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| SNIC > SEC Filings for SNIC > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, but are not limited to, statements regarding: the market for the Company's products; macroeconomic conditions; consumer spending; leisure and entertainment related activities and related technologies; proliferation of Internet-connected devices; the Company's competitive position; continued popularity of the DVD format; popularity of the Blu-ray Disc ("BD") format; market for digital distribution of premium content; impact of restructuring plans; liquidity and capital needs; gross margins; operating expenses; significant customers, major distributors and key suppliers; content licensing; impacts of the Company's pricing strategies; acquisitions and integration of related assets, business, personnel and systems; international operations; litigation or patent prosecution; intellectual property claims; and changes in effective tax rates. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ. Risks that may affect the Company's operating results include, but are not limited to, those discussed in "Risk Factors" section of the Fiscal 2009 Form 10-K. Readers should carefully review the risk factors described in the Fiscal 2009 Form 10-K and in other documents that the Company files from time to time with the SEC.
Overview of Business
The Company is a leading developer of products and services that enable the creation, management, and enjoyment of digital media content across a wide variety of technology platforms. The Company's products and services offer innovative technologies to consumers, original equipment manufacturers ("OEMs"), enterprises, high-end professional DVD authoring experts and developers. The Company distributes its products and services through retailers and distributors, personal computer ("PC") and consumer electronics ("CE") OEMs, Internet websites including www.roxio.com, and other channels. The Company also licenses core technology and intellectual property to other software companies and technology manufacturers for integration into their own products and services. Sonic software is intended for use with Microsoft Windows and Apple Mac operating systems, as well as some Linux environments and proprietary platforms.
Sonic products and services are used to accomplish a wide variety of tasks, including creating and distributing digital audio and video content in a variety of formats; renting, purchasing and enjoying Hollywood movies and other premium content; producing digital media photo and video shows for sharing online and via television, PCs and CE devices; recording and playback of digital content on DVD, BD, other storage media and portable devices; managing digital media on PCs and CE devices; and backing up and preserving digital information, both to local storage devices and on the Internet.
The Company differentiates between digital media content that is created by consumers (sometimes referred to herein as "personal" content) and digital content that is professionally created for mass consumption (sometimes referred to herein as "premium" content). Accordingly, the Company now organizes its business into two reportable operating segments targeted at these different forms of content: the "Roxio Consumer Products" segment, which offers products and services related to personal content, and the "Premium Content" segment, which offers products and services related to premium content. These segments reflect the Company's internal organizational structure, as well as the processes by which management makes operating decisions, allocates resources and assesses performance.
Roxio Consumer Segment
The Company's Roxio Consumer Products segment creates software and services that enable consumers to easily create, manage, and share personal digital media content on and across a broad range of connected devices. A wide array of leading technology companies and developers rely on Roxio products, services and technologies to bring innovative digital media functionality to PCs and next-generation CE devices and platforms. The Roxio Consumer Products segment offers products and services under a variety of names, including BackonTrack, Backup MyPC, CinePlayer, Crunch, Easy VHS to DVD, Just!Burn, MyDVD, MyTV To Go, PhotoShow, PhotoSuite, Popcorn, RecordNow, Roxio Copy & Convert, Roxio Creator, Toast, VideoWave, WinOnCD, and others. These products are sold in a number of different versions and languages. The Company distributes these products through various channels, including "bundling" arrangements with OEMs, volume licensing programs, its web store, and third party web-based and "bricks and mortar" retail stores. The Company also markets the same "under the hood" technology that powers Roxio products to other companies who wish to build their own PC software products.
Premium Content Segment
The Company's Premium Content segment offers a range of products and services related to the creation, distribution and enjoyment of premium content. Within this segment, the Professional Products Group offers software under the Scenarist, CineVision, and DVDit product names as well as under the Sonic and Roxio Professional brands to major motion picture studios, high-end authoring houses and other professional customers. CinemaNow, also a part of this segment, sells, rents and distributes premium entertainment content to consumers over the Internet. The Company also develops software components that it licenses to CE companies to enable their devices to offer premium content to consumers, and licenses intellectual property, including patents.
Recent Trends & Events
Due to the proliferation of computer technology, broadband Internet connectivity and personal electronic devices of all kinds, digital media content is now everywhere. The Company's products and services enable people to create, manage, enjoy and distribute premium and personal digital content, allowing them to organize and share their digital lives and memories in new and innovative ways. The Company's strategy is to utilize its technology, expertise and competitive positioning to deliver exciting products and services to enhance the value of digital media in people's lives, capitalizing on evolving trends in the technology industry, including:
· Optical Disc Playback Evolution - Optical disc technologies have enjoyed tremendous growth and extremely widespread consumer adoption. For example, DVD playback units (including set-top players, game consoles and PCs) have been one of the fastest growing consumer technologies in history, and multiple DVD players are now present in most households. Also as new operating systems, such as Windows 7, are introduced, consumers are offered new tools for editing, formatting and burning digital media, and there are opportunities for software vendors such as the Company to provide products that are complementary to the new operating systems. Additionally, sales of BD units and players have been growing at a rate comparable to that of standard definition DVD during the equivalent time periods in its life cycle, implying that BD is positioned to grow dramatically over the next several years.
