Monica Gould - IR, The Blueshirt Group Jay Samit - CEO Tony Dias - SVP and CFO

Steven Frankel - Dougherty Hamed Khorsand - BWS Financial Greg Mesniaeff - Drexel Hamilton Jim Roumell - Roumell Asset Management Juan Bejarano - Noble Financial Matthew Galinko - Sidoti

Greetings and welcome to the SeaChange International Fiscal 2016 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Ms. Monica Gould, Investor Relations for SeaChange. Thank you, Ms. Gould, you may now begin.

Thank you, Manny. Good afternoon, everyone and thank you for joining us. SeaChange released results for the third quarter of fiscal 2016 ended October 31, 2015 today after the market closed. If you would like a copy of the release, you can access it on the IR section of our Web site at schange.com/ir. With me on today's call are Jay Samit, Chief Executive Officer; and Tony Dias, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our Web site. Before Jay begins, I'd like to remind you that the information we're about to discuss today may include forward-looking statements, which 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 on April 07, 2015. 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. We've provided a reconciliation of these measures to the most directly comparable GAAP measures in tables attached to the Press Release. Finally, I would like to note that SeaChange will be participating in the Cowan Networking & Cyber Security Conference on December 15th in New York City. And with that I'd like to turn the call over to Jay.

Thank you, Monica. Good afternoon, everyone and thank you for joining SeaChange’s call today. I am pleased to report a solid third quarter performance marked by revenue at the top of our guidance range and a return to operating profitability for the first time in seven quarters and one quarter ahead of plan. This result was driven by our continued new product traction and execution on our cost reduction efforts. We continue to grow our new product revenue, while effectively managing the decline in our legacy revenue which now accounts for just 3% of our total revenue. In the third quarter total revenue increased 3% sequentially driven by new customer additions and the expansion of our business with telecom operators. New products accounted for 86% of product revenue in the quarter and 19% of our total revenue. We are delighted that the significant declines in our legacy product revenue which have impacted our results over the last few years are now largely behind us. This combined with our announced plans earlier this year to end of life our legacy Axiom backed office platform has resulted in two consecutive quarters of year-over-year growth in overall back-office revenue, the first year-over-year growth in this product category in two years. This growth combined with our recent cost reduction efforts enabled us to generate our first quarter of operating profit in seven quarters. We substantially decreased our cash burn and expect to begin generating positive operating cash flow in the fourth quarter. Now I would like to review some of our key achievements and progress on our initiatives during the quarter before turning the call over to Tony for a more detailed review of our financial performance and outlook. During the third quarter we continued to focus on executing on our existing design wins for our new products and made good progress on our efforts to expand in adjacent markets particularly OTT and mobile. In the third quarter we recognized revenue on initial Adrenalin roll outs to the subscribers of two large Canadian service providers supporting set top delivery of on demand content initially with the potential to expand to multi-screen in the future. In addition our telecom customer in Ireland eir which started with set top delivery last year has expanded their Adrenalin roll out and now serves iOS and Android mobile devices with live TV. Further a U.S. telco customer selected our AssetFlow and AdFlow platforms to centralize content management for its existing Sea Change based on demand and advertising operations across multiple markets. We're delighted to announce that our Rave platform achieved its first commercial deployment in the fourth quarter with the launch of the BBC Store in the UK last month. And we remain on track to launch Rave to Rock Mobile our first mobile customer in the first half of next year. We're currently running Rave demos on the iPhone and Android for Rock Mobile and will be showcasing this offering at the upcoming Consumer Electronics Show in Las Vegas in January. From an operational perspective we've strengthened our management team with several key hires during the quarter. We added expertise in mobile with the addition of Rochus Schreiber who joined us in October as SVP of Services and GM EMEA operations. Rochus was previously CEO of a 4G mobile provider and cable operator. Additionally, we added branded consumer experience with the addition of Martha Restrepo who joined SeaChange as VP of Human Resources. Martha will be focused on integrating human resources within the business functions that further enhance our operating performance. Lastly we are very proud that our service organization was declared winner of the Fall 2015 Technology Services Industry Association Star Award for best practices in the delivery of customer success. In the history of this award SeaChange is the smallest company ever to win this very prestigious award. Just to give you a sense of who SeaChange was up against for the award, past winners have include some of the world's largest service organizations including Cisco, EMC, Microsoft and Oracle. In summary, we continue to execute on our growth objective and are very excited about the opportunities ahead. Our continued progress strengthens our conviction and our strategy to accelerate growth in the business, maintain profitability and create long-term shareholder value. In conjunction with our stated goals we are in the process of developing some additional KPIs that will provide greater transparency and enable all of you to better track our progress against our objectives. We plan to introduce these new metrics when we report fourth quarter results in early April. With that I turn the call over to our CFO, Tony Dias, to walk you through our financial results and provide our outlook for the third quarter and full fiscal year, Tony, please go ahead.

Thank you, Jay. I'll start by reviewing our third quarter results before providing an outlook for the full fiscal 2016. Third quarter fiscal 2016 revenue rose 3% sequentially to 28.7 million, for the second quarter in a row, revenues came in at a higher end of our guidance range. In addition we generated positive non-GAAP operating earnings this quarter which was substantially higher than the operating loss that we had originally anticipated. These results were primarily driven by execution and cost reduction initiatives which drove higher margins and lower operating expenses. Product revenue was 6.2 million in the third quarter about 22% of the total revenue compared to 7 million in the second quarter this year and 7.3 million in the prior year quarter. The decline in product revenue year-over-year was primarily driven by lower revenue from our legacy products. New product revenues increased 22% year-over-year. New product revenue accounted for 86% of the total product revenue in the quarter compared to 91% in the second quarter fiscal of 2016 and 60% in the prior year quarter. Legacy revenues declined 71% year-over-year and accounted for 14% of the total product revenue. For the first nine months of fiscal 2016, legacy revenues declined by approximately $6.8 million in line with our guidance of a full year decline in the range of 7 million to 10 million. Service revenues totaled 22.6 million, an increase of 8% sequentially, and was essentially flat compared to the prior year quarter. Maintenance revenues accounted for 48% of total service revenues in the quarter compared to 49% in the second quarter of this year and 52% in the prior year. Sales to international customers rose 5% sequentially and 10% year-over-year and account for 59% of the total revenue compared to 51% in the prior year quarter. The increase in international sales primarily driven through new customer wins and upgrades in Canada and Europe. We had 10% customer in the quarter which account for 30% of the total revenue. Our blended non-GAAP gross margins increased to 57% in the third quarter from 53% in the second quarter, and 50% in the prior year quarter. The year-over-year increase in margins was due to higher mix of software product revenues and our cost reduction efforts. Product gross margins was 75% in the third quarter compared to 78% in the second quarter and 62% in the prior year quarter. Service gross margins increased to 51% in the third quarter from 44% in the second quarter and 47% in the third quarter of last fiscal year. Service gross margins increased primarily due to our announced headcount reductions and the initial recognition of SaaS revenues associated with our Rave platform. On a GAAP basis, we recorded a onetime accrual of 9.2 million to reserve against potential losses stemming from delayed acceptances related to third-party vendors on a project for a small European operator with SeaChange as a systems integrator managing 15 vendors. We continue to work with the customers to mitigate any potential losses and anticipate the net cash impact to be less than $4.5 million over the next 18 months. Non-GAAP operating expenses remained flat sequentially at 15.9 million from the second quarter of fiscal 2015 and was down from 17.2 million a year ago, primarily driven by a decrease in R&D expenses. R&D expenses decreased 17% year-over-year primarily due to the headcount reductions mentioned previously. Selling and marketing expenses were up sequentially due to the participation to large trade shows during the quarter. In the fourth quarter, we expect the overall expenses to trend up modestly as we build out our managed services team to support our Rave OTT launches. We generated non-GAAP operating earnings of $0.01 per diluted share sequentially better than our guidance range and the prior quarter loss of $0.04 per basic share as well as the loss of $0.07 per basic share in the prior year quarter. We ended the quarter with cash of approximately 70.8 million and no debt. Cash used in the operating expenses decreased sequentially to 1.2 million from 11.5 million in the second quarter. We continue to expect to generate positive cash flows in the fourth quarter. Turning to our outlook for the full fiscal year, as a result of our execution on cost reduction programs and better than expected operating performance in the third quarter, we’re narrowing our non-GAAP EPS guidance for the full fiscal year from a loss of $0.16 to $0.36 per basic share to a loss of $0.20 to $0.25 per basic share. For the fourth quarter of fiscal 2016, we anticipate revenues to be in the range of 28 million to 32 million which is in line with full year guidance of 105 to 115 and non-GAAP operating results to be in the range of a loss of $0.02 per basic share to earnings of $0.03 per basic diluted share. With that, I’d like to hand the call back to Monica. Thank you.

Manny could you start the Q&A session please?

Certainly. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Steve Frankel of Dougherty. Please go ahead.

Good afternoon and congratulation too in reaching profitability a quarter early, that’s clearly a good sign. I want to ask about a couple of subjects we always talk about every quarter but didn’t hear in the script. So let me start with Liberty Global and what’s new with their implementation and Nucleus?

We continue to expand our work that we’re doing with Liberty as to preempt your question from everything. We don’t control their schedule so I can’t comment on their schedule. We are in three countries and the fourth country will go live this month.

And what’s new with NewCoin?

NewCoin goes into beta this month. And based on that the partners are discussing the size and range of the funding for next year, next calendar year it’s how they operate. So we have a successful run analysis it’s out with the beta version.

And do you think by the time we get to the April call, you will have a -- kind of you’ll know what the fate of NewCoin is, whether it’s going to go to the next stage or not?

Yes, absolutely.

Okay. And what about the pipeline for Rave, I know you talked about ROK and talked about BBC how many trials are ongoing now and what’s in general does sales pipeline looking like?

So the pipeline is robust that I am excited about and now that we actually will be able to go to CES and let people hold it, play, use it, the BBC has been promoting the store heavily if you go on YouTube you can see some of the great commercials they’ve done pulling out all the stars from the history of the BBC to push the product. So, that gives us the test cases, which makes the inbound. We’re in lot of discussions, we have folks out there and we’re in active development with partners.

And how many live trials do you have today?

I don’t have a number because it’s what -- we then get into what’s a live trial, so I don’t want to split hairs with Steve.

Okay. So let’s talk about this systems integration issue and it only impacts the GAAP results, doesn’t sound like it’s a big cash impact. But is there a timing impact in terms of when you’ll recognize revenue around your products relative to where you might thought they were three months ago?

Yes and this is Tony. Yes obviously delays in getting the acceptances obviously will delay any recognition of revenue we can take on this contract.

And will it push that revenue out of next fiscal year?

No I think we will be able to take some revenues next fiscal year in regards to this project.

Okay. And then DSOs continue to creep up. Is that new terms, is that collections have been sloppy, why aren’t those coming back down into what used to be normal level?

No, I think there was some timing of certain large customers and the timing of those payments coming through. I think we are anticipating those payments before the end of this year. So I think it’s just the timing issue with certain large customers.

And maybe update us on what the Adrenalin backlog looks like today and your recent success if any in getting some of the Axiom customers to begin to move?

So there is still over 50 Axiom customers out there with about 10 million subs. The fact that we’ve told everybody that they’ve got to move off it and we’re sun setting it has made many active discussions and you’re going to see many transitioning next year off of it and into Adrenalin.

Yes, and don’t forget these -- what we’ve given them enough notice so they can budget for it for next year.

Okay. And then in terms of Adrenalin have you implemented most of the backlog that you entered the year with?

So we’re up to about 60 million subs. Yes I mean we’re still obviously as we mentioned the eir is a good example where we’ve now deployed the set top box broad implementation. Now they’re adding on new Adrenalin modules like the OTT start.

And we have two Canadian that went live this quarter and that have been let’s just go back and do more add-on sales. So, it’s a foot in the door and then build more revenue as we go, all good stuff.

Thank you. The next question is from Hamed Khorsand of BWS Financial. Please go ahead.

I have just got a couple of questions here, first off, did you generate any maintenance revenue in the quarter or when do you expect to generate that?

I am not sure I mean obviously, I am trying to understand maintenance revenues from what?

Well, the Liberty Global with those [Multiple Speakers].

Okay, yes, absolutely. Absolutely we have entered into an agreement with Liberty Global to support Nucleus and we took service support revenues on Nucleus.

Okay. Is that material some or?

It’s a sub I am not sure what the material is.

Okay. May be what are you expecting to drive revenue in Q4 from Q3 that you’re topping out 32 million on the guidance?

We anticipate there is a couple of new customer wins, new Greenfields as well as continued expansion of our existing Adrenaline customers that we’ve previously announced.

If you look at what we talked about we’ve seen all of our products contributing which is what’s been really solid about this, including new customers for a wider range of our products.

Including telcos and so on.

So getting into telcos was a big step, it’s been a great quarter.

Okay. And my last question is what could you generate from ROK Mobile since the last published report was that ROK is behind its own subscriber growth expectations?

They’re coming out the gates, they’ve hired very experienced management team that we’ve been dealing with. So they’ve been headed in my office today. We think their global footprint that they want to go after is pretty big we’re starting as we said with the U.S. launch in the first half. And so we’ll see what the size is by the time we come out to the market. But our piece is now when I see you at CES I’ll hand you a phone to play with.

And could you guys make comment on your Level-7 investment and what you think that’s worth and what’s your monetization plan is with that?

So I don’t think it’s our place to speak and it all that I’ll say is it’s been a very good investment and if the same rumors that you’re commenting on are true their value continues to go up which means the value of our stake continues to increase.

Could you give an update as to how much your stake is now given the rates they’ve done in the past?

I mean we haven’t announced that but it’s less than 10%, and it’s also Layer3 TV by the way just a [Multiple Speakers].

Thank you. The next question is from Greg Mesniaeff of Drexel Hamilton. Please go ahead.

Tony what was the DSO number, I know there was some discussion about DSOs creeping up but what was the number actually in the quarter?

It’s actually excess of 100 days at this point and we anticipate -- usually we are at the high mid-80s or so.

When you say excess of can you be a little more precise?

110.

Okay. And what was it on the previous quarter just for reference point?

Actually the previous quarter was 100.

Okay. Question I have is more of a general industry backdrop issue. With the recent changes in set top box vendor landscape both in the U.S. and globally, how do you guys see that impacting your new product sales and new software sales if at all?

It’s neutral to us we work with everybody in the consolidated and the whole reason that we’re launching products such as Rave is to satisfy all the new entrants into this market that will not be coming through a set top box. So we’re trying to cover all bases.

Okay. So the consolidation we’ve recently seen really has not in your view or in your experience impacted your outlook?

Not at all.

Okay, got you.

We continue to work with the same, and we’ll continue to work with all providers.

Okay. And then looking at your cash balance this quarter if you can just versus a year ago can you kind of give a general overview of some of the more significant uses of cash?

Obviously there was the acquisition of Timeline.

Right, okay.

In February.

Yes.

And the other uses has been there was obviously we had a cost reduction in force that occurred in January that obviously extended, we expended some cash and severances and restructuring in regards to that and obviously the rest of it has just been really operating needs.

Thank you. [Operator Instructions] And the next question is from Jim Roumell of Roumell Asset Management. Please go ahead.

Just going back to Liberty Global for a second, the countries that you’re in right now Poland, Czech Republic, Chile and Austria, is that correct?

We’re in all four of those, yes.

Okay. And did I understand you earlier to the first question Jay indicate that Liberty Global is rolling out in another market expected to be rolling out in other markets soon?

Yes Chile this month.

Okay. Can you comment because I’ve heard rumors of Netherlands, Belgium is there another European country on the docket?

I cannot publicly share information that my customer hasn’t publicly shared.

Got it, okay.

Especially when it’s an important customer.

Got it. Can you just in terms of -- I know you don't have any control over Liberty Global’s timing but do you have sense of how they'll be approaching European roll out next year?

With the highest quality and service.

With Nucleus?

I don’t know how to answer your question, Liberty announces when Liberty announces and we continue to do significant and expanded work with them.

