Mary Conway - Conway Communications Ed Terino - CEO Peter Faubert - CFO

Steven Frankel - Dougherty Hamed Khorsand - BWS Financials

Greetings, and welcome to the SeaChange International First Quarter 2018 Earnings 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 would now like to turn the conference over to your host, Mary Conway, Investor Relations.

Thank you, Omar. Good afternoon, everyone, and thank you for joining us. SeaChange released results for the first quarter of fiscal 2018 ended April 30, 2017, 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 Ed Terino, Chief Executive Officer; and Peter Faubert, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our Web site. Before I begin, 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 17, 2017. Any forward-looking statement 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 have provided a reconciliation of these measures to the most directly comparable GAAP measures in the tables attached to the press release. And with that, I'd like to turn the call over to Ed for opening remarks.

Thank you, Mary. Good afternoon everyone and thank you for joining SeaChange's call today. On behalf of the SeaChange management team and Board, I would like to welcome Mary Conway from Conway Communications to SeaChange. For SeaChange investors and analysts, Mary will be replacing The Blueshirt Group. Please note Mary's contact details at the top of our press release. On behalf of the management team and Board, I would like to thank Monica Gould in The Blueshirt Group for their five years of investor relations support. Now, let me start by outlining what I will cover today. I will provide an update on key sales wins in the quarter as well as an update on several key areas of the business including progress on our product roadmap, status of our revenue pipeline and progress on strengthening third-party partnerships to enable SeaChange to expand its go to market sales capability and better implement and support its customers. I will close with a few observations on the status of our restructuring program before I hand the call over to Peter. In terms of Q1 results, we are very pleased to report that our first quarter revenues are in the middle of our guidance range, while non-GAAP EPS well exceeded our guidance. This primarily reflects quicker progress on achieving some of the benefits from the restructuring initiatives that Peter will address. Total revenues of $16.7 million reflects stronger service revenues and within product revenues a better mix. During Q1, we realized revenues from our previously announced win of a mobile carrier in the Middle East. More importantly, we are seeing more opportunities in our pipeline for end-to-end solutions for mobile carriers around the globe and we expect to close several of these greenfield opportunities in the next several quarters. We also recorded revenues in Q1 from several existing customers who want to expand their video delivery platform through the addition of IPTV capability to mobile devices for their subscribers. In Q1, our momentum continued in transitioning current Axiom customers to our Adrenalin multi-screen capable platform including long time North American customer Midco which we announced during Q4. In addition of Midco, there were several new migration agreement signed in Q1, notably a large cable television operator in Latin America and several tier two operators in North America. The additional functionality of SeaChange's product suite such as content management, cloud deployment, multi-device user experience and advertising that ensures their consumers a more robust video viewing experience is the primary rationale for these migration decisions. We ended Q1 with a backlog of $9 million in book revenues compared to a backlog of book revenues of $8 million in Q4 2017. From a pipeline perspective, our pipeline entering Q2 2018 was greater than 2X at midpoint of our fiscal 2018 revenue guidance, which is an improvement over our pipeline coverage entering the fiscal 2018 year. We are excited about the growth of our global pipeline, it is growing in areas and geographies that reflect innovations in our product roadmap and expansion of our sales channels through partners into new markets. From product roadmap perspective, we are seeing our pipeline grow more specifically in end-to-end solutions, cloud deployments and content management. In addition, as I just mentioned many of our existing Adrenalin and Axiom customers are coming to SeaChange for a solution that will address their multi-device IPTV video platform needs. From a geographic perspective, we are seeing our pipeline expand with mobile carriers primarily outside of the U.S. and in the Middle East and Asia Pacific through new partner programs that we have initiated. Finally, we are beginning to see some pipeline opportunities from our competitors' customers who are concerned about our competitors' disposition relative to their video delivery business. As we discussed in our Q4 earnings call in April, many of the opportunities in our pipeline are being offered as both a perpetual license and SaaS pricing model. We are continuing to see a shift in many customers to as a SaaS managed service model of implementation. As a result, SeaChange will experience some short-term challenges in generating revenue growth. However, in the long run this transition of SaaS revenues will provide more recurring revenue to SeaChange and thus more predictable revenue growth in the future. During the first quarter, we attended the NAB television tradeshow in Las Vegas and it was an effective event for SeaChange. We utilized our presence their in a very targeted fashion engaging with customers and prospects in regional channel partners from Asia, Latin America and Europe in addition to North America ensuring that they understand our direction and how we can help them in renewing our connections with existing and new customers on a global basis. Now, let me shift to an update in our fiscal 2018 product roadmap that I outlined in April. We are making good progress and I'm pleased to report that we are ahead of schedule for NitroX and we are on-schedule for upgrades to content management and Adrenalin. In the first half of this year, new NitroX deliveries included support for iPad, Android tablet and smart TV, Chromecast and Amazon Fire TV, which features now include Binge Watching, ReStart TV, network DVR, Netflix deep linking and advance search among many others. During the second half of fiscal 2018 will debut NitroX for Apple TV, Roku and popular web browsers. Our feature set will continue to expand with highlights including watchlist, companion based search and download to rent or own. Also included in our product roadmap is a major upgrade to our content management product asset flow, which we will demonstrate at the IBC conference in Amsterdam in September. This year, we will also deliver an upgrade to our video delivery platform Adrenalin to increase integration and performance in support of multi-screen and services including time-shift TV and network DVR. We will also ensure a more robust multi-screen monetization by virtualizing our advertising product infusion as a 100% software solution that does not require any hardware for ad targeting in linear and OTT streams. Currently, we are installing infusion to enable two large customers in the Americas with OTT, VOD ad insertion. Finally, we are in the process of strengthening our underlining video platform capabilities for database management, security, monitoring and reporting, load balancing and testing and integration. These improvements will enable SeaChange to implement and maintain and support its video delivery platform in a much more efficient and cost effective manner and provide our customers improved reliability and performance. More importantly, as our sales organization is present in our product roadmap, current and perspective customers have indicated a strong interest in buying these products and consequently our pipeline has grown and strengthened. A key element of our strategy to return SeaChange to revenue growth in the coming years is to expand the use of channel partners and technology partners to reach more customers and prospects and a go-to market with a better end-to-end solution and capabilities that meet our customers' needs. I'm pleased to report that during the first quarter of fiscal 2018, we were successful in signing up several new channel partners in Asia Pacific. These channel partners provide SeaChange with an opportunity to compete for business with operators in countries such as Thailand, Taiwan, India, Vietnam, Australia and Laos where we had little to no presence previously. As we enter Q2, we are in discussions with additional channel partners in Latin America and in the Middle East to expand our sales reach. In addition to channel partners, we are also expanding our partners in two other areas. First, we are in discussions with technology partners that will enable SeaChange to strengthen its end-to-end solution. Areas include, CDN partners, digital rights management partners and coding partners, recommendation engine partners and set-top box partners/ Second, we are strengthening our relationships with third-party professional service organizations and end-to-end system integrators particularly in North America, Latin America and Europe, who can provide expanded capabilities and scale for implementation of SeaChange solutions. Now, let me turn to our progress on our restructuring program. Throughout fiscal 2017 and during the first quarter of fiscal 2018, we made significant progress in right-sizing on both the people and facilities front. The results of our efforts were evident in our Q1 2018 financial results with much improved gross margins and substantially lower operating expenses. Despite our strong efforts some of the restructuring such as workforce reductions in certain geographies, real estate disposition and business system improvements are taking longer to complete them we would like. We had expected to complete the total program by the end of next quarter. However, we now anticipate that some restructuring actions will be delayed into Q3 and Q4 of fiscal 2018. While there maybe some slippage in cost savings in fiscal 2018, we do not believe that our goal of achieving profitability in the second half of fiscal 2018 is in risk due to these delays. When the program is complete, we expect to have approximately 300 employees and we also anticipate that we will have transferred more of our engineering responsibilities from the Philippines to Poland and shift to some of our professional services capacity to third parties. Overall, while we are continuing to evolve both our organization and our industry leading products, we are working hard to stabilize our operations amidst an industry where changes and challenge are constant. We are pleased with the progress we've made over the past five quarters since I became CEO, but recognize we still have much hard work ahead of us to ensure that SeaChange can successfully complete its transition and resume profitable revenue growth in years ahead. We had committed to continuing to lead our industry with innovative new products to help our customers monetize their video assets, while optimizing our operating expenses to drive profitability. Based upon our progress so far, we believe we are well positioned to execute in this objective in fiscal 2018. With that, I will turn the call over to Peter to walk you through our financial results and provide our outlook for the second fiscal quarter as well as the full fiscal year 2018. Peter, please go ahead.

