SONIC™

Technology
Computer Networks
NASD: SNIC

Sonic Solutions

101 Rowland Way – Suite 110
Novato, CA 94945
Phone: 415-893-8000



Robert J. Doris
President and
Chief Executive Officer

Interview conducted by:
Walter Banks
Co-Publisher

CEOCFOinterviews.com
June 2002

Bio of CEO,
Robert J. Doris
President and Chief Executive Officer
Mr. Doris founded Sonic Solutions in 1986 and has served as President, Chief Executive Officer and Director of the Company since that time. Prior to 1986 he was President of The Droid Works, a subsidiary of Lucasfilm Ltd., which produced computer-based video and digital audio systems for the film and television post-production and music recording industries. Prior to founding The Droid Works, Mr. Doris was a Vice President of Lucasfilm and General Manager of the Lucasfilm Computer Division. Mr. Doris received B.A., J.D. and M.B.A. degrees from Harvard University.

Company Profile:
Sonic Solutions is the world's leading supplier of authoring systems for digital media – DVD and CD – production. Beginning in 1986, Sonic set the standard for quality, productivity and creativity for digital audio workstations and CD pre-mastering. It built upon this success with the introduction of the first commercial systems for DVD production in 1996.

Sonic continues its technology and market leadership role today with a full line of DVD authoring systems -- from professional workgroups designed for Hollywood studios to desktop applications that bring DVD to the home market for the first time. Sonic is the DVD solution of choice, and today more DVDs worldwide are authored on Sonic than on all competing products combined.

Sonic's success is based in strong technology know-how. Since the introduction of the award winning NoNOISE®, to powerful extensions to DVD for web support (eDVD™), DVD format on CD-R discs (cDVD™), and more, Sonic continues the drive toward better digital media solutions.

Sonic Solutions, with over 100 employees is headquarters are located in Marin County, California. The company's international sales and distribution network spans more than 40 countries, with headquarters for Europe in London, England and Pacific Rim in Tokyo, Japan. Independent distributors provide sales and support throughout Europe, South America, Asia, Australia, Africa and the Middle East.

DVD is one of the most compatible, fastest-growing consumer formats of all time, with enormous potential for sharing video, audio and multimedia content. Sonic has revolutionized DVD creation with a variety of easy-to-use, flexible applications that give you everything you need to create stunning DVDs on your PC desktop. If you have a camcorder or digital photo collection and want to create DVDs on your home PC, Sonic has the product for you.

Hollywood studio products include:
AuthorScript®
AuthorScript is the technology underlying all of Sonic's DVD authoring applications, and the engine that makes it possible to format content for DVDs. Creating an interactive framework for a DVD/SVCD/VCD title. The AuthorScript API (Application Programmer's Interface) is a collection of C++ libraries -- and associated calls that can be made from within applications -- that handle all of the low-level processes for converting video, audio, graphics and interactivity into a DVD-Video disc. These libraries are available to third-party developers who would like to add direct DVD-Video publishing to their multimedia, video and audio applications.

Sonic Scenarist®:
For commercial title production in Hollywood and the top post facilities worldwide, Sonic Scenarist is the de-facto standard on which they rely, time and again, for highly-featured productions which carry the confidence of ultimate compatibility across the broadest range of DVD players. Using a cross-platform DVD authoring engine and database, Sonic Scenarist provides accelerated performance within an integrated workflow environment. Commercial DVD producers can create title templates, re-use data across multiple video titles, share assets and simultaneously access DVD projects among multiple users.

Products for Corporate and Small Business:
DVDit!®:
DVDit! allows you to create professional quality DVDs on your PC using your existing avi files and MPEG files, and digital stills.

ReelDVD™:
Designed specifically for independent and corporate video projects and brings exciting multimedia DVD to your professional productions.

Consumer Product:
MyDVD™:
The Easiest Way to Record on DVD, is designed for the home market place.

CEOCFOinterviews: Mr. Doris, please give us a brief history of Sonic Solutions.

Mr. Doris: “Sonic was founded in 1986, by three people who came from the Lucasfilm Ltd., computer division. Lucasfilm is George Lucas’ company,  the filmmaker who made Star Wars and Indiana Jones. In the mid-eighties, he had a research group, which was part of his company. The charter of that group, the computer division, was to develop ways in which digital technologies could be used to assist filmmakers in making movies. We were part of that group; our group went into video editing and audio, postproduction and editing, computer graphics and video games. Around 1986, that group started to wind down; a couple of companies attempted to spin off, one became Pixar, it was the computer graphics group, and eventually was bought by Steve Jobs. They then went on to become a publicly traded digital production company, now making movies.