Okay. And Tony just the other question I had regarding, a caller brought up Layer3, our indications are that the SeaChange investment the $2 million investment with a pre-money evaluation in early '14 was about 30 million and that company raised capital mid-summer at a pre-money evaluation of 350 million. Does that -- is that congruent with what you know to be?

Obviously I -- they are a private company and I can't publically say those figures.

Okay.

We're very thrilled with our investment.

Thank you. The next question is from Juan Bejarano of Noble Financial. Please go ahead.

Jay so just wanted to get thoughts surrounding some kind of recent developments, so we saw Time Warner Cable talk about the potential of replacing the cable box with a roqu and doing some trials there and then we also saw the introduction of the new Apple TV which will be based on apps. Basically just kind of want to hear your thoughts around these two things as it relates to SeaChange, do you feel they impact you all on the Apple TV side do you feel it speeds up the ramp of more OTT solutions. Any high level thoughts around that and how it can help or impact SeaChange would be helpful? Thanks.

Well I could do two hours on that one. That's a good broad question Juan. But let me just hit on the high points. It is obvious by all the headlines that more and more people will need a robust back-office to deliver and our continued market dominance in that space makes us stronger, including the various opportunities that you just talked about. The second reason why you see cable providers experimenting is there are more and more OTT people that want to find a way to get into the living room and so whether it's coming in through broadband, through a home gateway, through a set top box, we've developed the software to give that flexibility and our intention is to work with everybody in this ever expanding TAM.

Okay, got it. And just as far as Liberty Global have you noticed any ramping advertising from their side regarding their Horizon TV product and maybe any insight into how that is going have you heard or noticed any subscriber base increase, more people kind of subscribing to Horizon TV?

I can't comment on their numbers other than what they've publically said and I don't spend enough time in those countries to notice their advertising or frequency.

Thank you. The next question is from Matthew Galinko of Sidoti. Please go ahead.

So I’ve missed the prepared remarks so my apologies if this was previously covered but can you provide an update on where you are with Timeline Labs, sort of using that to open up the OTT market and also I guess where you're at with NewCoin and what the JV is?

Okay, so I'm going to take them in reverse order. NewCoin we're now at the beta trial, is out this month, the partners are then deciding to what size next year's expansion and funding goes. And obviously the landscape has changed and you've seen a lot more people questioning the way things are being measured today, so the world's coming this direction. With regard to OTT we talked about that we’ve recognized our first revenues and we're going to be demonstrating so everybody can see our ROK platform at CES a month from now and then the last one was Timeline. So Timeline continues to roll out, they now have local TV stations in addition to some of the networks that we’ve mentioned in the past. So does that catch you up?

Yes, that's helpful and then second question just around Rave, have you quantified this quarter the number of trials that are ongoing?

No. All that we said because we didn't get into what's the trial and what's the test and who are we developing with. The pipeline is really robust and now that we have the BBC Store live and we have the ROK software deployable on people's phones and that's launching in the first half of the year, we see more activity and one of the reasons why we'll add a couple of bodies for running the managed service piece of this as these things start going live in next fiscal year.

Thank you. [Operator Instructions] And the next question is from Steve Frankel of Dougherty. Please go ahead.

So Jay you guys lay out a very compelling case for Nucleus and clearly Liberty Global believes and they are a great proof point and they’re out in multiple countries yet your follow-up wins with other parties are few and far between. Why shouldn’t we be concerned about that?

Well we’ve had seven wins I don’t know what the definition of few and far between is you see…

It’s been a while since you had an announcement of another Nucleus customer those seven have been around for a while.

Right, and the reason as you’ve seen is it takes a period of time as you see how long it took Comcast with their rollout Liberty with their rollout. This is really a next generation and so these things don’t deploy at the same speed as getting into cellphone.

My question is not around deployment it’s around sales pipeline and kind of where I would think that you would be an attractive solution for lots of providers in this market and yes you have seven. But I would hope that you would have a lot more than seven.

And I think next year we’ll see that number increase.

Thank you. We have no further questions at this time. I would now like to turn it back over to Mr. Samit for any closing comments.

I’d like to thank you all for joining us today and for your continued support and interest in SeaChange. Have a great evening.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.