Thank you, Ed. Good afternoon everyone. I will start by reviewing our first quarter results before providing you with an outlook for the second quarter and full fiscal year of 2018. As Ed mentioned, we are pleased that our first quarter revenue came in at the midpoint of our guidance range and non-GAAP EPS results well exceeded our guidance. Total revenue in the first quarter was $16.7 million compared to $21.6 million in the first quarter of last fiscal year. Our revenue performance in the first quarter was affected primarily by a decline in maintenance and support revenue related to legacy hardware products as anticipated. In addition, services revenue decreased due to the completion of our project with one our largest customers. Although product revenue was down from the prior year quarter, we have visibility into a strong pipeline of product deals related to both Adrenalin software license sales and Axiom to Adrenalin migrations. We entered the first quarter with $8 million in total backlog excluding maintenance and support and we booked new business of $10 million during the first quarter of fiscal 2018 and ended the quarter with backlog of $9 million. During the quarter, we generated $8.3 million in revenue from maintenance and support. With increasing demand for end-to-end cloud based solutions, we are seeing more customers looking to implement our offerings on a subscription basis. We expect these subscription products to continue to increase as a percentage of total product sales in fiscal 2018. Total product revenue was $2.7 million in the first quarter or 16% of total revenue compared to $4.2 million in the year ago quarter or 19% of total revenue. Video platform software revenue was $1.8 million and accounted for 67% of total product revenue compared to $2.6 million or 61% of the total product revenue in the first quarter of last year. The remaining product revenues of $900,000 included revenues for user experience software and third-party hardware. Total service revenue in the first quarter was $13.9 million or 84% of total revenue compared to $17.4 million or 81% of total revenue in the first quarter of last year. As discussed in our last quarter call, the decline in professional service revenue in the first quarter was due to the lower in-home services related to commercial launch of a product -- a project for one of our larger customers'. We have additional professional service work with customer in the pipeline that will result in additional professional service revenue related to other future projects in future quarters. The decline in maintenance and support revenue continues to reflect the decreasing footprint of our legacy installed base of video streamers, which are gradually being replaced by next generation hardware. As our product revenue increases and we close more end-to-end solution sales, we expect to see our recurring revenue base stabilize. Video platform professional service revenue totaled $4.2 million down from $4.7 million in the same quarter last year. Maintenance revenue totaled $8.3 million or 59% of total service revenue compared to $9.7 million or 56% of total service revenue in the first quarter last year. The decline in maintenance revenue was driven by a decrease in legacy video streamer support. The remaining service revenues of $1.5 million include SaaS and user experience revenue. Revenue from international customers of $9.6 million in the first quarter accounted for 58% for total revenue compared to $13.1 million or 61% of total revenue in the prior year quarter. We had one customer account for more than 10% of total revenue in the first quarter with Liberty Global contributing 28%. Our blended GAAP gross profit margin increased to 59% in the first quarter compared to 42% in the prior year quarter due to the product mix and greater efficiencies generated from our restructuring program. Excluding the provision for lost contract and other non-GAAP charges in the first quarter of 2018, our blended non-GAAP gross profit margin was 62% in the first quarter compared to 44% in the prior year quarter. The increase reflects continued effects of our restructuring program a larger contribution of total revenue from higher margin maintenance and support revenue than in the prior year. Our non-GAAP products gross margin in the first quarter was 80% compared to 63% in the prior year quarter due primarily to product mix which included less lower margin third party hardware sales in the current quarter compared to the same quarter in the prior year. Non-GAAP service gross margin in the first quarter was 58% compared to 40% in the first quarter of last year due primarily to the greater efficiencies generated by our restructuring program. Non-GAAP operating expenses declined 27% year-over-year to $12 million in the first quarter of this fiscal year achieving the run rate expectations we shared with you last quarter from $16.3 million in the first quarter of last year. Lower labor cost drove this significant reduction as we transitioned our in-home software development to DCC Labs group in Poland as well as other restructuring efforts and headcount reductions. Given that we are