Mary Conway - Investor Relations Ed Terino - Chief Executive Officer Peter Faubert - Chief Financial Officer

Steven Frankel - Dougherty Hamed Khorsand - BWS Financial

Greetings and welcome to the SeaChange International First Quarter 2019 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.

Thanks, Omar. Good afternoon, everyone and thank you for joining us. SeaChange released results for the first quarter of fiscal 2019 ended April 30, 2018 today after the market closed. If you would like a copy of the release, you can access it on the IR section of our website at seachange.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 website. Before Ed begins, I would like to remind you that information we are 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 16, 2018 and our most recent Form 10-Q, which was filed on December 7, 2017. 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 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 would like to turn the call over to Ed for opening remarks. Ed?

Thank you, Mary, and good afternoon everyone. We are glad you could join our call this afternoon. Let me start by outlining what I will cover in today’s call. First, I will provide some insights on our Q1 fiscal ‘19 results which are at the high-end of our guidance. As a result of this performance and actions taken to-date, we believe we are on track to meet expectations for the remainder of the year. Second, I want to share some key sales wins in what we have been doing to build a stronger pipeline, especially for the second half of the year, including providing more color on trends that we are seeing in our pipeline in describing some newer pipeline opportunities. Third, I will cover our announcements last week that I hope you saw, where we launched our major new solutions portfolio and integrated end-to-end solution and a new look and feel of the company solutions which can be experienced on our new website. So let me start with our Q1 results. We have heightened confidence in our ability to achieve our targets based upon what we have accomplished thus far this year even if it’s not reflected in our Q1 revenues. We have made good headway with our partner programs resulting in a number of pipeline opportunities. Our new platform portfolio unveiled last week responds directly to the market’s evolution and the marketplace’s response has been enthusiastic and encouraging. In Q1 ‘19 while there were no deals over $1 million, let me share with you three significant wins. First, there was an EMEA customer that renewed our engagement, their engagement with us for close to $1 million for improvements to their in-home gateway software. We also had an Asian customer that purchased Adrenalin licenses in the mid 6-figure range for an IPTV video solution and we had a Tier 1 North American cable operator that purchased a mid 6-figure amount of licenses to upgrade their spot advertising platform. In addition, there were some notable trends in Q1 ‘19 that should continue to help us generate revenue for SeaChange throughout fiscal 2019 such as a number of advertising customers who need upgrades to their spot advertising platforms to expand their advertising businesses as they increase their video distribution footprint. We also see continue to see existing customers with broader needs for content management and we continue to see customers with greater needs from multi-device IPTV video capability. Turning to our pipeline, let me start by saying that today it is stronger than it’s been since I became CEO at about 3x the remainder of our annual revenue bookings target needed to achieve the midpoint of our fiscal 2019 revenue guidance. Please understand that our pipeline does not include maintenance and support revenues which for fiscal ‘19 we projected approximately $30 million. Thus, based on the pipeline’s continued support, our revenue growth expectations for the year are looking very good. In terms of size, the pipeline today is nearly 50% higher than it was when we spoke less than 2 months ago on our Q4 call. While there are only a couple of pipeline opportunities for the newly announced PanoramiC solution so far, there are several trends worth noting in our pipeline, including. The largest area of growth is in Asia-Pacific mainly attributed to opportunities we are securing through partnerships established in the last year. The majority of the Asia-Pacific opportunities are for OTT video solutions and content management solutions. These opportunities are outside of our traditional video service provider market segment with fixed and wireless telcos, content aggregators and content owners as well as broadcasters. LatAm and EMEA are also demonstrating strong pipeline growth with a mix of opportunities with existing customers and new logos. The LatAm opportunities include more service providers as compared to other market segments. Channel and technology partner identified opportunities are our largest growing segment of our pipeline. Overall, the pipeline continues to be driven by video platform deals that comprise more than 60% of the total. In content management and spot advertising opportunities are very abundant. There are more than 30 deals in the pipeline valued at greater than $1 million, about half with existing customers and half with new logos. We continue to see opportunities to replace competitors both traditional video service providers as well as OTT players. More specifically, let me describe several very exciting opportunities in the pipeline that have been identified by partners in different geographies and market segments as well as new logos. These opportunities are