Your computer might already have Sonic Solutions' (NASDAQ:SNIC) digital media software loaded on it, under the market-leading Roxio brand. Tonight, the company reports third-quarter earnings, so let's take a look at whether it belongs in your portfolio, too.

What analysts say:

  • Buy, sell, or waffle? Seven of nine Wall Street analysts rate the stock a buy, and the other two are holding. In our Motley Fool CAPS community, the love buzz isn't quite as strong, and the stock carries a three-star rating on the backs of 59 player opinions.
  • Revenues. The analysts expect about $40.85 million of revenue, up ever so slightly from the $40.77 million a year earlier.
  • Earnings. But the consensus on the net income line is just $0.16 per share, down from $0.30 last year.

What management says:
Chris Loeper, vice president of Roxio retail sales, is happy about his division's place in the market. "Particularly gratifying is our remarkable revenue market share," he says, "a full 19% more than our closest competitor, proving that our applications continue to command a premium price point. With Roxio applications featuring prominently in Microsoft's (NASDAQ:MSFT) Vista launch activities and robust channel-wide marketing programs, we fully expect to extend our market leadership position through 2007."

What management does:
Gross margins are coming back up after an extended slump, but net margins appear to have peaked three quarters ago. Free cash flow is a bumpy affair, even on a trailing 12-month basis.

Margins

6/2005

9/2005

12/2005

3/2006

6/2006

9/2006

Gross

80.3%

78.2%

77.2%

77.1%

78.7%

80.1%

Operating

11.8%

10.1%

12.7%

17.1%

20.2%

21.2%

Net

9.7%

8.1%

12.9%

13.4%

12.1%

11.5%

FCF/Revenue

18.3%

17.3%

12.9%

14.4%

11.0%

13.5%


The growth figures show me a clearer picture. That massive growth up to the end of 2005 compares revenue and earnings including the Roxio division to pre-acquisition numbers from 2004. The slowdown after that comparison rolls off the calendar is to be expected. Even then, Sonic had a couple of great sales performances last December and March, and the cash flowed straight to the bottom line.

YOY Growth

6/2005

9/2005

12/2005

3/2006

6/2006

9/2006

Revenue

72.5%

81.9%

98.9%

64.1%

38.6%

25.4%

Earnings

-22.1%

-33.9%

62.1%

133.3%

73.2%

77.0%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Sonic is up against some really tough comparisons in this quarter and the next. Analysts estimate flat year-over-year revenues, but lower income thanks to higher fixed costs. Part of that comes from the internal options accounting review. The process of conducting these reviews can be costly for a small company like this one, and then there are the restatements of past results to consider.

With that in mind, we're not likely to get a full report out of Sonic Solutions this time, but rather a couple of preliminary revenue and earnings figures. And what we do get won't be very impressive. That's just the way the cookie crumbles sometimes.

Major customers:

  • Dell (NASDAQ:DELL)
  • Digital River (NASDAQ:DRIV)
  • Hewlett-Packard (NYSE:HPQ)

Competitors:

  • Apple (NASDAQ:AAPL)
  • Adobe Systems (NASDAQ:ADBE)

Dell is both a Motley Fool Stock Advisor pick and a Motley Fool Inside Value selection. Microsoft joins the gang at Inside Value. Try out these or any of our other Foolish newsletters for yourself, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he's a customer of all of them. Go figure. You can check out Anders' holdings if you like, and Foolish disclosure is always on the up-and-up.