· Growth of Digital Distribution of Premium Content - Content owners, such as Hollywood studios, are increasingly offering sell-through and rental of premium content through digital distribution. Simultaneously, a growing number of consumers are enjoying and taking advantage of the benefits of digital distribution of premium content. As more Internet-enabled electronic devices offer delivery of premium content, the rate of adoption and number of title offerings should continue to increase.
· Digital Phone, Portable and Gaming Devices - The consumer usage of mobile phones, gaming consoles and portable CE devices, particularly those with high-end digital media capabilities, continues to increase worldwide. The growing popularity of portable devices leads to greater demand for software products and services, such as those offered by the Company, that provide digital media management and functionality.
· Growth of Online Social Networks - Online social networks, such as Facebook and MySpace, increasingly feature personal digital photo, video and audio content, and these networks function as distribution platforms for sharing and enjoying digital media content. The rising popularity of these networks and their platforms creates an increased demand for products and services that can capture, create, edit and manage digital media.
During fiscal 2009, the Company acquired the assets of Simple Star, Inc., a software products and online service provider, and the assets of CinemaNow, Inc., a privately held online entertainment provider. The addition of Simple Star, Inc. assets allows the Company to further its initiative to embrace web services as an important part of its consumer business, while the addition of the CinemaNow assets helps expand the Company's products and services across the entire premium entertainment supply chain, from creation to distribution to consumption. The Company plans to increase the number of premium content titles available for rental and sell-through, increase the number of titles that are enabled for Qflix burning, and continue to expand the number of CinemaNow relationships it has with PC and CE OEMs and retail partners.
Strategic Objectives
Enable Consumers to Buy and Play Premium Content Anywhere and at Anytime. The Company believes that digital distribution of premium content will grow dramatically over the next few years, and that ultimately industry revenue from the digital distribution of premium content may surpass revenue from the sale and rental of premium content on optical media such as DVD and BD. As the digital content ecosystem continues to expand and evolve, the Company aims to makes its products and services available through an increasing range of platforms, devices and partners, with the goal that the Company's technology will represent a symbol of compatibility and a common point of interaction for consumers who want to enjoy Hollywood movies and other premium digital content anywhere and at anytime.
Develop and strengthen Roxio-branded products and services. The Company seeks to build on the brand strength of its Roxio products and services by strengthening its relationships with OEMs and retail partners, while deepening its relationship with consumers by adding new products and services. The Company plans to continue to enhance its Web-based offerings, add innovative solutions to its consumer product portfolio and extend the reach of the Roxio brand to a new audience of online users.
Improve Operational Efficiencies and Cash Flow Performance. Management's goal for fiscal 2010 is to achieve operational efficiencies and improve cash flow through revenue growth and cost management. In fiscal 2009, the Company engaged in restructuring activities designed to achieve its efficiency goals, and it will continue to focus on aligning its cost structure and business initiatives. See "Note 12 - Restructuring" to the Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Outlook
While the current global economic downturn has resulted in a decline in overall consumer and corporate spending, impacting the Company's business and financial results in fiscal 2009 and 2010, the Company believes it is well positioned to capitalize on its strong brand name, consumer market position, OEM relationships and evolving premium content business models and opportunities. The Company made significant strategic and financial progress during fiscal 2009 and the six months of fiscal 2010 to bring costs in line with revenues while positioning the Company for revenue growth and margin improvement.
