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Scientific Learning Corp. Reports Operating Results (10-Q)

November 06, 2009 | About:
10qk

10qk

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Scientific Learning Corp. (SCIL) filed Quarterly Report for the period ended 2009-09-30.

Scientific Learning Corp. develops markets and sells proprietary software and other educational products and services. The products and services are based on research on how the brain learns and are designed to increase human learning and performance. Language and reading skills are the foundation for all learning and the company developed products to help children learn how to read or become better readers. Teh Fast ForWord products are intensive computer-based training programs that focus on improving critical language and reading skills. Scientific Learning Corp. has a market cap of $99.8 million; its shares were traded at around $5.53 with a P/E ratio of 23.1 and P/S ratio of 2.1.

Highlight of Business Operations:

Federal education funds are a critical resource in helping school districts address the needs of the most challenged learners. We believe that a significant proportion of our sales are funded by federal sources, particularly Title One and IDEA (special education) grants. With the passage of the American Recovery and Reinvestment Act (“ARRA” - the recent stimulus bill), these two federal sources are together projected to increase from $24.9 billion in the 2008 – 2009 school year to $37 billion in the 2009 – 2010 school year. In most states the ARRA funds have been and are being disbursed to school districts, and we believe that the ARRA funding has had a substantial positive impact on our 2009 sales.

We recorded a net income of $6.5 million for the three months ended September 30, 2009 compared to a net income of $590,000 in the same period in 2008. We recorded a net income of $3.3 million for the nine months ended September 30, 2009 compared to a net loss of $4.5 million in the same period in 2008.

Product revenues increased by 107% and 22% during the three months and nine months ended September 30, 2009 respectively, compared to the same periods in 2008. The increase in the three months ended September 30, 2009 was due to higher booked sales, including one transaction for $6.9 million where we recognized product revenue of $3.2 million, and the recognition of approximately $2 million of revenue related to our Reading Assistant Expanded Edition product. This revenue resulted from sales in prior quarters that included Reading Assistant Expanded Edition software, which was deferred until the product s release in September 2009. The increase in the nine months ended September 30, 2009 is primarily due to higher booked sales, reflecting the impact of federal stimulus funding and sales productivity improvements.

During the third quarter of 2009, we closed 38 K-12 sales that had a contract value in excess of $100,000, compared to 23 for the same period in 2008. For the three months ended September 30, 2009, approximately 79% of our K-12 booked sales were realized from booked sales over $100,000. For the comparable period in 2008, these large booked sales accounted for approximately 60% of K-12 booked sales. Large booked sales include volume and negotiated discounts but the percentage discount applicable to any given transaction will vary and the relative percentage of large booked sales and smaller booked sales in a given quarter may fluctuate. Because we discount product license fees but do not discount service and support fees, product booked sales and revenue are disproportionately affected by discounting. We cannot predict the size and number of large transactions in the future.

Research and Development Expenses: Research and development expenses increased by 19% and decreased by 13% in the three and nine months ended September 30, 2009, compared to the same periods in 2008. The increase in the three months ended September 30, 2009 is mainly due to an increase in bonus expense of $273,000 and a decrease in OEM customization costs transferred to cost of revenue of $172,000. The decrease for the nine months ended September 30, 2009 is due to the capitalization of approximately $1.1 million of development costs, mostly relating to our Reading Assistant Expanded Edition product, and a decrease in headcount related costs of $366,000 as a result of the restructuring actions taken in January 2009, partially offset by a decrease in OEM customization costs transferred to cost of revenue of $415,000 and increased bonus expense of $402,000. Research and development expenses principally consist of compensation paid to employees and consultants engaged in research and product development activities and product testing, together with software and equipment costs.

In the three and nine months ending September 30, 2009, we recorded income tax expense of $301,000 and $367,000, respectively. For the three and nine months ended September 30, 2008 we recorded an income tax benefit of $36,000 and an expense of $1.2 million, respectively. The tax expense for the nine months ended September

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