Scientific Learning Reports Third Quarter Results

Scientific Learning Corporation (NASDAQ:SCIL), a leading provider of technologies for accelerated learning, today announced financial results for the third quarter ended September 30, 2010.

Third Quarter Summary (3Q10 vs. 3Q09)

• Total revenues decreased 50% to $10.2 million, while booked sales decreased 56% to $11.4 million, caused by a K-12 booked sales decrease of 59% to $10.5 million;
• Gross profit decreased 56% to $7.4 million and gross margin decreased to 72.6% from 84.0% of total revenues;
• Operating loss of $0.8 million versus operating income of $6.8 million, and EBITDAS of $0.2 million versus $7.5 million;
• Net loss of $0.8 million versus net income of $6.5 million
• Net loss per share of $0.04 versus earnings per share of $0.35.

Andy Myers, Chief Executive Officer stated, "Overall, our results continue to reflect a challenging K-12 environment. As school districts struggle with current and anticipated budget shortfalls, they are often creatively juggling available federal funds to save teacher jobs and core services at the expense of implementing supplemental programs like ours. In addition, our comparison was especially difficult because of a $6.9 million order in last year’s third quarter. Looking ahead to the fourth quarter, we still have significant opportunities in the pipeline and the potential to close the year on a strong note. We began seeing an increased level of activity in September as schools returned their focus from getting their budgets and teachers in place to educating students.”

Myers continued, "Our products are highly effective, they align with current educational reform initiatives, and there continues to be strong interest in our programs from school districts, parents, international and virtual school partners. However, we also know that the critical product and technology improvements we are making are necessary for a more diversified sales approach in K-12 and more predictable, aggressive revenue growth across our various markets. Our success in 2009 gave us the financial wherewithal to make significant organizational changes and invest in this transformation, which should begin to have a positive impact on sales in 2011. We are not pleased with our third quarter and year-to-date results, but we remain very excited about our progress toward our long term goals and are not deterred by the short-term challenges we are experiencing in the K-12 environment.”

Operating Results

Total revenues decreased 50% to $10.2 million in the third quarter of 2010 compared to $20.3 million in the third quarter of 2009. Product revenues decreased 67% to $5.0 million, however service and support revenue increased 8% to $5.2 million. Product revenue decreased mainly as a result of lower booked sales. The increase in service and support revenue was primarily due to the increased delivery of both on-line and traditional service offerings for training and implementation, and more schools using our Progress Tracker reporting tool. Total booked sales decreased 56% in the third quarter, driven by a 59% decrease in K-12 sales. School districts current and anticipated budget shortfalls are making it especially difficult to close large deals in our pipeline. Last year’s third quarter also included an extraordinarily large $6.9 million deal.

Gross profit decreased 56% to $7.4 million in the third quarter of 2010 compared to $17.0 million in the third quarter of 2009. Gross profit margin decreased to 72.6% from 84.0% of total revenues. The decrease in the gross profit margin was primarily driven by a change in revenue mix toward services and support, which carry a lower gross margin. Product gross profit margin decreased to 89.4% from 93.5%, mainly due to fixed logistics costs being spread over a lower amount of revenue compared to previous quarters. Service and support gross profit margin increased to 56.2% from 53.3%, as support, professional services and Progress Tracker gross margins all increased on more efficient delivery of both web-based and on premise services and a reduction in royalties paid on our Progress Tracker reporting tool.

Total operating expenses decreased 20% to $8.2 million in the third quarter of 2010 compared to $10.3 million in the third quarter of 2009. Sales and marketing expenses decreased 24% to $4.8 million, primarily due to lower commission and bonus accruals. Research and development expenses increased by 5% to $1.9 million, primarily due to higher headcount and consulting expenses in product development and management. General and administrative expenses decreased 30% to $1.5 million, mainly due to lower bonus accruals.

Earnings before interest, taxes, depreciation, amortization, and stock compensation (EBITDAS) decreased to $197,000 in the third quarter 2010 from $7.5 million in the third quarter 2009. Operating loss in the third quarter 2010 was $795,000 versus operating income of $6.8 million in the third quarter 2009. Net loss was $820,000, or $0.04 per share, in the third quarter of 2010 compared to net income of $6.5 million, or $0.35 per share, in the third quarter of 2009.

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 September 30, 2010, cash and short-term investments were $17.2 million compared to $16.9 million at September 30, 2009 and $20.7 million at December 31, 2009. Net accounts receivable were $4.6 million at September 30, 2010 compared to $10.3 million at September 30, 2009 and $6.4 million at December 31, 2009.

Conference Call Information

A conference call to discuss third quarter results and the outlook for 2010 is scheduled for today, October 21, 2010 at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time. Investors and analysts interested in participating in the call are invited to dial (866) 652-3154 (domestic) or (706) 634-7311 (international), conference id number 15196833 approximately 10 minutes prior to the start of the call. The conference call will be available live on the Investor Information portion of the Company’s website at http://www.scilearn.com/investorinfo. 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 number 15196833.

About Scientific Learning Corporation

We accelerate learning by applying proven research on how the brain learns. Scientific Learning’s results are demonstrated in over 200 research studies and protected by over 55 patents. Learners realize achievement gains of 1 - 2 years in as little as 8 - 12 weeks and maintain an accelerated rate of learning even after the programs end.

Today, learners have used nearly 3 million Scientific Learning software products, which apply "Brain Fitness” principles to the areas of English language and reading. We provide our offerings directly to parents, K–12 schools and learning centers, and in more than 40 countries around the world. For more information, visit http://www.scilearn.com/ or call toll-free (888) 358-0212.

Forward-Looking Statements

This press release contains forward-looking statements that are subject to the safe harbor created by the federal securities laws. Such statements include, among others, statements relating to the Company’s future booked sales and other financial results, the availability of funding and other trends in the K-12 education market, the overall economic environment, and our product development plans and their anticipated impact. Such statements are subject to substantial risks and uncertainties. Actual events or results may differ materially as a result of many factors, including but not limited to: general economic and financial conditions (including the current adverse conditions in the general economy and in the financial and credit markets); availability of funding to purchase the Company's products and generally available to schools; unexpected challenges in product development; the acceptance of new products and product changes; seasonality and sales cycles in Scientific Learning's markets; competition; the extent to which the Company's marketing, sales and implementation strategies are successful; personnel changes; the Company's ability to continue to demonstrate the efficacy of its products, and other risks detailed in the Company's SEC reports, including but not limited to the Report on Form 10-Q for the quarter ended June 30, 2010 (Part II, Item 1A, Risk Factors), filed August 13, 2010. The Company disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise.