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

Steven Frankel - Dougherty Hamed Khorsand - BWS Financial Todd Mitchell - Brean Capital Juan Bejarano - Noble Financial Michael Kupinski - Noble Financial

Greetings and welcome to the SeaChange International Fiscal 2016 First Quarter Financial Results. At this time, all participants are in a listen-only mode. A brief 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 your host Monica Gould, Investor Relations for SeaChange. Thank you. You may begin.

Thank you, Audrey. Good afternoon, everyone, and thank you for joining us. SeaChange released results for the first quarter of fiscal 2016 ended April 30, 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 www.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 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 on April 7, 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. Per SEC requirements, we've provided a reconciliation of these measures to the most directly comparable GAAP measures in tables attached to the press release. Any redistribution, re-transmission or rebroadcast of this presentation in any form without the expressed written consent of SeaChange International is prohibited. And with that, I'd like to turn the call over to Jay.

Thank you, Monica, and good afternoon everyone. And thank you for joining SeaChange's call today. I'm pleased to report a solid first quarter performance and steady progress on our key strategic priorities. I will first review some of our recent accomplishments before turning the call over to Tony for a more detailed review of our financial performance and outlook. We experienced a high-level of activity in our core service provider segment during the first quarter. First, we secured a major competitive win of a new Canadian service provider for our Adrenalin multiscreen offering displacing the existing VOD platform provider. Additionally, one of our largest U.S.-based customer's representing well over 4 million subscribers completed its upgrade from Axiom to Adrenalin to offer multiscreen commercially across more than 20 markets. Following the successful launch of Nucleus and Poland with Liberty Global during the fourth quarter, we are pleased to report that this customer commercially launched Nucleus in the Czech Republic during the first quarter. Our experience deploying Nucleus and Poland enable us to deliver what our customer refer to us “Flawless rollout with no additional development required on our part.” Furthermore, our Latin American Nucleus deployment with this customer advanced to a field trial in the quarter and we were awarded additional multi-million dollar contracts for Nucleus that will extend our footprint with this customer across new markets to several million new video subscribers that were not previously anticipated. Turning to our SaaS offering, Rave premium OTT platform continues to generate very strong interest and recognition in the market. During the first quarter, we were honored with our third industry award for Rave with the receipt of the TV connect award for best service delivery platform for IPTV and OTT TV. Moreover, we have been extremely busy responding to requests for OTT proposals in the first quarter alone we responded to more RFPs per Rave than we identified for our multiscreen offering in all of last year. This is a significant achievement for several reasons. First, it validates the sheer size of the OTT opportunity as well as the high level of urgency on the part of potential customers to get to market quickly with a robust and flexible offering. Secondly, it demonstrates the substantial progress that we have made in expanding our marketing efforts to a whole new set of potential customers. From content owners to TV networks and broadcasters, just to name a few. Now turning to our more recent initiative; Timeline Labs, the NewCoin. We closed our acquisition of Timeline Labs early in the first quarter and completed the integration process across our entire organization. So far, we have deployments with affiliates of the major U.S. broadcast networks, including ABC, CBS, Fox and NBC. NewCoin, our audience measurement joint venture, has been approved for a second round of funding from our partners and we continue to make good progress towards launching a beta test in the second half of this year in Dallas. Last month, we attended the INTX's cable show, the Internet and Television Expo in Chicago where we hosted back-to-back demonstrations of our Rave and Timeline SaaS platforms for content owners and service providers. Feedback from these and/or other discussions has been extremely positive, particularly around Rave's key differentiating features, the flexibility of our platform to support any business model from sell-through to subscription to ad supported and the depth of our analytics. We are running an aggressive marketing program to ensure SeaChange's association with the OTT opportunity and working to get in front of new types of customers in particular, TV programmers and content owners in vertical markets and those in regions including Latin America and Asia. Before I turn the call over to Tony, I would like to welcome Ed Terino to the executive team. Ed has been a valued Board Member for a number of years and we look forward to working with him more closely in his new role as Chief Operating Officer. In summary, we are experiencing a high-level of inbound interest for our new OTT solutions and we continue to execute on and expand our existing service provider opportunity. This continued progress strengthens our conviction in our strategy to accelerate growth in the business and create long-term shareholder value. 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 second quarter and full fiscal year. Tony, please go ahead.