making significant progress in stabilizing the cost structure of the business, our plan is to continue to invest in infrastructure to improve operations. More importantly, we are investing in additional resources in our research and development function to support delivery against our product roadmap despite the cost reduction efforts. These investments include scheduled releases for our Adrenalin back office products, next generation content management product and continued investment in our NitroX product. In addition, we continue to fund the development of a common platform that will increase our development efficiency and innovation capabilities going forward. Our primary focus continues to be to deploy products that will ensure the success of our customers. Our non-GAAP operating loss of $0.05 per basic share came in well above our guidance range due to more quickly realizing some of the benefits from restructuring initiatives and compared to a non-GAAP operating loss of $0.20 per basic share in the first quarter of last year. This strong performance allows us to reinvest more aggressively in our operating and product development objectives as discussed earlier. Turning to our balance sheet, we ended the first quarter with cash and cash equivalents of approximately $37 million and no debt. In the first quarter, we used cash from operations of approximately $900,000 mainly associated with higher than anticipated severance payouts during the quarter. We continued to execute against our restructuring plans in certain geographies despite any additional cash restructuring cost, we continue to expect our cash balance to fluctuate between $35 million and $40 million per quarter during the remainder of fiscal 2018. Deferred revenue of $11.7 million declined from $14.9 million in the prior year's first quarter due to a decline in new maintenance and support revenue related to lower product sales in the current quarter compared to the first quarter of the prior year. In addition, we continued to see a reduction in maintenance contracts related to the run-off of our legacy hardware business. DSOs excluding unbilled receivables totaled 87 days at the end of the quarter compared to 90 days in the first quarter of last year. Including on billed receivables DSOs totaled to 126 days compared to a 139 days in the first quarter of last year. Our unbilled receivables were $7.3 million in the first quarter of this fiscal year compared to $6.6 million in the first quarter of last year. Unbilled receivables increased primarily due to milestones that we achieved during the quarter on our ongoing project with Quickline that will be invoiced in the second quarter. As Ed mentioned, in the first quarter, we continued to make substantial progress on the cost reduction program we announced last year. We are experiencing delays in some of our cost reduction efforts in certain geographies. As a result, we now believe it make through the under the year of fiscal 2018 to complete the remaining activities. Once complete, we continue to expect that we will extract $38 million in annual run rate cost out of the business. And despite the delays, our goal remains to be profitable in the second half of fiscal 2018. In fiscal 2018, we expect that product revenue will contribute between 20% and 25% of total revenue for the year, which is consistent with the contribution we saw in fiscal 2017. We expect maintenance revenue to decrease from 44% of total revenue in fiscal 2017 to approximately 40% of the total revenue in fiscal 2018. We expect professional service revenue to contribute approximately 35% of total revenue in fiscal 2018, which is slightly up from fiscal 2017. The remaining revenue in fiscal 2018 will consist of user experience and cloud deployed products. We expect the ongoing cost cutting initiatives will allow us to maintain GAAP gross margins in the high 50% range to low 60% range despite our commitment to reinvest in the business. As previously mentioned over the course of fiscal 2018, as customer shift to cloud-based deployment models, we expect our revenue mix to transition from perpetual license to monthly recurring revenue or SaaS. This is expected to impact the top line performance, but over the longer term as Ed noted, we will improve our visibility and predictability of our revenue base. With this in mind, we anticipate that revenue for the second quarter of fiscal year 2018 will be in the range of $17 million to $20 million and that non-GAAP operating loss will be in the range of $0.09 per share to $0.03 per basic share. For the full year, we continued to expect that revenue will be in the range of $80 million to $90 million and we expect revenue growth in the second half of the year will be driven primarily by software license sales to our largest customer and Adrenalin upgrades as we deliver against our product roadmap. We expect to reinvest some of the additional contribution from this revenue growth and therefore are maintaining our non-GAAP guidance for the year at a range of a loss of $0.10 per basic share to income of $0.02 per diluted share. With that, I will hand the call back to Mary. Thank you very much.

