Good morning. My name is Arnika, and I will be your conference operator today. At this time, I would like to welcome everyone to the SeaChange International First Quarter Fiscal Year 2013 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call to Martha Schaefer.

Thank you, Arnika. Good morning, everyone, and thank you for joining us. SeaChange released results for the First Quarter Fiscal Year 2013 ended April 30, 2012, last night after the market closed. Attached to the press release were our prepared remarks regarding the financials. If you do not have this material, please go to www.schange.com at the IR section to download the document. These prepared remarks will not be read on our call today. Raghu Rau, CEO; and Mike Bornak, CFO, are joining me today. Raghu has a short introduction and comments. Following these comments, we'll be happy to take your questions. This call is being webcast and will be archived on our website in the Investor Relations section. Before Raghu begins, I'd like to remind you that the information we're about to discuss today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in our SEC filings, including our annual report on Form 10-K, which was filed April 5 of this year, 2012. Any forward-looking statements should be considered in light of these factors. Additionally, this presentation contains certain non-GAAP or adjusted financial measures as defined by the SEC. Per SEC requirements, we have provided a reconciliation of these measures to the most directly comparable GAAP measures in tables attached to the press release. Any redistribution, retransmission or rebroadcast of this presentation in any form without the express written consent of SeaChange International is prohibited. And with that, I'd like to turn the call over to Raghu.

Thank you, Martha. Good morning, and welcome, all of you, to our first quarter earnings call. In my last earnings call, I communicated to you that SeaChange was implementing a transformation strategy that -- and an important part of that strategy was to focus on our core Software business and sell our noncore assets. In May 2012, we successfully completed the sale of the media services business to avail TVN. In the same month, we also closed the sale of the broadcast server and storage business. These actions now allow us to focus our attention exclusively on the growth and profitability of our software business while enabling the monetization of noncore assets. SeaChange participated in the Cable Show organized by NCTA in May 2012. We had the opportunity to debut our next-generation software for back office, advertising and gateways. The demonstration of these products was very enthusiastically received by our customers, prospective customers, as well as investors and industry analysts and created a lot of buzz at the show. Over the next 2 quarters, we will be stepping up our investments in R&D in order to -- and show the timely launch of these next-generation products in the latter half of this fiscal year. This will be partially offset by further reductions in general and administrative expenses through actions taken in Q2 and Q3. As you will have observed from the copy of the prepared remarks, revenues for the Software business first quarter FY '13 at $36.6 million were at the high end of our guidance, and non-GAAP operating earnings was $0.06 per share. Beginning this quarter, we are providing greater transparency than customary, including the table showing the adjusted EBITDA, which was contained in part of the prepared remarks. We anticipate our second quarter Software revenues to be in the range of $35 million to $37 million. Our full year outlook remains unchanged. With that, I thank you for your interest in SeaChange and will now turn it over to Martha.

Arnika, could you please give the instructions for the Q&A, and we can get started on that.

[Operator Instructions] Your first question comes from John Zaro with Bourgeon Capital.

A couple of questions. One, can you just walk us through on -- you've done a great job following exactly how you've laid everything out, and we've now had a couple of quarters of this. And you've got the cash up to $98 million or whatever the number is, and then that doesn't include the latest close, which -- of the European business. Is there some plan to -- or why wouldn't you dividend out some of that cash that you have, particularly if the potential tax loss changes and sort of giving some money cash back to the shareholders who have been so patient over the last 3 or 4 years?

Thank you very much, John, for your comments, as well as your question. Yes, the figure of cash that we provided did not include the proceeds of either of the 2 divestitures. We do expect cash at the end of the quarter to be in the range of about $120 million at the end of Q2. As far as what we do with the cash, what we have said in the past is that we do not intend to do any big acquisition with this cash. We have authorization for a buyback of $25 million, and we have made some small purchases against that authorization. It's only about $0.5 million or so. We will consider all possibilities of using the cash more productively. We understand that it is not a productive use to just remain on the books. We do need a strong balance sheet to do support our very large customers who are making some very big bets on our next-generation products. However, as far as dividends are concerned, I'm sure it's something that the board will consider at the appropriate time.

Because given the model that you've gone to, you're not just going to need that much cash on a -- given the company and the revenues and everything else, given the amount of cash that you have.

That's absolutely right. We do not need the amount of cash that we have for our other operations.

And then the second question has to do with just -- you're sort of on plan for this increased R&D for the next couple of quarters. And I'm assuming that the rollout of everything in the third and fourth quarter is still sort of on plan, and none of that has changed, and we're just going to -- we're just sort of ramping up to get ready for that.