Thank you, Jay. I'll start by reviewing our first quarter results before providing an outlook for the second quarter and full fiscal year 2016. For the first quarter of fiscal 2016, total revenues were $23.2 million, in line with our expectations. Product revenue totaled $3.2 million and accounted for 14% of total revenue, down from 21% in the prior year quarter. New product revenues accounted for approximately 53% of total product revenue compared to 53% in the prior year quarter. There is a decline in product revenue primarily driven by continued legacy declines as well as a difficult comparison from last year's first quarter, which benefited from a large Adrenalin acceptance in Europe and the negative impact of the strength of the U.S. dollar. Service revenues totaled $20 million, an increase of 4% over the prior year quarter. Sales in international customers accounted for 49% of total revenue in the first quarter, compared to 45% in the prior year quarter. Our blended non-GAAP gross margins decreased to 44% in the first quarter, down from 46% in the prior year quarter due to the decline in product revenue. Product gross margins decreased to 47% from 59% in the same quarter of last year – last fiscal year, and decreased substantially due to decline in product revenue and increasing third-party hardware shipment in advance of the new Adrenalin deployment. Service gross margins increased sequentially from 41% to 44% reflecting several acceptance during the quarter for which expenses were recognized in prior periods. Non-GAAP operating expenses decreased to $17.1 million from $18.4 million a year ago, primarily driven by a decrease in R&D expenses as we begin to see the initial benefits of our streamlining efforts in the first quarter. As you recall, early in the first quarter we announced a 10% workforce reduction reflecting the completion of several major product development effort that result in the elevated level of operating expenses, particularly in R&D. We've implemented the work force reduction across our U.S. offices and we are implementing the changes in our international locations over the next several quarters. We generated a non-GAAP operating loss of $0.20 per basic share compared to a non-GAAP operating loss of $0.22 per basic share in the prior year quarter. We utilized $11.7 million in cash during the first quarter to complete the acquisition of Timeline Labs which closed on February 2nd. We ended the quarter with cash and cash equivalents of approximately $85.3 million and no debt. Now I'd like to turn to our outlook for the second quarter and full fiscal year. We anticipated second quarter revenues to be in the range of $26 million to $28 million and non-GAAP operating results to be in the range of a loss of $0.15 per basic share to a loss of $0.09 per basic share. For the full year we continued to expect revenues to be in the range of $105 million to $115 million and non-GAAP operating loss to be in the range of $0.38 per basic share to a loss of $0.16 per basic share. Our full year guidance reflects a decrease in Legacy revenues in the range of $7 million to $10 million as well as the negative impact on our European business from the continuing strength of the U.S. dollar. With that, I'd like to hand the call back to Monica. Thank you.

Thank you, Tony. Audrey, could you please provide instructions for the Q&A session?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Steven Frankel with Dougherty. Please proceed.

Good afternoon. Jay, I wonder if we might start with the Liberty relationship and if you could tell us a little more about the additional territories that you won this quarter and walk us through how revenue gets recognized around that.

Okay. So I can't give you details that Liberty doesn't publicly share. I hope you can understand that, but what I can say is when you look at the success of Poland, which they alluded to in their call and the smoothness flip a switch and Czech Republic went so well, their confidence in the software decided to want to expand it to areas that they hadn't talked about to us prior. And this is new revenue that was not in the plan and was not -- it was above and beyond just taking down licenses.

And it will be recognized over a period of time on a percentage completion as we get to the end.

And with any of that in the quarter, and was it in there as service revenue?

Yes. It was a little bit – there was some in the first quarter. I would expect bigger amount in the future quarters.

But, again, going back to Liberty in general, then there's another revenue event as they burn through each of the million license packs that they have, correct?

Correct. The present, they've only purchased a million licenses. They publicly said that at the end of last year they had had about 2000 subscribers in Poland and by the end of the quarter they were up to 23,000 as of the end of March.

Okay. And now let's switch to Rave. You talked last quarter about three trials. Could you give us an update on where you are with those customer trials?

They are still deployed.

And what do you think the average length of the trial will be in Rave? What's the decision cycles look like to you and are you in competitive trials? Or they baking you off against somebody else?