We were with Droid Works, the division that focused on video editing. Droid Works attempted a spin-off, but didn’t make it out the door, so it was wound down by Lucasfilm. Since our Lucasfilm experience made us very familiar with the different ways in which digital technologies could advance the craft of making film, video or music entertainment, the three of us decided to start our own company – Sonic Solutions”

CEOCFOinterviews: What was the original focus of Sonic Solutions?

Mr. Doris: “One of our original co-founders had a specialty in digital audio technology, so we decided to focus first on professional digital audio applications, building one of the world’s first digital audio work stations. These are computer-based tools, which are used by audio professionals to prepare music for sound, film, videos, or for release on compact disc.”

CEOCFOinterviews: Are you still focused on Audio, or has that changed?

Mr. Doris: “Our involvement with the professional audio community led us to become very comfortable with the compact disc format, when it was just starting to really take hold of the music industry in the late eighties and early nineties. As recordable compact discs came along, we jumped on that as well and became one of the first companies in the world to supply recordable compact discs as part of our workstation offerings. Our involvement with the recordable compact discs led us to become an early participant in initiatives to put video onto a CD (compact disc) carrier.

In the early nineties, there were many attempts of this kind. All of those led up to the formation of the video standard in 1995, and it’s introduction in 1996 and 1997.   When that format was solidified and introduced, Sonic Solutions was involved with it and introduced the world’s first professional DVD video production system, to assist the Hollywood studios in taping their videos and films and publishing them in the DVD format.

Our original professional audio business has given way to our 100% involvement with the DVD video format, in three broad application market areas; the professional market, which is the Hollywood type community, the desk top professional market, which are business users, and consumer users. In addition to serving applications for each of those market sections, we also have a very active program of licensing our DVD video creation technology.”

CEOCFOinterviews: Have you sold your Audio Business?

Mr. Doris: “Yes, we did about a month ago; we announced the formation of the new company called Sonic Studio, LLC, which was a product line named Audio Work Station. We formed that company in partnership with some individuals who were long time participants in the professional audio industry, and essentially sold our audio business into that LLC. Our company, Sonic Solutions will retain a small minority interest.”
 
CEOCFOinterviews: So now your entire focus is on your DVD product.

Mr. Doris: “Correct.”
 
CEOCFOinterviews: Could you give us a revenue break down from each line?

Mr. Doris: “Roughly, out of the Professional/Hollywood line we did about 2.5 million in the most recent quarter. The Desktop Application Systems is about 2 million dollars, and then the balance reaches a little bit over 2 million dollars. Therefore, it is roughly divided equally among the three.”

CEOCFOinterviews: Moving forward, do you see that trend continuing, or does one of your lines have a greater growth potential?

Mr. Doris: “Moving forward, we’ve indicated that we think that our Professional/Hollywood business is unlikely to significantly grow in size. Even though it only has been 5 years since DVD videos have been produced, it is already a matured business, because Hollywood studios are now pretty well equipped to publish DVD video titles. We expect that line to continue to be a good one, but we don’t expect a lot of growth in that area.”

CEOCFOinterviews: Can you tell us about possible growth in your other two business lines?

Mr. Doris: “We expect our Technology business to grow roughly 50% per year, composite rate over the next couple of years. The Desktop business, which includes our consumer level DVD creations software, is expected to grow 100% per year over the next couple of years.”

CEOCFOinterviews: Why do you believe that you will maintain steady revenues from your Professional/Hollywood business?

Mr. Doris: “We think that we will continue to prosper there because we have such a large market share. About 75% plus, of all Hollywood level systems that are sold or installed around the world are of Sonic Solutions origin.”

CEOCFOinterviews: Why would someone who has your system be hesitant to change over?

Mr. Doris: “For someone to operate that system, it would take a couple of days training before they could sit down to start making their first DVD video disk. They become expert on the systems. Our systems are like any other professional system in that they aren’t designed for casual use. On the other hand, if you know what you are doing, you can really accomplish a lot with them.

The way that we keep our customers satisfied there is that professionals have a number of very specific requirements. Most importantly, they need great flexibility in the Authoring tool, because they want to be able to make use of every aspect of the DVD video specification that is a very rich and complex format. The second thing that they need out of that kind of system is absolutely the highest quality of handling of raw material for both the video and audio. As an example, in our Professional/Hollywood systems we incorporate some of our very advanced Ampex Video encoding hardware, which is very specialized and very sensitive. It allows a Hollywood studio to take a video master tape and encode it into the highly compressed Ampex video that is actually shipped onto the DVD videodisc. That process if done right produces extremely good looking video. We specialize in that Hollywood class system, in delivering the ultimate in quality and control to that Hollywood customer. Understanding those customers and learning exactly what they want, is what keeps you successful.”