Thank you, Peter. Operator could please provide instructions for the Q&A session.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Steven Frankel of Dougherty. Please state your question.

Good afternoon and congratulations on the progress in the quarter. First, let's talk a little bit about those product gross margins, you said they benefited from less passthrough of hardware, is this level sustainable for the next couple of quarters or do you expect passthrough hardware to kind of return to more normal levels and put some pressure on the product gross margin from here?

Yes. Steve, I think it really depends on the types of deals that we are selling from a product perspective, generally, I think the Axiom with Adrenalin upgrades are going to require some more third-party hardware passthrough versus Adrenalin upgrades which will require less. So, it depends on the product mix in terms of what the steady state looks like.

And just kind of to square the outperformance in Q1 and not raising full year EPS guidance, if you could parse, how much of that is OpEx might not fall as fast as you thought earlier because you said some of these savings are delayed versus a decision to incrementally invest more in R&D?

So, I think it's a combination of both, but I will say that I think we are more focused on the latter as we have moved through our cost cutting initiatives, we have identified gaps in operations of the business that we are starting to experience having to bring in additional resources to fill those gaps, which we expected to happen as you are reducing resources, you are going to uncover things in the operations that needs to be addressed. So, what we are doing is, we are basically reinvesting some of those contribution that we expect from increasing revenue streams and reinvesting that back into and accelerating some of our product roadmap items to keep those on track. So, we are reinvesting some of those contributions back into the business. On a R&D side and frankly on the G&A side, as we are trying to improve operations through implementing new tools and processes.

And on the SaaS business, your U.K. customer was going to do some market testing which would determine, how if at all that business moves forward, could you give us an update on kind of where they are in testing various pricing models and go-to-market models?

Yes. I think they are still in the preliminary stages of testing that solution. I think we have stated before that we think that the growth in that business is going to be slow and certainly the revenue growth that we see is going to be slow. But, they are in the midst of testing and we are not really sure how quickly they are going to be able to rollout a full solution. But, the feedback so far has been positive from them.

And could you size for us the pipeline of Quickline like end-to-end deals?

Steve, this is Ed. I don't -- the Quickline end-to-end deal is somewhat unique because we played the role of an SI in that deal and that was obviously a multimillion dollar deal. I would say that the deals we are looking at our end-to-end solutions as Peter and I both mentioned are mostly SaaS deals. But, I would say that they are in the range of the high six digit to low seven digit price range. There could -- we could expect to earn that money over several years.

And how many deals are you working on at the moment?

We have roughly about 30 opportunities in our pipeline for OTT deals. About 15 or so those have been quoted and the value is really difficult for us to get our hands on.

And what would those numbers have been last quarter?