And none of these are, if they are bake-off, are the only thing that they're trying. The length of it, this is new turf for both them and for us. This is a new market. So I really don't have visibility into our customers decision-making time cycle.

Okay. One more subject and then I'll pass the baton. Last quarter you mentioned that you had customers that were considering deploying cloud Adrenalin rather than the traditional Adrenalin. Have you signed any of those deals? What does the pipeline look like and give us an update there.

Yes. We announced that we were ending licensing Axiom this quarter and we announced that to our customers. And one of the solutions to these existing Axiom customers could be a cloud Adrenalin solution.

So there's some were about 50 customers using Axiom. They've all been told the end-of-life story and that keeping Axiom during the end-of-life period is more expensive than it used to be, so that gives them a little nudge to make their decisions quicker.

And when do you think you'll start to sign contracts around cloud Adrenalin?

Well, we just announced this to our customers within the past couple of weeks.

So those conversations are ongoing. We announced at this time of year so that people could plan for their budget cycles for next year. So I think you'll see most of this activity take place in next calendar year for their budget cycles and next fiscal year for us recognizing the change.

Okay. And any update on BBC and their Rave launch?

They continue to work on it. Again, we don't control when they deploy, but it's still on schedule for the second half of the year.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed.

Hi. Just – want a couple of follow ups on those questions. Given the cloud Adrenalin push, are you expecting – you upped the price on the end-of-life, right, just to push the – to nudge them to cloud. Wouldn't that --

Absolutely.

Yes. So wouldn't the cloud Adrenalin be cheaper though, won't that hurt revenue, cannibalize it?

No. Because what we're talking about is a product that to continue to add on services or new features doesn't make sense for us to invest more resources when we can deliver a better product to them.

Okay. And the competitive win you had in Canada, was this purely because you're the only one in the market and this was an upgrade to Adrenalin, or was this purely because your product is much better?

The latter.

Okay.

And down. This was a new greenfield opportunity.

My mother raised me, if I don't have anything nice to say about something, not to say it. So they spoke loudly by choosing us.

While your competitor was very slow in getting to the market on the multiscreen side. That's why I'm asking this.

We are better.

Okay. All right. And then any updates as far as on the North America side as we talked about the RDK and Nucleus the deployments in – it seems like it's been very cold on that front.

I wouldn't describe it as cold. I think, as we said in the past, everybody was waiting for that deployment of Liberty. And Liberty has been a fantastic partner in touting and inviting others to see what it does and how it goes. Even [indiscernible] came by at the show in Chicago. And there's a lot of activity, but we don't get to talk about when and how that's up to our partners.

All right. That's it for me. Thank you.

Thank you.

Thank you. Our next question comes from the line of Todd Mitchell with Brean Capital. Please proceed.

Hi. Thank you. A couple of questions here just logistically. Going back to the large U.S. [indiscernible] customer where you went from Axiom to Adrenalin, how long was that project from start to finish, and what were the major components and how would that be accelerated or decelerated in a similar deployment going forward?

So Todd, as you know, each customer has a unique system out there of what they bought and how they run and all of that, and in this particular one it was a very decentralized system that we were able to solve and reduced their OpEx and so this particular one was almost 18 months.

Okay.

And I know what one no other customer that has that same complexity.

Okay. Okay. And similarly, in terms of your rollout of Nucleus over Liberty, is there a corresponding – how do I say this – ASP component or revenues component that a CPE deployment, Nucleus CPA deployment unlocks in terms of your back office business there?

Can you repeat your question in the way I hear your question?

Sure.

Does success in rolling out Nucleus open or lean people towards buying our back office?

Well, no. I mean just in terms of how Liberty uses your back office, if the Nucleus rollout unlocks the new features that had previously not been used by them, does it up what they pay you for the back office component?

So no, but what it does is really secure our position of being the back office.

Because, essentially, they can't operate without your back office. They can't operate the CPE without the back office component?

You can't run an airline without planes, yes.

Got it. And lastly, can you comment at sort of a high-level how easy your strategic positioning vis-à-vis the sort of ever-changing in a story in the U.S. would be [VMSOs] [ph], with Comcast not getting Time Warner, but with Charter getting there – does that change how you feel your position and how you would, perhaps be pitching potential close there?

