Although revenue was slightly below our Q3 estimate, higher-margin service revenue helped Sonic Foundry (SOFO) post a small profit after noncash expenses. Not only was this ahead of our most recent EPS estimate, but it was also better than what we expected entering the year before the Q1 shortfall.

We would still like to see the company sustain its revenue run rate and show some operating leverage in fiscal 2009, and therefore maintain conservative estimates. However, we are incrementally more positive on the stock. We maintain a Hold recommendation and $1.00 price target.

A number of Sonic Foundry's closest competitors are private, or part of a larger company, making comparable valuation difficult. One way to value SOFO is by looking at competitors that have been acquired. In September 2007, Codian, a competitor in some areas, was acquired for $270 million. This was approximately 10 times trailing 12 month revenues. A closer competitor, WebEx, was acquired by Cisco (CSCO) earlier in the year. Cisco paid $3.2 billion for WebEx, or $57 per share, which was a premium of 23%.

This means that WebEx had been trading at $46.34 per share prior to the acquisition, or 6.8 times trailing revenue. Applying a 6.8 multiple to revenue per share of $0.47 in 2008, we arrive at a price of $3.21. For comparable public companies we have selected a few that provide a similar solution to SOFO, such as Onstream Media (ONSM), or provide competing services delivered through a differing solution, Akamai (AKAM) and Blackboard (BBBB). In the comparable group, price-to-sales on current year estimates in the group range from 3.1 to 4.8 with a median of 3.5.

Applying the median multiples to SOFO revenues, we arrive at $1.64 on sales per share of $0.47. Based on these valuations, SOFO should trade between $1.64 and $3.21. However, we believe there is significant risk associated with the shares and the company still needs to prove it can maintain recent results.