They would have been lower than that. So, we are seeing some ramp in the pipeline for these types of opportunities.

And what's your visibility relative to Liberty and to getting back, it's -- growth in that relationship or additional…

So, as we've said previously, the major revenue opportunity for us with Liberty is, with their one back office initiative, which is a cloud deployed back office that they would rollout to their affiliates around the globe with the European affiliates taking place first. We think the revenue opportunity there is very good. They are making good progress with building out their data center and building out the cloud deployed platform. We would hope that they are able to start rolling out their cloud deployed platform to some of those European affiliates in the second half of this year. And that would be a significant driver of our second half revenue up tick.

And is a portion of that business already in the unbilled receivables or that would add to what, as we get into the back half?

It's not in the unbilled receivables. We have realized some revenues already. They were recognized in the fourth quarter, they were principally licensed revenues, but there is nothing in our unbilled receivables at this point related to that opportunity.

All right. Thank you.

Thanks Steve.

Our next is from Hamed Khorsand [BWS Financials]. Please state your question.

Could you talk a little bit more about what cost could come out of the business and if not, will most of the cost that come out be in the COGS line?

So, I would say that both COGS and operating expenses will be affected by our continued cost reduction efforts. We are still working through some of the regulatory requirements as it relates to restructurings in certain geographies. So, we will see cost reductions resulting from those efforts in both the cost of sales and all of the operating expense lines. And then, what I would say is that, those cost reductions that we will achieve in the second half of the year, like I said we will need to reinvest in certain areas around adding resources to certain functions within the organization that will offset some of those cost savings going forward.

Is there a percentage you can provide on what is left to come out of the COGS line and what could come out of the OpEx line?

It is tough for me breakout between COGS and operating expenses right now. I will say that we are probably 85% of the way through our total cost savings initiative for the year. The only reason I say it's difficult to classify between cost of sales and other OpEx is, part of that initiative is trying to leverage third-party professional service organizations to deliver again some of our projects. And we are still in the negotiation phase of what that might look like. And so, we don't know what the true economics of that will be, once we successfully make that transition.

Okay. And then, in terms of marketing, have you had time to begin marketing your newer products or have you turned all your efforts on Adrenalin?

We really haven't put a lot of effort into marketing other than some of the things I mentioned in my comments about identifying partners. So, we are focusing on how to better support partners. And that will be some of the investment that we will look to make. But, we really haven't done a whole lot of marketing beyond building out the partners to go-to-market in some of these geographies that I mentioned.

And then, what is the timing like for converting the pipeline to actual sales?

It can vary quite a bit. Obviously, it's been a long conversion cycle generally it can be between 9 and 18 months. We are trying obviously to use that and that's really going to be a big factor in our second half performance. So, we are looking for ways to shrink it what we are seeing, is that, when we are dealing with some of these greenfield opportunities around mobile carriers. They tend to make a decision a little bit faster than some of the other telco and cable operators we have worked with. And then, with respect to some of the partner opportunities, we would expect those to have a shortest sales cycle as well. So, hopefully as we get to more end-to-end solutions that will be -- what we would term out of the box, we would get a shorter sales cycle. So, that's a goal, we certainly have, but we haven't seen evidence of that yet. But, it's something that we continue to really focus on.

Okay. Thank you.

[Operator Instructions] As there are no further questions at this time, I would like to turn the call back to Mr. Ed Terino, CEO of SeaChange International for closing remarks.

Thank you. As you can see from these results, SeaChange is working very hard to meet it's product roadmap delivery timelines, expand its outreach to customers and complete its restructuring. All of these elements are critical and enabling us to return the company to profitability and revenue growth and streamline our operations and increase our capacity to serve the dynamic market for multi-screen video delivery and monetization. Thanks to everyone for joining us today and for your continued support and interest in SeaChange. If you any questions, please feel free to reach out to us. Have a great evening. Good night.

This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation.