Next-Gen DVD Deployment Slow, Thwarting Studio Commitments, Sonic Says
Major studios are reluctant to release Blu-ray and HD DVD titles amid a “relatively slow” hardware deployment, Sonic Solutions executives told analysts in a Thurs. quarterly earnings call. Fewer than 2 million Blu-ray and HD DVD players have shipped since the first hardware debuted a year ago, and most of those are videogame consoles, said Exec. Vp-Strategy Mark Ely. Studios won’t quicken the release pace until shipments of standalone next-generation players pass the 2-million-unit mark, he said.
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In the late 1990s, when standard DVD players debuted, consumers typically purchased 20-25 titles within the first year of buying one, said Ely, whose company markets Scenarist next-generation DVD authoring software. By comparison, early next-gen adopters, who could have bought a player last April at the earliest, are buying titles at the rate of only one per player, Ely said. “We think that has a lot to do with the fact that the dominant player platforms here so far are really game consoles, and gamers focus on games,” he said: “As we get later in the year, I do not think you would necessarily have to see one format or another win. We just need to see a broader population of players. As we get to 2 million plus players outside of consoles, then I think we have a market for the studios.”
About 145 titles have been released for Blu-ray and 160 for HD DVD, Sonic Solutions CEO David Habiger said. Another 50-60 Blu-ray titles are expected by mid-year, plus 20-30 HD DVD movies, he said. In comparison, about 80,000 standard DVD titles are available with “several thousand” more expected the first half, Habiger said.
Next-generation DVD player growth will be driven by the increase in U.S. DTV households, Habiger said. In 2006 there were 48 million such households, a figure that will more than double to 100 million by 2008, Habiger said. The category also will benefit from arrival of lower-cost players and dual-format models, he said. Sonic is developing software for dual-format players; a Blu-ray player containing its firmware is expected to ship in the first half, company officials have said (CED Dec 8 p2). “As the player population grows, Hollywood will commit more production to the HD format,” he said: “However, it is becoming clear that Hollywood is taking a relatively cautious approach to HD title production.”
Studio wariness is forcing Sonic to temper expectations for sales of professional HD authoring software. Sales of Sonic’s HD authoring software “did see a ramp” in Q3, but “we do not expect to see it” in Q4, Habiger said. In Q3, Sonic professional products revenue was $2.2 million, about $3 million below the company’s original forecast and down 17% from Q2, CFO Clay Leighton said. So Sonic is “significantly” cutting its projection for professional division revenues “until we have great visibility,” Leighton said. He didn’t forecast Q4 professional revenue.
Sonic reported preliminary Q3 revenue of $39.1 million, short of analysts’ forecasts of $40.9 million, as it reviews its option-grant practices. It projected Q4 revenue of $37- $41 million, below analyst estimates of $48.3 million. Q3 revenue was up from $35.9 million the previous quarter, driven largely by consumer product sales of $36.9 million. Consumer business benefited from higher OEM revenue, including $8.7 million from Dell, up from Q2’s $8.2 million, officials said.
Sonic benefited Q3 from strong sales of Roxio’s Creator 9 CD/DVD burning software, officials said. Sonic e-commerce sales the first 30 days of the Creator 9 launch last fall outpaced 2005 Creator 8 revenue by more than 50%, Habiger said. Sonic forecasts OEM and direct sales revenue growing 10-15% and 25% in Q4, while its retail business is flat with a year ago. “We believe the mix is going toward the e-tail operation rather than the bricks and mortar, which is a more challenged environment,” Leighton said. Retail sales -- bricks and mortar and e-commerce -- account for about 50% of Sonic consumer revenue, Leighton said.
The company isn’t expecting “significant revenue” until fall from its download-to-burn software and Qflix licensing and certification program, Habiger said. The first download- to-burn services are expected to emerge at retail first half, with direct-to-consumer business arriving the 2nd half via Movielink and others, company officials have said. Sonic has shepherded download-to-burn technologies through major movie studios and DVD licensing organizations (CED Dec 11 p3).
Sonic expects Q4 operating expenses of $24 million, some from review of options granting, officials said. The probe’s cost is expected to be a “seven-figure” number that will be a “significant” cost in Q4 and Q1, Leighton said.
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Sonic is appealing its proposed Nasdaq delisting for failing to “timely file” its 10-Q for the quarter ended Dec. 31, the company said Fri. Nasdaq staff issued the decision last week and Sonic is seeking a hearing, the company said.