Yes. Again, we never know what regulatory bodies say, but Charter has waited to move to an upgrade path for a long time, and it's probably that they waited till they completed acquisitions were being required. And now if they go ahead and you put Time Warner and Charter together, they need a new unified back office and they need new set-top boxes. Both of these are great opportunities and on their board is Liberty's DTO that has had a positive experience and uses both of our products.

Thank you. Those are my questions.

Thanks Todd.

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Juan Bejarano with Noble Financial. Please proceed.

Hi, how are you, and thank you for taking my questions. I kind of wanted to switch gears a little bit. We discussed all of your other products, but I just wanted to touch base on your advertising solution in fusion. I know that VOD advertising has gained traction faster in Europe, and it's been somewhat slow in the US. Have you seen those trends change and can you discuss how that market is going in the U.S.?

Yes. So when we look specifically and the various people looking at launching OTT, advertising is, obviously, a key part of that aspect. And one of our strong differentiators, and I appreciate the question, Juan, is that we have such a strong background in that and we do so many ads in Europe, as you said that that is one of the things that really sets us apart from other people trying to enter the space.

Got it. Okay. Thank you. And just looking at Asia, you recently appointed a General Manager there. Can you discuss your opportunity there? Are you gaining any traction? And then just as a follow-up, do you believe you have more resources there and perhaps in other markets?

So Dave Ulmer, who is running the Pacific region for us, is doing a phenomenal job. Don't forget that we have a ton of employees already in the Philippines and in India. So we have lots of boots on the ground over 100 in that part of the world. Dave was just appointed to the Board of the Industry Trade Organization in that part of the world and I couldn't be more pleased with our progress.

Okay. Thank you. And Anthony, not sure if you have the information handy, but how much did Legacy product revenue declined in the first quarter and maybe if you can update us on the currency impact in the first quarter?

Well, the currency impact is probably about – I would say about a half million dollars.

Okay.

And the percentages – what, 53% I think I mentioned for legacy product for the quarter.

Got it. Okay. Thank you. That's it for me. Thanks.

Thanks, Juan.

Thank you. Our next question comes from the line of [indiscernible]. Please proceed.

Hey, guys. Quick question – or two questions. One, it's interesting that Terino has come on board, and I guess it would be interesting to hear what the plan is.

Sure. So the company has always had a COO position, I didn't jump and immediately filled it in my first few months here because I was trying to figure out what skill sets best back filled because I really look at that as a team and got to know Ed quite well and I was thrilled that he leaned in and we were able to convince him and it's --

So what exactly is he going to do?

He's operationally, as we said in the press release, dealing with a lot of the day-to-day internal groups and he's got a very strong software background and a very strong detail oriented financial background.

Okay. And then, secondly, the cash dropped roughly $20 million. That looks right.

Yes.

I know 11.2 is the acquisition?

Correct.

I'm assuming there are a couple of other acquisitions and then we had some cash losses.

Yes. And these were anticipated cash losses as well as the severance payments as related to the risk that we had in the fourth quarter last year.

Okay. And then, last, -- last question. Can you just go into, if possible, a little more detail on sort of the Timeline, because it seems like that's one more group – affiliate group that you are in as opposed to at the beginning. I thought they were only in three out of the four. And then if anything with NewCoin?

So Timeline continues to be something that just absolutely delights everybody that sees it. Not everybody was anticipating having that capability. The ability to change what news you are creating is low hanging fruit. The idea that you can increase your revenue, increase your tune in, increase the size of your audience. So that's going really well. NewCoin is moving as fast as you can move a consortium to launch something that is breaking a tradition of how advertising and broadcasters have worked for half a century.

Great. I mean that's a very competitive -- I mean, lots of people are trying to get in that area, and I'm assuming that this consortium realizes that because then they'll be host to some other God as opposed to their current God that they have to pay attention to.

I wouldn't use the word God. I find that too high of a mighty word.

Well, that would imply they are good at measuring. But --

Well, there's that God's. I'd say the word dictator. The reason why I say dictator is you have one entity that dictates the terms for hundreds of billions of dollars. Our consortium, on the other hand, is democracy. What made this country great? It's everybody having a voice. So at the end of the day, if you can get all the stakeholders to agree how they would like to self govern that tends to have a better chance of having an overthrow of a dictator and making a prosperous future.