International Locations and Revenue
The Company is headquartered in Novato, California, and has sales and marketing offices in North America, Europe, Japan, China, Taiwan, Singapore and remote offices in a number of locations around the world. In the three months ended September 30, 2009 and 2008, approximately 79% and 72% of net revenue was attributable to domestic sales while 21% and 28% of net revenue was attributable to international sales, respectively. In the six months ended September 30, 2009 and 2008, approximately 79% and 71% of net revenue was attributable to domestic sales while 21% and 29% of net revenue was attributable to international sales, respectively. In the future, the Company may expand its operations, professional services and direct sales force abroad, thereby incurring additional operating expenses and capital expenditures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes in the Company's critical accounting policies and estimates during the three months and six months ended September 30, 2009 compared to those described in the Company's Fiscal 2009 Form 10-K.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements of
operations as a percentage of net revenue for the three and six months ended
September 30, 2009 and 2008, respectively (in percentages):
Three Months Ended September 30, Six Months Ended September 30,
2009 2008 2009 2008
Net revenue 100 % 100 % 100 % 100 %
Cost of revenue 31 % 30 % 31 % 28 %
Gross profit 69 % 70 % 69 % 72 %
Operating expenses:
Marketing and sales 27 % 31 % 27 % 32 %
Research and development 24 % 34 % 26 % 36 %
General and administrative 16 % 17 % 17 % 19 %
Restructuring 0 % 1 % 1 % 3 %
Total operating expenses 67 % 83 % 71 % 90 %
Operating income (loss) 2 % (13 )% (2 )% (18 )%
Other income (expense) (2 )% (1 )% (1 )% 1 %
Income (loss) before income taxes 0 % (14 )% (3 )% (19 )%
Provision for (benefit of) income taxes 1 % (2 )% 1 % (7 )%
Net loss (1 )% (12 )% (4 )% (12 )%
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Net Revenue Comparison for the Three and Six Months Ended September 30, 2009 and 2008
The following table is a comparison of net revenue by segment (in thousands other than percentages):
Three Months Ended September 30,
Increase
Net Revenues 2009 2008 (Decrease) %
Roxio Consumer Products $ 23,302 $ 26,732 $ (3,430 ) (13 )%
Premium Content 2,754 4,344 (1,590 ) (37 )%
Net revenues $ 26,056 $ 31,076 $ (5,020 ) (16 )%
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(1) For presentation purposes, the Company reclassified the Advanced Technology Group ("ATG") licensing net revenue of $1.0 million to the Roxio Consumer Products segment, ATG CE licensing net revenue of $0.9 million to the Premium Content segment and Qflix net revenue of $0.2 million to the Premium Content segment for the three months ended September 30, 2008 to reflect the Company's current reporting business segments. The revenue reclassifications had no effect on the Company's consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders' equity and comprehensive income (loss) and consolidated statements of cash flows for the prior periods presented.
Net revenue decreased to $26.1 million for the three months ended September 30, 2009, from $31.1 million for the three months ended September 30, 2008. The decrease in net revenue for the three months ended September 30, 2009 was a result of a decrease of $3.4 million or 13% in Roxio Consumer Products and a decrease of $1.6 million or 37% in Premium Content net revenue. Roxio Consumer Products net revenue decreased primarily due to the continued global economic weakness affecting consumer demand and corporate spending, along with a decreased demand from the OEM bundling channel. Premium Content revenue during the three months ended September 30, 2008 included $1.5 million in revenue from a professional development contract for which there was no corresponding amount during the three months ended September 30, 2009. The decrease in Premium Content revenue during the quarter ended September 30, 2009 is also partly attributable to the continued global economic weakness affecting consumer purchasing and lower licensing revenue as result of fewer license sales and renewals. This decrease was partly offset by the revenue from Premium Content sales and services of the acquired CinemaNow business.
Six Months Ended September 30,
Net Revenues 2009 2008 Inc (Dec) %
Roxio Consumer Products $ 45,666 $ 52,491 $ (6,825 ) (13 )%
Premium Content 5,917 8,698 (2,781 ) (32 )%
Net revenues $ 51,583 $ 61,189 $ (9,606 ) (16 )%
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(1) For presentation purposes, the Company reclassified the Advanced Technology Group ("ATG") licensing net revenue of $3.1 million to the Roxio Consumer Products segment, ATG CE licensing net revenue of $2.7 million to the Premium Content segment and Qflix net revenue of $0.3 million to the Premium Content segment for the six months ended September 30, 2008 to reflect the Company's current reporting business segments. The revenue reclassifications had no effect on the Company's consolidated balance sheets, consolidated statements of operations, consolidated statements of stockholders' equity and comprehensive income (loss) and consolidated statements of cash flows for the prior periods presented.
Net revenue decreased to $51.6 million for the six months ended September 30, 2009, from $61.2 million for the six months ended September 30, 2008. The decrease in net revenue for the six months ended September 30, 2009 was a result of a decrease of $6.8 million or 13% in Roxio Consumer Products and a decrease of $2.8 million or 32% in Premium Content net revenue. Roxio Consumer Products net revenue decreased primarily due to the continued global economic weakness affecting consumer demand and corporate spending, along with a decreased demand from the OEM bundling channel. Premium Content revenue included during the six months ended September 30, 2008 $2.7 million in revenue from a professional development contract for which there was no corresponding amount during the six months ended September 30, 2009. The decrease in Premium Content revenue during the six months ended September 30, 2009 is also partly attributable to the continued global economic weakness affecting consumer purchasing and lower licensing revenue as result of fewer license sales and renewals. This decrease was partly offset by the revenue from Premium Content sales and services of the acquired CinemaNow business.
