Business Headlines

Scientific Learning Reports Second Quarter Results

OAKLAND, Calif.--(via BUSINESS WIRE)--Scientific Learning Corporation (NASDAQ:SCIL), a leading provider of technologies for accelerated learning, today announced financial results for the second quarter ended June 30, 2009.

Second Quarter Summary (2Q09 vs. 2Q08)
Total revenues decreased 21% to $10.6 million, total booked sales decreased 10% to $13.0 million and K-12 booked sales decreased 8% to $11.7 million;
Gross profit decreased 23% to $8.1 million and gross margin decreased to 75.9% of total revenues from 77.4% of total revenues;
Operating loss of $334,000 versus operating income of $690,000, and EBITDAS of $437,000 versus $1.8 million;
Net loss of $314,000 versus net loss of $438,000; and
Net loss per share of $0.02 versus net loss per share of $0.03.

Andy Myers, Chief Executive Officer, stated, “Unusual market factors led to second quarter financial results that are not indicative of our positive expectations for full year performance. Uncertainties surrounding the use of federal education stimulus dollars and delays in states releasing those funds to school districts forced many of our customers to temporarily delay purchasing decisions in the second quarter. However, given the continuing demands to improve student achievement and the temporary boost to IDEA and Title I federal funds, we remain optimistic about the 2009-10 outlook for our business. Our pipeline of potential new business is robust, the flow of federal stimulus funds is improving, and we fully anticipate capturing delayed and incremental sales in subsequent quarters. We have already seen some of this business close in July, including a $6.9 million sale approved by a school board in Florida on Tuesday. Overall, we remain comfortable with our 2009 objectives of generating positive cash flow and achieving year-over-year growth in booked sales.”

Myers continued, “Despite the funding difficulties being experienced by K-12 schools, the operating improvements implemented over the past year allowed us to reduce our operating expenses, and we ended the quarter with approximately $5 million in cash which was better than we had expected.”

Operating Results
Total revenues decreased 21% to $10.6 million in the second quarter of 2009 compared to $13.5 million in the second quarter of 2008. Product revenues decreased 31% to $6.1 million and service and support revenue decreased 2% to $4.5 million. Product revenue was negatively impacted by uncertainties and delays related to the new federal stimulus funding. With the new federal stimulus money not reaching many school districts until July, districts were not in a position to commit to new federally funded purchases in the second quarter. In addition, we deferred over $1 million of product revenues that otherwise would have been recognized in the second quarter. This revenue is part of bundled sales that includes the new Reading Assistant Expanded Edition which is expected to be delivered in the third quarter. We cannot recognize any revenue that is part of a bundled sale that includes the new Reading Assistant product until such product is delivered. The decrease in service and support revenue was primarily due to an expected reduction in OEM revenue. Total booked sales decreased 10% in the second quarter, with an 8% decrease in K-12 booked sales helping to offset the larger, but expected, decline in international, private provider and other booked sales.

Gross profit decreased 23% to $8.1 million in the second quarter of 2009 compared to $10.4 million in the second quarter of 2008. Gross profit margin decreased 150 basis points to 75.9% from 77.4% of total revenues. The decrease in the gross profit margin was primarily driven by a change in revenue mix away from software, which carries a higher gross margin. Product gross profit margin declined to 91.1% from 92.6% and service and support gross profit margin increased to 55.0% from 47.9%. Product gross profit margin was negatively impacted by revenue deferrals and the incremental amortization expense from the Soliloquy acquisition in January 2008. Service and support margins improved principally due to year-over-year price increases and more efficient delivery of services.

Total operating expenses decreased 14% to $8.4 million in the second quarter of 2009 compared to $9.8 million in the second quarter of 2008. Sales and marketing expenses decreased 15% to $5.3 million, research and development expenses decreased 25% to $1.2 million, and general and administrative expenses decreased 2% to $1.9 million. The decreases in all three areas were primarily driven by strategic and operational improvements to the core K-12 business to streamline the sales process, reduce costs, and maximize productivity. In addition, during the second quarter of 2009, approximately $427,000 of research and development costs were capitalized relating to costs incurred after technological feasibility was reached on Reading Assistant Expanded Edition.

Earnings before interest, taxes, depreciation, amortization, and stock compensation (EBITDAS) decreased to $437,000 in the second quarter 2009 from $1.8 million in the second quarter 2008. Operating loss in the second quarter 2009 was $334,000 versus operating income of $690,000 in the second quarter 2008. Net loss was $314,000, or $0.02 per share, in the second quarter of 2009 compared to a net loss of $438,000, or $0.03 per share, in the second quarter of 2008.

The company believes that booked sales and EBITDAS (both non-GAAP measures) are important measures of operating performance and has chosen to disclose these figures as part of the earnings results. EBITDAS and booked sales should not be considered in isolation from net income and revenue and are not intended to represent substitute measures of performance calculated under GAAP. Reconciliations of booked sales, revenue and deferred revenue, and EBITDAS and net income (net loss) are included at the end of this earnings release and in the investor information section of our website, www.scientificlearning.com.

Selected Balance Sheet Information
As of June 30, 2009, cash and cash equivalents were $4.9 million compared to $6.0 million at March 31, 2009 and $2.3 million at June 30, 2008. The sequential quarterly decline is driven by normal seasonal trends in the business. Net accounts receivable were $9.1 million at June 30, 2009 compared to $5.4 million at March 31, 2009 and $10.7 million at June 30, 2008. As of June 30, 2009, short-term borrowings under our line of credit were $2.5 million compared to $2.5 million on March 31, 2009 and no borrowings on June 30, 2008.

Conference Call Information
A conference call to discuss second quarter results and the outlook for 2009 is scheduled for today, on Thursday, July 30, 2009 at 5:00 p.m. EDT / 2:00 p.m. PDT. The conference call will be available live on the Investor Information portion of the Company’s website at www.scilearn.com/investorinfo. The conference call can also be accessed at (866) 652-3154 (domestic) or (706) 634-7311 (international), conference id number 20752912. Please dial in or visit the website at least 10 minutes prior to the commencement of the call to ensure your participation. A replay of this teleconference will be made available on the Scientific Learning website approximately two hours following the conclusion of the call. To hear the replay by phone, please call (800) 642-1687 (domestic) and (706) 645-9291 (international) and enter conference id: 20752912.

About Scientific Learning Corporation
Scientific Learning creates educational software that accelerates learning by improving the processing efficiency of the brain. Based on more than 30 years of neuroscience and cognitive research, the Fast ForWord® family of products provides struggling readers with computer-delivered exercises that build the cognitive skills required to read and learn effectively. Scientific Learning's Reading AssistantTM combines advanced speech recognition technology with scientifically-based courseware to help students strengthen fluency, vocabulary and comprehension to become proficient, life-long readers. The efficacy of the products has been established by more than 550 research studies and publications. For more information, visit www.scientificlearning.com or call toll-free 888-452-7323.

Contact: Scientific Learning Corporation, Jessica Lindl, 510-625-6784, Senior Vice President, Marketing and Product Management, jlindl@scilearn.com