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Sonic Eyeing Digital Media Roll-Up

Posted on Friday, Jun 20th 2008

Sonic Solutions (SNIC) is a provider of digital media software for consumer and professional users. Last week, the Company announced their annual results for the fiscal year ending March ’08.

Sonic has classified its business into three segments depending on the nature of customers it services. The Consumer Products Group develops digital media encoding applications for home and business users under the Roxio brand. Roxio products and services enable users to author photos, music and video into multi-media DVDs and Blu-Ray DVDs. The Easy Media Creator for the PC and the Toast for Macs are leading media applications in the
US. Besides Roxio, they have also entered into the online photo business through the recent acquisition of Simple Star’s Photo Show.

Their Professional Products Group develops authoring solutions for the release of video entertainment including major motion pictures. Their leading brands Scenarist and CineVision are media encoding systems which are used by high end authoring and design houses and major motion picture studios.

Finally, their Advanced Technology Group (ATG) develops media solutions and recording engines that are licensed by tech firms to create media content on a broad range of consumer electronics including mobile devices, set-top players, retail kiosks and PCs. Their brand in this segment is the Qflix which is a platform and licensing and certification program for the electronic sell-through of video content that can be burned to DVD.

For the quarter, their revenue of $34.9 million marginally exceeded the market’s expectations of $34.7 million but slipped by 7.7% from the previous year’s Q4 revenues of $37.8 million. Their EPS of $0.08 met the street’s views and recorded a year on year increase of 100%.

Segment wise, Professionals Product Group contributed $1.8 million and Consumer Revenue contributed $30.4 million and the Advanced Technology Group brought in the balance $2.7 million in the revenues.

For the year, their revenue of $133 million recorded a 10.7% drop from the previous year’s revenue of $149 million. EPS for the year was $0.16 compared to the market’s expectations of $0.11 and was substantially lower than the previous year EPS of $0.78.

For Q1, the company gave an outlook of revenues of around $29 million with a loss per share of $0.09.The disappointing outlook sent the stock down by 12% to $6.75. It is currently trading at $6.05.

1yr SNIC

For the 2009 fiscal, the Company is expecting Blu-Ray and Qflix to be the major drivers for revenue growth. Blu-Ray formats will grow since Hollywood is backing the format and Qflix will benefit from the recent amendment, facilitated by Sonic itself, to allow for legal DVD download. They are also anticipating an OEM partner for Qflix by the end of the summer.

Roxio continued to be a leading provider of digital media encoding software in the PC industry. They expanded their OEM offerings with partners including NEC, Lenovo, and Sony and strengthened their existing relationships with Dell and HP. Roxio continued to innovate with mobile media management and online services and tied up with Motorola to enhance their Z10 handset phones with Sonic’s mobile media manager software.

As the PC OEM industry moves towards “a cloud based media management world where their PCs and their devices that connect to those PCs are moving digital media around and managing it” Sonic continues to feel confident of the growth of their Roxio business.

They recently announced the acquisition of Simple Star and its personal media web service – Photo Show. Photo Show is a comprehensive multimedia platform and online community that lets users turn photos and video clips into entertaining shows that can be enjoyed and shared on PCs, TVs, handhelds, and even be published on popular social networking sites. It is being deployed by Time Warner as part of their VOD service offerings. They expect this acquisition to help broaden their web products and services portfolio.

My guess is that Sonic Solutions, like United Online discussed earlier, has its eye on the drying up of web 2.0 funding that is making a lot of small companies available as acquisitions at reasonable prices. Many of these companies have received big chunks of venture capital, but have not necessarily achieved enough scale or business model validation to convince investors to come back for more.

They need exits.

Sonic Solutions would, likely, be opportunistic about these deals in the digital media infrastructure, as well as photo/video/music sharing applications spaces.

In fact, companies with a $50-$200 Million revenue trunk that are struggling to find growth ought to look at roll-ups as a core strategy. There are hundreds of web 2.0 companies out there right now that would be available for pick-up.

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