CEOCFOinterviews: Can you detail what your customers purchase from you, software, hardware, etc?

Mr. Doris: “They purchase the systems that are designed to run on PCs; we actually have some systems that are on Macs and some that are run on Windows PCs. What they purchase from us is plug-in hardware that does things such as the Ampex video encoding or Multi Digital Audio Encoding. They also purchase application software that provides them an interface and an environment that they can actually lay out and design a DVD video title that is going to be published. It’s a combination of hardware and software.

Typically, when high-end, Hollywood customers purchase from us, we include some training, which is sometimes done on site, but the customers usually come to one of our training centers; we run classes here in Novato, and also in Los Angeles, New York and London. It is quite typical for a production engineer to take a full two days in one of these courses. We also have advanced courses, and they come back after they have gotten some experience.”

CEOCFOinterviews: Do you generate any revenues maintenance and replacement parts?

Mr. Doris: “Many of our installed base subscribe to what is called Sonic Care, which is a program where we provide software upgrades as we continue to develop new versions of products. It also provides maintenance and replacement hardware parts that would be necessary if their system goes down. In addition, it provides on-line telephone support. The kind of on-line, telephone support this kind of customer requires is a bit different, in that these are the kind of customers that will call up and say ‘I can’t turn my system on’. This customer is a very highly skilled and knowledgeable, person that will call up with a very exotic kind of problem.”

CEOCFOinterviews: As you look at the market place for both the Professional and consumer end of your business, what do you need to do to continue to grow your business and stay ahead of your competition?

Mr. Doris: “The thing that is driving growth in that area of our business is really quite straight forward. Since about a year ago, DVD recorders have started coming down in price. Until as recently as the year 2000, if you wanted to buy a machine that could record a DVD videodisc, you had to spend $5,000.00 or more. Last year (2001), the average price fell to about $700.00, and in 2002, we expect the average price to be around $400.00. In fact, if you go online you can already find DVD recorders priced for under $400.00.

That price decline has set off a wholesale expansion in the number of DVD recorders being shipped. Last year about 500,000 highly compatible DVD recorders were shipped, this year the projection is for about 4 million worldwide, with 13 million next year and 22 million plus the following year. As we are 5 months into this year, we are beginning to believe, that projected 4 million, may be to small. This gives us a very rapidly ramping level of shipments for DVD recorders. Therefore, that is what is driving our desktop application software business. The advent of reasonably priced DVD recorders in large quantities is creating a significant demand for our DVD Video Creation software.

CEOCFOinterviews: What is your marketing strategy in this space?

Mr. Doris: “In this space we have a very simple strategy. We aim to bundle introductory versions of our software with as many DVD recorders as we can to reach the users.  We are creating a positive experience for the users, and it is putting us in a position to sell those users higher-end and more elaborate versions of our software through web delivery and retail.”

CEOCFOinterviews: Is this marketing effort put forward through partnering?

Mr. Doris: “Yes, we have a long list of partners that we bundle our software with, including companies like, Hewlett Packard Company (NYSE: HPQ, Dell Computer Corporation (NASD: DELL), Compaq Computer Corporation (NYSE: CPQ), NEC Corporation (NASD: NIPNY), Kon Philips (NYSE: PHG) and Pioneer Corporation (NYSE: PIO) to name a few. The list is quite long.

CEOCFOinterviews: So when they sell their computers your software is bundled in there.

Mr. Doris: Yes, if they have a DVD recorder.  In some cases such as Hewlett Packard, which has a large business selling just the DVD recorders alone, we refer to them as ‘add to’ market recorders, because they are meant to be sold as an item added to an existing PC. However, whether it comes as an ‘add to’ market recorder or as a recorder bundled as part of a PC purchase, what we aim to do is have our software bundled with them.”

CEOCFOinterviews: What is your competitive edge in building the relationships with your partners?

Mr. Doris: “We are one of the first companies to do DVD video creation. We have quite a long history, doing Hollywood for 6 years.  About 2 years ago, we introduced the first EBTU DVD video creation software, called DVDit!®.   Last year we produced MyDVD™. DVDit! was more of a professional package and MyDVD was aimed directly at consumers. Therefore, we’ve been providing the DVD creation software longer than anyone else has and we’ve been providing easy to use DVD creation software, longer than anyone else, hence we have more experience with it.