multimillion dollar deals among the approximately 30 multimillion dollar deals I just mentioned. First, we are working with a partner who provides global broadcast and digital media services to provide a managed service end-to-end video solution for a Latin American video service provider. The partner will provide the managed service capability as well as content, while SeaChange will provide this PanoramiC end-to-end video solution. If we are successful, there are more opportunities with this global partner. We are working with a channel partner in Asia to deliver an OTT video solution for a large broadcaster and a content owner in Southern Asia. The OTT video solution will include an Android TV-based user experience capability. We are also working with a global communications and IT service partner to launch a managed service end-to-end video solution for content owners and aggregators to enable B2C video delivery and as a fourth opportunity we are working with a global information and communications technology partner in Asia to deliver our managed service video solution to broadcasters and mobile operators in Asia. The partner will provide managed service capability, content and network capacity for the end-to-end video solution. So altogether while we have had a slower start to this fiscal year as expected, we do see many more sizable opportunities, ones where we believe we have an excellent chance to win new customers with partners and through direct sales for the second half of this fiscal year. All these opportunities together provide us with greater optimism around our ability to attain the level of bookings required to meet our targets for revenue growth for this fiscal year. And while I am on the topic of pipeline since our major customer Liberty Global was part of that pipeline, I want to share my views on the recently announced sale of Liberty Global assets in Europe to Vodafone. While it is very early in a transaction that is expected to require significant regulatory review over the next 12 months, the bottom line is we see this development as potentially offering us some opportunity. Further, we believe that there will be some period to transition service arrangement between the two companies for Liberty Global to provide video delivery support to the entity sold to Vodafone. But given the nature of this transaction, we cannot comment further about it at this time. We will keep you updated on any new developments that we learn. Now, let me take you – let me tell you more about our new product launched just last week. This launch however is more than just new products. It’s a new brand underlying structure and messaging, including a refreshed website under our new domain seachange.com rather than our existing domain schange.com. We are positioning these new products for branding and selling our entire portfolio of solutions. This approach is designed to make it easier for a wider variety of customers to understand and utilize our product solutions, whether singly or as part of a new integrated cloud-based end-to-end solution and as a platform-as-a-service with managed service capabilities. And it is consistent with the direction in which the market is moving towards more telcos, other service providers and content owners finding ways to monetize their content for consumers. The PanoramiC platform is designed to take advantage of two key shifts occurring in video delivery, where more and more video is being delivered to mobile devices and where the video consumption experience is becoming more personalized to the individual viewer. Our revolution building on our 25 years of industry expertise acknowledges that video customers’ patents have changed dramatically. Today, consumers want video on any device at any time and anywhere with content that is personalized for them to create what we call individual experiences. PanoramiC is a pivotal step forward embodying the SeaChange portfolio of solutions linked together with complementary best-of-breed elements from trusted partners into living on a platform-as-a-service, or PaaS basis. PanoramiC is a turnkey fully integrated delivery platform, with a powerful set of standardized functionalities in multiple monetization models. PanoramiC combines the scalable components of the SeaChange cFlow video management and monetization portfolio with complementary video delivery elements from ATEME, ATES Networks, Broadpeak and castLabs. This combination of pre-integrated multi-vendor best-of-breed video delivery elements in a subscription-based service model offers a robust cost effective market proven option for video providers building their multi-screen video businesses. We intend to deliver PanoramiC as a platform-a-a service as I noted, so that all revenues generated by PanoramiC will be on a subscription basis furthering our transition to subscription-based revenues. We anticipate the impact of the launch of PanoramiC will start to be reflected in the second half of fiscal ‘19 with a full impact in fiscal 2020 and beyond. Before I hand the call over to Peter to review our financials, I want to again commend our entire team for their hard work over the last 6 to 8 months to improve SeaChange’s solution offerings and market position. When I joined SeaChange, it was apparent that the company was not functioning as one company across the globe. Today, we are one company globally and that is – and it is executing much better and competing much more aggressively. I am confident that these improvements will lead to success in the marketplace and even better financial performance in the future. With that, I will turn the call over to Peter.