That's exactly right. What we're doing is we're also using our variable resource model so that while we ramp up the R&D over the next couple of quarters, we're also able to ramp down because of an outsourced variable resource model that we have to be able to ensure that we meet the timelines. And presently, we're on target to be able to achieve the launch of these next-generation products as planned.

And then finally, Martha, I know it's kind of hard, and we've got sort of different cadre of people covering you in and out from time to time, any way to sort of get these guys all on the same page so we don't have these giant headlines that say you missed when in actuality, you didn't really miss and you're doing better and...

Yes, that's the plan, John. I think after this quarter, everybody will be on the same page.

Yes, I mean, because it's -- I mean, again, you guys are doing a fantastic job executing on this, and it's just seeing these headlines is ridiculous.

Thanks, John. Appreciate it.

That was because of the discontinued operations for both of our businesses. But that's out of the way now, and we're squarely focused on the growth and profitability of the Software business.

Your next question comes from Todd Mitchell with Brean Murray.

I have a question. Okay. So if you look at your guidance for the year, it implies a pretty strong back half revenue ramp, and I assume what the dynamic is, is Axiom customers are kind of scaling down in the beginning and the Adrenalin customers are coming on in the back half. Can you talk about, I guess, the leverage ability of rolling out a new customer? So I'm assuming that there's some sort of upfront investment, and then as the customer comes online, that customer becomes much more profitable. Can you talk about just in the phasing of bringing on new customers how that works, how long it takes and at what point do you get to the scale that you see some operating leverage across the entire P&L? And what could we see sort of 18 months out in terms of an operating margin level? And similarly, as you address that, could you talk to me a little bit about within these 3 product lines of the BackOffice, the Home Gateway and the Ad Insertion kind of the different levels of profitability of each?

Yes, sure. Let me start with your first question. You're right, our business is back loaded in the second half. And the first half, you will see significant declines in Axiom, which was our legacy BackOffice, and that really has accounted when you do a quarter-to-quarter comparison of Q1 '12 versus Q1 fiscal '13. That's the primary reason, including reduction in the [indiscernible] server business. As far as the model for the next-generation products is concerned, yes, we do expect to launch a couple of these products in the fourth quarter of this fiscal year. The model is that we get a license fee for a certain number of subscribers bought by these carriers. In addition, we get a significant services revenue. We also get revenues and annuity revenue stream based on per active subscribers. Now this model varies between customers, but by and large, that's the model that we will use. Regarding the long-term operating margins of the business, we expect we will get around 15% operating margins in the 18- to 24-month time period. And it will be added digits this fiscal year.

And in the profitability of one business unit vis-à-vis the other?

Yes, at present, we're not providing individual segment in details. But generally, our overall gross margins is going to be in excess of 55%.

Okay. And one other -- going back to John's comments on not getting the numbers on, so in the back half of the year, let's say most of these Adrenalin customers are coming on in the fourth quarter, can you give us some sort of loose guidance as to what the revenue split is over the remainder of the year, sort of by quarters, so that we don't get it wrong and have 3Q too high?

We have provided revenue guidance for Q2. And together, I mean, I think it's fairly simple to compute what the total revenues for the BackOffice is going to be. The guidance I can provide you now is that the fourth quarter is going to be significantly higher than the third quarter because that's where the bulk of -- that's when the bulk of the installations happen.

And will 3Q be closer to 2Q than 4Q?

I would say they'll probably be around midway.

[Operator Instructions] Your next question comes from Jack Ripsteen with Potrero Capital.

Just so we better understand the nature of the sales pattern for Q4, be helpful and give us an idea, I mean, are these contracts that are already in place in Q4 and it's just a matter of deployment? Or is this a sales cycle that is predicated on a product launch? I'm just trying to understand, given that there's now more clear business line here, how that business progresses, what the sales look like and kind of visibility on this Q4 ramp.

Right. There are many customers involved here. And in some of the cases, the design wins have already happened. In some of the cases, handshakes have happened but a contract has not yet been signed and is in the process of being signed. But we have visibility to all of the business that we are talking about here. And the only question is, and that's why we are stepping up our R&D, is to ensure that it happens in a timely manner in fiscal year '13. But the business is there.

And the product is there? It sounds like the product is still -- some finishing touches being put on this product?

The product is already -- we demonstrated the product at the NCTA. And so it's not yet G8 [ph]. But however, it is in the labs, and it's being tested.

Okay. And then by next quarter, I think, I would imagine or at some other point, is there something we should look for that signals that it's going as planned and these product launches are on plan?

Yes. By the end of next quarter, we'll certainly have much more visibility to the launch of these new products, yes.

Okay. And is there anything that you see that could be a potential derailment of just deployment? I mean, obviously, customers can decide they don't want the product at a certain time point. But is there something that's driving a Q4 deployment, I guess, another way to put the question?

No, I think it's more of ability to ramp and be able to execute in this -- in a timely manner. I mean, I think that's the biggest variable here.

Okay. And I'm curious, is there something about the fourth quarter that's special to your customers from their deployment standpoint?

Not necessarily. But the advantage to our customers with the next-generation product is that they can reduce their operating expenses fairly substantially. So the earlier they can do that, the earlier they can get the advantage. The other big advantage is in the case of the BackOffice, they will get multiscreen capability. And so to that extent, they will be much better armed to face the competition over the top players.

Okay. And then last question towards that end, will it require a deployment of hardware on their end from like a cable box? Or is this all back-end related?

As far as the BackOffice is concerned, it will require servers, hardware on which our software resides. We do provide that hardware along with our software, but we can work with any anybody else's hardware as well. As far as the set-top box, Gateway software is concerned, it would be we work with any set-top box vendor including -- and multiple chip vendors including all of the major set-top box vendors we have tried, tested out with our Gateway software.

Okay. But it doesn't require -- for you to make your fourth quarter number, I'm trying to figure out, do they need to step up and buy and deploy set-top boxes?

Not necessarily, no.

Your next question comes from Christopher Ferris with Global Financial.

Sorry, I joined the call a few minutes late, so I'm sorry if you covered this. But I just want to ask one question. Some tech companies like Cisco, a few others have recently commented that they're seeing a slowing business out of Europe. Has your business been noticeably affected by the economic lows in the region? And what are you hearing from your MSO customers internationally about the prospects for new business?

Right. We haven't noticed any significant slowdown in Europe. In fact, recently, over the past month, we announced 3 major wins because we've already launched our next-generation BackOffice in Europe. It's the U.S. version, which has not yet been launched. And we announced wins Cyprus, Estonia and Poland. However, we're watching the situation very closely. And our customers' business is something that might get impacted, but they do need to be prepared for multiscreen, and that's why we're seeing more and more deployments continue to happen in Europe.

Right. And then a couple of housekeeping, and I'm sorry if you covered this as well. Obviously, the Media Services pieces and discontinued operations, if -- can you back out what the operating income for the Media Services business was in the quarter, in the first quarter?

Yes, up to the $0.06 is entirely from the Software business, continuing Software business. The Media Services was a breakeven business in the quarter.

Okay. And then again I'm sorry if you covered this as well, but can you -- I would have thought that the cash number would have been slightly higher given the divestiture that closed in the first quarter. Can you walk us through what happened in the first quarter and start with the cash flow statement? Can someone walk through some of the dynamics of the cash in the first quarter?

Right. The first quarter numbers, and I did cover this earlier, Chris, the first quarter numbers did not include the proceeds from the divestitures. I haven't -- it was closed at $95 million. The increase was due to free cash flow that the business generated from its operations. As far as at the end of Q2, we expect cash to be in the range of about $120 million.

Your next question comes from John Zaro from Bourgeon Capital.

One last thing. Raghu, I know when you and I spoke a while back, you're very excited about the next-generation Gateway software and that you -- can you give any more comments on that and sort of what you think the growth rate is going to be on that business once it gets up and going?

Yes. We're excited about that part of our business because I think it represents a big bet by SeaChange. That Gateway software that resides on any hardware is going to be preferred by the service provider versus having dedicated gateway boxes with the -- made by different manufacturers. So the growth rate for that business we expect, certainly, to be in a double digits. And if you look at the first quarter results, we have mentioned part of the growth of 8% in the Services business is because of In-Home Gateway Software Services business.

And I'm sure that customers are -- I heard that the customers are pretty whipped up about this. Are you taking market share with from people or potential market share away from people?

They're really creating a new category here. I don't think we're necessarily taking market share away from people, but what is happening is that the set-top box is being hollowed out with SeaChange software because the intelligence, the DVR functionality, the whole home DVR capability now resides in the SeaChange software.

Right. And I'm assuming that given the size of that market and the way it's going to progress, that you'll be able to hopefully announce contracts or announce wins in that area?

Yes. Unfortunately, our major customers don't want us to mention their names. But we will -- we can say that we have been designed in by a major MSO in the U.S. We're talking to at least a couple of others, and we expect to be able to conclude a major design win with a major European MSO as well.

And part of that is, I'm assuming, too, because as you're getting designed in, you don't want -- they don't want other people to know or their old suppliers to know what's happening.

Those reasons are left -- best left to them, John. I won't speculate on that.

Your next question comes from Todd Mitchell with Brean Murray.

Yes. Once again, I want to follow on, on one of John's questions. So this kind of has to do with the architecture of both the 3-screen delivery and the Gateway product and sort of the implementation. Is it -- here's my understanding. I kind of want to be corrected if I'm wrong. Axiom or Adrenalin will enable a 3-screen delivery within the household, sort of a TV everywhere model. And it seems to me that in initial deployments, the MSOs can do that over kind of a current infrastructure and their DOCSIS plan. But as it scales, they want to bring in a Gateway to kind of become sort of a hub and a hub-and-spoke network and sort of improve the capacity utilization in the plan and also maybe bring in everything through a dedicated IP channel. Is that correct in the way that it works and so that where you have basically Adrenalin deployment, what we can see is as they scale, then a follow-on purchase to the Home Gateway product? Or is that unrelated, and I'm misunderstanding how that works?

Yes, I think it's largely correct. The Gateway that we provide, the Gateway software that we provide, that's resident on any box, whether it's a Motorola box or a Cisco box or a Samsung box, is able to support both PROM as well as the IP. And so that's one of the values that this software brings. In addition, what the software brings is the ability to stream to DLNA-enabled TVs directly or through IPTV box or through PS3 or through an Xbox. So you don't have to have expensive set-top boxes for every TV in your home. So this brings -- and the third advantage that the Gateway software provides is the ability to have applications in the cloud. So you can develop and launch applications very quickly. What you're also able to do is change the UI, customize the UI without having to work with multiple set-top box vendors and multiple markets and have time-consuming rollouts.

Okay, okay. And is it true that once the Gateway is installed, basically what you've done is you created a one-to-one relationship between the node and the household as opposed to a one-to-many relationship between the node and all of the connected devices in the household?

Yes.

Okay. And that basically can improve your capacity utilization [ph]. You can manage your QoS better. But also, my understanding, because one of the things I've been looking at is what counts towards data caps and what doesn't count towards data caps. So in a Home Gateway installation, basically you're bringing in a TV everywhere offering but because it's on associated on a TV plan, it's not counting towards your data cap?

Right. Having different MSOs are looking to deploy this differently and roll it out in a different manner. It all depends on how they want to progress to going to an all-IP network. And that implementation is different for different MSOs. But you're largely right in terms of general direction.

[Operator Instructions] Your next question comes from Ian Murray with Lanexa Global Management.

Just to follow up on some of these detail questions, could you explain to us where the new products, the Gateway and the Adrenalin, fit in versus what Cisco may be putting together with their acquisitions of BNI and NDS this year and where you might be complementary versus where you might be competitive?

Yes, sure. Firstly, I want to mention that we have 3 new products. Otherwise, my general manager of advertising will be really upset. We have the BackOffice, the Gateway software, as well as advertising. So I want to clarify that in advertising, the product is called Infusion, and what it does is enables the MSO to leverage the power and popularity of multiscreen to be able to provide really targeted ads based on gender, age and demographics. Having said that, let me answer your question. And could you just repeat your specific question, Ian?

It's kind of bigger picture. What do you think Cisco -- Cisco has made these 2 acquisitions, the small one, BNI, and then NDS. Where do you think -- historically, you haven't really run into them a lot. It's been more complementary. Do you think that will continue? Or do you think they are intending to introduce a Home Gateway product or something competitive in the VOD software space? Or just what you know about kind of their roadmap vis-à-vis where you are and where you're going?

Right. As far as BNI is concerned, we see -- have seen them in Comcast. We haven't seen them at any major MSO anywhere else. As far as NDS, we have been very complementary with NDS in the past. However, I think in the next-generation Gateway software, I expect Cisco would like to provide that intelligence within their own box. I can't speak for them, but I would expect that's what they would try and do. Our approach is to be able to put our software on anyone's box. And it's a question of which model the MSO prefers.

At this time, there are no further questions. I would now like to turn the call back over to Raghu.

Okay. Thank you very much. On behalf of the SeaChange management, thank you for your time and participation this morning. Over the coming quarters, we look forward to reporting further progress in our ongoing strategy to transform SeaChange into a pure software company and deliver value to our shareholders. Thanks.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.