Our approach is more innovative than anyone else’s approach. We’ve pioneered concepts such as direct to DVD, where basically the consumer plugs their camcorder into one end of the PC recorder and pretty much with three or four mouse clicks is already creating a DVD video disc directly from the camcorder. Other concepts, such as being able to edit on DVD, allows consumers to change discs that have already been made. All of this is because we have the deepest and longest standing technology base and frankly, it makes it much easier for us to innovate in this space. Most importantly for our OEM partners is the fact that we have such a long experience in this space means, that our software produces the most highly compatible DVD videodiscs, because not all videodiscs are created equal.  The DVD video spec is a very complicated spec; it has a few hundred very dense pages of technical specifications.  Because the spec is so complicated, it is not uncommon for errors to be made in authoring or even for a player to misinterpret the spec. This is the reason why some DVD videodiscs cannot be played back consistently in every player.

Because we have a long base in serving the Hollywood community, with the same image and the same back-end to technology that we use in our consumer products, our software produces the most highly compatible discs in the world. Every mom or dad that sits down to use MyDVD to make a DVD video disc of their child’s birthday basically is using the same technology engine that the high-end guy in Hollywood is using.   That’s what gives Sonic Solutions such a strong position in this space. I believe we have a good reputation, and I would like to think that among our OEM partners, that we are highly competitive.”

CEOCFOinterviews: Can you do high-tech video editing on MyDVD™?

Mr. Doris: “Our application software is not video-editing software, we have a very clear view on this which is that, inside of a DVD video creation tool, while there may be some functions that are editing ‘like’, consumers don’t want to be doing video editing; it is fairly complicated and time consuming and in many ways frustrating. Consumers want to get to their disc as quickly, easily and pain-free as possible. We never design DVD editing systems; it is true that many times with raw video, people will want to do some editing. We are taking a different approach to that, forming relationships with other companies that have video editing technology. For example, we introduced a product called MyDVD™ Video Suite about one month ago, which actually incorporates some video editing from another company called Arc Song, which we thought was a very nice consumer level video editing.  We offered this product in cooperation with them so an OEM partner or retail consumer could easily get a video editing package as an add-on or a companion package to MyDVD and Video Creation application.”

CEOCFOinterviews: What have your revenues been like from year-to-year?

Mr. Doris: “For the past few years our revenues have hovered around 4 or 5 million dollars, plus or minus, on a quarter basis. Quite frankly we’ve lost money. We’ve been unprofitable over the last 4 years, basically because we’ve been maintaining a heavy R&D load for the size of revenues that we’ve been seeing. We were convinced 3 years ago that DVD video would eventually hit the consumer market, while at the time, the main revenues we were getting in the DVD space came from the Hollywood community.

We decided that we were going to make a forward investment in the R&D line, in developing our software and technology to be able to take it to a broader range of customers. We waited for the DVD recorder to get cheaper and while it took a little longer than expected, the good news is they have now really come down. If you look at the results from our March quarter, our revenues ballooned up to considerably; for that quarter, we reported about 6.8 million in revenues, which was up from about four and a half million dollars. We reported an operating income of about 838,000, and 4 cents a share, compared to a loss from the prior quarter of about 8 cents a share.”

CEOCFOinterviews: Have you projected a return to profitability?

Mr. Doris: “For the fiscal 2003 year, which is the year ending in March of 2003, we expect revenues to be 33-34 million dollars and operating income 27-29 cents a share. Last quarter, the March quarter of our fiscal year, was the first solidly profitable quarter in quite some time for Sonic Solutions, but now that the lift off is taking place, we expect to have pretty good news for a while.”

CEOCFOinterviews: Have you lowered R&D spending?

Mr. Doris: “No, for the past few years we have spent in excess of what we should have spent, given our size and revenue. We are not decreasing R&D spending, if anything we are increasing it.”

CEOCFOinterviews: So you believe that good R&D can produce growth for your company.

Mr. Doris: “Yes.”

CEOCFOinterviews: Do you have the cash and/or credit to continue to build out your business?

Mr. Doris: “Yes we do. We are basically a software company and if you look at our most recent quarter, we are a profitable software company.   That kind of company should not need a tremendous amount of capital; in fact by many measures, we shouldn’t need any significant capital to fund growth. At the end of last quarter, we had about 11 million in cash on our books. On an operating basis, we are pretty well fixed for a while. What we may do is engage in some selective acquisitions to acquire some products or technology over the next several months, if we do that, then that may introduce a financing requirements. I wouldn’t be surprised to see us make some moves as we look at some of these opportunities.”

CEOCFOinterviews: In closing, what thought would you like leave with our readers?

Mr. Doris: “I would like to suggest to your audience that if they like DVDs and exiting technology, then I’m sure that they will be as excited as I am knowing that DVD video creation is something that is very interesting to consumers. Moreover, if they believe that DVD video creation is going to be a success, then they should take a serious look at Sonic Solutions. We are nicely positioned to profit from that success over the next few years.”

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