The following tables set forth a comparison of net revenues geographically for the fiscal periods ended September 30, 2009 and 2008, respectively (in thousands other than percentages):
Three Months Ended September 30,
Increase
Net Revenues 2009 2008 (Decrease) %
United States $ 20,695 $ 22,394 $ (1,699 ) (8 )%
Export
Canada 268 587 (319 ) (54 )%
France 390 430 (40 ) (9 )%
Germany 628 1,121 (493 ) (44 )%
United Kingdom 989 950 39 4 %
Other European 533 883 (350 ) (40 )%
Japan 1,449 3,345 (1,896 ) (57 )%
Singapore 706 886 (180 ) (20 )%
Taiwan 116 43 73 169 %
Other Pacific Rim 206 247 (41 ) (17 )%
Other international 76 190 (114 ) (60 )%
Net revenues $ 26,056 $ 31,076 $ (5,020 ) (16 )%
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Domestic sales accounted for $20.7 million and $22.4 million, or 79% and 72% of net revenue for the three months ended September 30, 2009 and 2008, respectively. The decrease in domestic sales was primarily due to the continued global economic weakness and was partially offset by sales of Premium Content and services from the acquired CinemaNow business.
International sales accounted for $5.4 million and $8.7 million, or 21% and 28% of net revenue for the three months ended September 30, 2009 and 2008, respectively. The decrease in international sales was primarily due to $1.5 million from a Japan professional development arrangement for which there was no corresponding amount during the three months ended September 30, 2009 and decreased sales during the three months ended September 30, 2009 from a German-based web store reseller upon the launch of the Company's own online services offering.
Six Months Ended September 30,
Net Revenues 2009 2008 Inc (Dec) %
United States $ 40,560 $ 43,412 $ (2,852 ) (7 )%
Export
Canada 419 1,029 (610 ) (59 )%
France 413 726 (313 ) (43 )%
Germany 1,275 2,658 (1,383 ) (52 )%
United Kingdom 1,425 1,495 (70 ) (5 )%
Other European 1,239 1,585 (346 ) (22 )%
Japan 3,948 7,736 (3,788 ) (49 )%
Singapore 1,328 1,727 (399 ) (23 )%
Taiwan 275 120 155 129 %
Other Pacific Rim 442 480 (38 ) (8 )%
Other international 259 221 38 17 %
Net revenues $ 51,583 $ 61,189 $ (9,606 ) (16 )%
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Domestic sales accounted for $40.6 million and $43.4 million, or 79% and 71% of net revenue for the six months ended September 30, 2009 and 2008, respectively. The decrease in domestic sales was primarily due to the continued global economic weakness and was partially offset by sales of Premium Content and services from the acquired CinemaNow business.
International sales accounted for $11.0 million and $17.8 million, or 21% and 29% of net revenue for the six months ended September 30, 2009 and 2008, respectively. The decrease in international sales was primarily due to $2.7 million from a Japan professional development arrangement for which there was no corresponding amount during the six months ended September 30, 2009 and decreased sales during the six months ended September 30, 2009 from a German-based web store reseller upon the launch of the Company's own online services offering.
Significant Customers
The following table reflects sales to significant customers as a percentage of
total net revenue and the related accounts receivable as a percentage of total
receivables for the three and six months ended September 30, 2009 and 2008,
respectively (in percentages):
Three Months Ended September 30, Six Months Ended September 30,
% of Total Net % of Total Accounts % of Total Net % of Total Accounts
Revenues Receivable Revenues Receivable
Customer 2009 2008 2009 2008 2009 2008 2009 2008
Digital River 23 % 20 % 15 % 12 % 22 % 21 % 15 % 12 %
Navarre 23 % 20 % 32 % 26 % 22 % 16 % 32 % 26 %
Dell 16 % 15 % 9 % 5 % 15 % 15 % 9 % 5 %
Hewlett-Packard 10 % 12 % 3 % 4 % 12 % 10 % 3 % 4 %
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Revenue recognized from Dell and Hewlett-Packard was pursuant to various development and licensing agreements; revenue recognized from Digital River was pursuant to a reseller agreement; and revenue recognized from Navarre was pursuant to distributor agreements. The loss of any one of these customers and the Company's inability to obtain new customers to replace the lost revenue in a timely manner could have a material adverse effect on its financial results.
Cost of Revenue
Cost of revenue consists mainly of third party licensing expenses, employee salaries and benefits for personnel directly involved in the production and support of revenue-generating products, packaging and distribution costs, if applicable, and amortization of acquired and internally-developed software and intangible assets. In the case of consumer software distributed in retail channels, cost of revenue also includes the cost of packaging, if any, and certain distribution costs. The following table reflects cost of revenue as a percentage of net revenue (in thousands other than percentages):
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