought 8 to 10 of their customers into the school to basically do a reference sell off of that base. So that’s one example where we think we have the opportunity to capitalize mostly through OneZero short-term opportunities.

The second thing that I would say we have another university, who I won't even try to pronounce the name of that was again a customer that was sold by us by Sonic Foundry which we’re now transitioning over to be supported and expanded on by OneZero. So that's probably about as much detail as I can go into. I will say that we've seen a number of videos that have been captured in Chinese K-12 schools. We've got a pretty good understanding of how the government subsidizes that and having a partner like one of these two that we have is absolutely instrumental at selling anything in China.

Unidentified Analyst

When will the company make a dollar a share?

Ken Minor

I'm going to stick with the guidance we’re providing for fiscal '15. So our expectation for fiscal '15 is that the upper end of that range is $2 million and currently we have about 4 million shares outstanding, so that’s easy math, that’s about a $0.5 per share and we are going to continue to grow the business in fiscal '16 and '17. I think the percentage will improve in terms of pretext numbers in bottom line percentages. So I think not only will we grow the topline which will grow the bottom line, but we will also grow the percentage that drops to the bottom line. So we'll see improvement in fiscal '16 and '17.

Gary Weis

And I think from the EBITDA guidance we will be between a $1 and a $1.25 a share if you stick to this guidance.

Unidentified Analyst

It appears your international acquisitions are playing to your strengths in education, do you expect the education billings in 2015 to be the same as 2014? Or will the international acquisitions results in higher corporate sales?

Gary Weis

Yes absolutely. We are guilty of sometimes talking a lot about higher education because that's where the larger deals tend to be and that's where the more leverage deals tend to be, meaning you get into two schools and universities and you can upsell the three and four and five schools. However, in both MSKK and MediaMission there is a corporate component of their sales activity. There are some exciting things going on in Japan in the pharmaceutical industry which is in regard to educating customers of those pharmaceutical companies, educating their customers in the capabilities that are drugs, so that yes --we would anticipate growth in corporate sales as well as higher education.

Unidentified Analyst

What does the competitive landscape look like today versus a year ago?

Gary Weis

That’s an interesting discussion, I think from the standpoint of room-based lecture capture today, we have consistently beat every other player for large automated classroom-based capture and I mean consistently. Echo360 and Panopto are two of the players, Echo competed against us in Leeds and lost, Panopto competed against us at Leeds and lost. We simply are the preeminent provider in room-based lecture capture. Tegrity is still in the game from the standpoint of software capture, Panopto is, Panopto recently announced some other hardware devices. We think that our established position will be, you never want to say impossible, it will be extremely difficult to challenge and we have some interesting things we’re doing in the software space that would allow us to be able to offer a bundled total solution for our customers that address both technology rich classrooms where automation is very important and more casual classrooms where a software solution may be more appropriate.


All right. And that’s all the time we have for questions.

Ken Minor

Thank you, Tammie.

Gary Weis

Thanks Tammie and thank you all for joining us. We look forward to doing this again I guess in a couple of month's right? It's a short one.

Ken Minor

That’s right.

Gary Weis

And we I think will just leave you with a thought that we are all very optimistic and very practically bullish about the future of what we can do in 2015 and will hope to report on some of those things we talked about today in a couple of months. Thanks again for coming,

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