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 reiterating our guidance for fiscal year 2019. As I have mentioned, we are pleased that both our first quarter revenue and non-GAAP EPS came in at the higher end of our guidance range. We entered the first quarter of fiscal 2019 with $7.4 million in total backlog, excluding maintenance and support. We have booked new business of $6 million during the first quarter and ended the quarter with a backlog of $5 million. As Ed stated, we have a strong pipeline with many opportunities that we can realize this fiscal year and that provides us with the confidence about meeting our expectations for the full year. Total revenue in the first quarter was $14.9 million compared to $16.7 million in the first quarter of the prior fiscal year, a significant contributor to revenue for the first quarter of fiscal ‘19 with software revenue related to the first sale of our next-generation content management product to Cox Communications as well as product revenue from the delivery of our end-to-end solution to the second largest mobile carrier in Israel. Total product revenue was $3.1 million in the first quarter or 21% of total revenue compared to $2.8 million in the year ago quarter or 16% of total revenue. Video platform software revenue was $2.8 million and accounted for 91% of the total product revenue compared to $1.8 million or 67% of the total product revenue in the first quarter of last fiscal year. Total service revenue in the first quarter was $11.8 million or 79% of total revenue compared to $13.9 million or 84% of total revenue in the first quarter of last fiscal year. The decrease in services revenue was driven primarily by the termination of a managed service arrangement with BBC. As expected, maintenance revenue contributed to the decline driven by further decommissioning of legacy hardware as well as the migration of subscribers off of our legacy Axiom video platform. Video platform professional service revenue remained consistent totaling $4.4 million compared to $4.2 million in the same quarter of last fiscal year. Maintenance revenue totaled $7.2 million or 48% of total revenue and 61% of total service revenue compared to $8.3 million or 50% of total revenue and 59% of total service revenue in the first quarter of last fiscal year. Revenue from international customers of $9.1 million in the first quarter represented 61% of total revenue compared to $9.6 million or 58% of total revenue in the prior year quarter. Two customers comprised more than 10% of our total revenue in the first quarter with Liberty Global and its affiliates contributing 19% and Cox Communications contributing 10%. Our blended GAAP gross profit margin remained relatively consistent at 60% in the first quarter compared to 59% in the prior year quarter. Excluding the non-GAAP charges in the first quarter of fiscal 2019, non-GAAP gross profit margin was 61% in the first quarter compared to 62% in the prior year quarter. We continue to anticipate being able to generate gross margins in the low to mid 60% range with fluctuations being driven primarily by product mix. Our non-GAAP product gross margin in the first quarter was 90% compared to 80% in the prior year quarter. The improvement in non-GAAP product gross margins was primarily driven by less hardware product sales in the current quarter compared to the same quarter last year. Non-GAAP service gross margin in the first quarter was 53% compared to 58% in the prior year quarter. This decrease was driven by less revenue generated by fixed cost resources. Non-GAAP operating expenses in the first quarter were $12.9 million, down sequentially from $13.1 million in Q4 of 2018, but up from the $12 million in the same quarter of the prior year. Expected investments in certain one-time internal projects such as the adoption of the new revenue recognition guidance, ASC 606, which was effective February 1, 2018 impacted our expenses. Other one-time projects included the implementation of a new global HRIS system and the implementation of an automated coding capability. Once these projects are completed, we expect our operating expense run-rate to return to approximately $12 million quarterly in the second half of fiscal 2019. Our non-GAAP operating loss of $0.11 per basic share came in at the top of our guidance range and compares to a non-GAAP operating loss of $0.05 per basic share in the first quarter of last fiscal year. Turning to our balance sheet, we ended the first quarter with cash and cash equivalent of approximately $49 million and no debt compared to approximately $52 million at the end of fiscal 2018. In the first quarter, cash decreased by approximately $3 million driven by the operating loss during the quarter. Deferred revenue of $10.3 million declined from $14.4 million as of January 31, 2018 primarily by the timing of maintenance renewals. DSOs, excluding unbilled receivables, was 73 days at the end of the first quarter of this fiscal year compared to 87 days in the first quarter of last fiscal year due to our continued focus on collection activities. Including unbilled receivables, DSOs totaled 104 days in the first quarter compared to 126 days in the first quarter of last fiscal year. Our unbilled receivables were $6.3 million in the first quarter of this fiscal year compared to $7.3 million in the first quarter of last fiscal year. The decrease reflects invoicing against service contracts related to multiple projects for which we received purchase orders during the first quarter. Looking ahead in fiscal 2019, we expect that product revenue will contribute approximately 35% of total revenue for the year. We expect that maintenance revenue will be approximately 35% of total revenue for the full fiscal year. And lastly, we expect professional service revenue to contribute approximately 30% of total revenue for fiscal 2019. Over the course of fiscal 2019, we expect a growing portion of our product and service bookings to be from pipeline that is subscription-based business models. These opportunities represent large multiyear revenue opportunities and are largely being driven by channel partners. By winning these opportunities, we will significantly increase our backlog and recurring revenue going forward. At the same time, the mix of transactions between subscription and perpetual licenses could impact the timing of revenue recognition for products and services in the short-term. As of February 1, SeaChange adopted new technical accounting standards related to revenue recognition commonly known as ASC 606. We have concluded that the effect of this new guidance resulted in a $2.3 million increase to retained earnings as of February 1, 2018. Of this increase $1.5 million represents a decrease to deferred revenue for revenue that would have been recognized in fiscal year 2018 under the new guidance. That revenue will not be recognized in fiscal 2019. The remaining adjustment is related to cost of sales and commissions that were expensed in fiscal 2018 that are now required to be capitalized and incurred over the estimated life of the customer. We anticipate that revenue for the second quarter of fiscal 2019 will be in the range of $17 million to $19 million and that the non-GAAP operating loss will be in the range of $0.04 per share to breakeven per basic share. For the full year, we continue to expect revenue to be in the range of $80 million to $90 million. And as I have stated, we have multiple large perpetual license revenue opportunities in our pipeline today, which we have greater confidence about winning. And all of our full year revenue expectations are supported by a subset of these total opportunities available to us. We are currently evaluating the impact of tax reform and any potential impact on our business. To-date, the most impactful section of the code relates to global intangible low taxed income, which requires U.S. shareholders of controlled foreign corporations to include its income in any income generated by those controlled foreign corporations in excess of 110% of the net book value of PP&E for each of those entities. We believe the impact of this tax maybe an acceleration in the use of our net operating losses in the United States. As I said earlier, we continue to expect to maintain gross margins in the low to mid 60% range. We are still anticipating non-GAAP GAAP income per share in the range of $0.10 to $0.25 per fully diluted share for the full year of fiscal 2019. In addition, we continue to expect to be cash flow positive for the year. And with that, I will hand the call back to Mary. Thank you very much.

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

[Operator Instructions] Our first question comes from Steven Frankel with Dougherty. Please proceed with your question.

I just want to get a good handle on these expenses in Q2 and you are confident that after Q2 expenses can go down to the levels that you predict and then what room is there beyond $12 million a quarter to reduce expenses?

Thanks, Steve. This is Peter. During the quarter about $400,000 was spent on making sure that the revenue recognition module that we implemented for NetSuite was operating appropriately and ensuring that we got the ASC 606 rev-rec correct. We think in Q2 that professional service expense will come down fairly significantly. We are also wrapping up both the HRIS system implementation and the [quoting] [ph] capability. There is some work ongoing in Q2 for that. So we won’t be able to eliminate 100% of those professional service costs in the second quarter, but we do expect to be able to get back down to the $12 million quarterly run-rate by Q3 and we do have further opportunity to reduce that if necessary in Q3 and Q4. So, there is some flexibility on the OpEx line for us.

And then back up to revenue, you talked a lot about partners which is great but as partners generate revenue won’t that impact either gross margins or where are we going to see the impact of that relative to the deals that you generate on your own?

So, we don’t have a lot of revenue in our current forecast for fiscal ‘19 coming from these subscription-based partner deals. Based on where are quoting those deals so far, we are seeing margins in the 75% range on those deals versus direct product deals with software license components running between 85% to 95% gross margins. So what we will see in the future is a little bit of a degradation of product gross margins starting in 2020 as that subscription-based revenue stream grows, but we don’t expect a huge decrease in product margins coming from the new business model.

Yes, Steve, this is Ed. It’s not as if it is a reseller fee that we paid to the partner. I mean, the partners are bringing their own components to the table, whether it be a managed service capability or content. So we really don’t have that type of a kind of a pass-through or reseller fee to the partner, so that really is where we are able to sustain the margins at the levels that Peter mentioned.

And if you are successful with this partner model, do you anticipate that next year you might be able to cutback your own SG&A expense and get leverage that way?

I don’t see that happening, because frankly I think we are a little bit light on the sales and marketing cost. So what we are doing is using a hybrid approach to how we sell with the partners. It’s not a completely kind of indirect sale. We still need sales support. In fact, we have increased our sales support and our pre-sales capability in the Asia-Pac region to support the partners. And I think that what we are seeing is that hybrid model is having success that when we have our salespeople accompany the partner, get better traction on deals.

Okay. And do you think we’re through the bulk of the Adrenalin conversions at this point?

No. So in our pipeline I mentioned that there were a couple of – there were a number of 7-figure deals that are actually still a few Axiom to Adrenalin migrations, mainly in Latin America and South America that are fairly sizable in nature.

And do you have a feel for whether those are deals that are doable next year, doable this year in terms of maybe getting them - will that produce revenue this year or those are deals that are more likely have a revenue impact next year?

No, they will produce revenues this year.

Okay, alright. That’s all for now. Thank you.

Thanks Steve.

Thanks Steve.

Our next question comes from Hamed Khorsand, BWS Financial. Please proceed with your question.

Hi. So, first off, the question I have was is this activity you are talking about from an industry standpoint that you are seeing is this really just a catch up from the industry having not spent a lot on upgrades or is this really more about SeaChange starting to get some traction as far as potential customers goes?

Yes, no, this is about SeaChange getting some traction. So one of the things I kind of mentioned in my script is that of these $1 million plus opportunities about half of them are with new logos. And I can tell you Hamed that we haven’t had this big of a pipeline with new logos. And as I said earlier some of them – a lot of them are coming through these partner channels, so this is for expanded video capabilities in geographies and in market segments that we really haven’t been successful in. So with mobile carriers or with content owners and what we are finding is with the partnerships that we actually are getting in the door and having an ability to deliver an end-to-end solution that is compelling to the prospect.

Okay. And then could you just clarify when you mean partners is this the – are these like channel partners that you are talking about or are these the partners you signed up with on the PanoramiC and cFlow?

Both. So, the pipeline is made up of a mix of both I would say more of them are coming from channel partners than from technology partners, but in some cases, the channel partner brings technology to the table so that it’s kind of a bit of a mix there too, they are a channel partner, but they are bringing some elements it’s like they bring a managed service capability, they bring network capacity, they may even bring the UI instead of using our UI. So there are elements of technology that they bring. So while I wouldn’t consider them to be a technology alliance partner like the four that we mentioned in the script and in the press release, they do have some element of that in what they do.

Okay. And Cox are going to be a regular customer or was this a one-time event?

No, I don’t see Cox as a one-time event. I think that what we are excited about is that they’ve chosen our content management solution going forward and we would expect them to continue to build out that content management capability as they go forward even with the migration to X1.

Okay. And then finally on your DSOs, would that come down further as we progress through the year, or what’s the normal range that you guys think it will be?

So, Hamed we continue to work on obviously managing working capital. The DSOs for this quarter I would say exceeded our expectations. I think going forward as we transition more to a kind of recurring revenue business will probably be more successful in managing the DSOs going forward, but I think they will still be a little bit lumpy for the remainder of this year, but we are focused on keeping those DSOs down as much as...

Yes, the timing of revenue has an impact. I mean we closed deals at the end of the quarter and we are unable to collect [indiscernible], then that adversely affects the DSO calculation.

Correct.

Yes. Okay, thank you.

Thanks.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Ed Terino for closing remarks.

Thank you. We are really pleased with the progress we have made in the first quarter and the progress we are making as a company. We are building upon the transformation of our company over the past 1.5 year. To that firmer foundation we have established we are now bringing exciting and innovative solutions to the market, a new brand identity in a growing pipeline, along with a reenergized and reshaped sales and marketing organization, including some key partners in important geographies, in important market segments. With all these elements in place and consistent with the consumer-driven trends that we are seeing in the market, we are confident that this fiscal year will be successful in growing profitability within an evolving industry. Our industry-leading technology, open architecture, scalability and cloud-enabled platforms are critical competitive advantages in addressing our customers’ needs, so that they can offer their consumers the individual viewing experience they desire. Thanks to everyone for joining us on today’s call and for your continued support and interest in SeaChange. Good night.

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