Okay.

For God and country.

Okay. That for God and the country. Okay. Great. Great progress. I hope to hear some more news releases this quarter. Thanks again.

Thanks.

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Steven Frankel with Dougherty. Please proceed.

So will move from God and country to the mundane. Tony, could you give us the customer concentration percentages and the maintenance number in the quarter?

Again, the two biggest customers, again, made up the biggest, greater than 10%. I don't have that percentage in front of me at the moment. I can give that to you off-line and it's probably in our Q that we will file tomorrow.

And what about maintenance as a percentage of revenue?

So maintenance continues to be steady and it's approximately – what is it -- 41%.

Of total revenue, right?

Correct.

And then let's go back to Adrenalin and remind us what your current backlog is today in terms of number of deals and when is the next big installed due? Is there something due this quarter?

As we said, we won a major account in Canada and that will be deployed over the next couple of quarters.

Okay. Is that the only thing that is in backlog at this point?

No. There's other things in backlog. There's many things in backlog.

So I'm asking how many accounts are in backlog.

No. I don't have that number off the top of my head.

I don't know if we've ever put out that number.

Yes. The company used to routinely talk about, 40, 50 customers and I've also heard a sub-number from time to time in terms of the numbers subs in the backlog and number of subs [deeply] [ph]. How about the other question? So I remember last quarter you said the next big Adrenalin install was Q2. Is that this Canadian customer, or is that somebody else in addition that is due in Q2?

No, it's going to be Q2.

Yes.

Again, I'm sorry. There is two customers in Q2 that are due for install, or is this Canadian customer in Q2?

There's many customers being installed in Q2. One of them will be the Canadian customer.

There is Canada plus other.

Plus others.

Others.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Michael Kupinski with Noble Financial. Please proceed.

Thank you. And congratulation on your progress, guys.

Thanks Mike.

I want to talk a little bit – drilled down a little bit on this Charter-Time Warner prospect. And correct me if I'm wrong, but I recall your business relationships were much stronger with Charter then it was for Time Warner. I was just wondering if you can frame the potential incremental benefit by a merger of that – of a merger of those two companies.

So not to challenge your recollection, but I don't think that's how I would characterize where our relationship. We've done a lot more business with Time Warner in the past. We have an amazing relationship with Liberty. They are now deeply entrenched with us and we are a significant part of a roadmap. I don't want to get myself in trouble with my best customer and talk more than I can, but when you look at their involvement, when you look at balance hands on involvement with us, with giving birth and creating Nucleus with us, she knows it's the best that's out there. He's using it every day and, both Time Warner and Charter need to upgrade. They're falling behind in what they can offer their consumers. So we see that as a huge greenfield for us.

And that leads into my next question and thanks for the clarification. In the past when the industry went for consolidation, there was a [lull] [ph] CapEx and it usually was like 18 months. Would you expect some digestion period, or do you believe that Charter would just be out of the gate with the sense of urgency to upgrade the back office and set top and so forth?

I don't have a Ouija board.

Okay.

I mean, the only difference that I can give you other than the glib answer is this. In the past, the cost of rolling out a next-gen box always cost more and substantially more. Today thanks to Adrenalin and the back office and Nucleus in the box, the cost of these boxes is one-fourth of the current boxes. So that should change the tide of some of that decision-making on CapEx.

Do you have – yes, I'm sorry.

I don't it's time table.

Yes. Do you have a sense where Charter is on terms of the depreciation of – boxes with percentage and so forth?

Absolutely no information.

Okay. And then – I'm actually more – while we concentrated on Time Warner and Charter, I'm actually more interested in the prospect of T-Mobile merger, is there any opportunity what can you describe as the opportunity for you with that perspective merger?

Yes. This is currently a customer of SeaChange. So obviously, a merger with T-Mobile is just another opportunity there where we can expand what we have with addition to T-Mobile solution as well.

And I'm a big fan of Charlie, so –

All right. Okay. Perfect. Thanks for the clarification.

Sure.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to management for any closing remarks.

I want to thank everybody for joining us today and for your continued support and interest in SeaChange and I hope everybody has a great evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.