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

Steven Frankel - Dougherty Greg Mesniaeff - Drexel Hamilton Todd Mitchell - Brean Capital Juan Bejarano - Noble Financial Matthew Galinko - Sidoti

Greetings and welcome to the SeaChange International Fiscal 2016 Second 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 your host Monica Gould, Investor Relations for SeaChange. Please go ahead.

Thank you, Shay. Good afternoon, everyone, and thank you for joining us. SeaChange released results for the second quarter of fiscal 2016 ended July 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 website 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 website. 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 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. 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 two investment conferences in New York next week, the Brean Technology Conference on September 9 and the Drexel TMT Conference on September 10. 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 second quarter performance marked by 20% sequential revenue growth and continued progress on our key strategic priorities. Our revenue growth in the second fiscal quarter was driven by continued momentum in new product revenue, which nearly quadrupled from the first quarter and increased 50% year-over-year. These strong results were led by our recent new customer wins for our Adrenalin multiscreen software and asset flow content management system and the delivery of our advanced advertising solutions to an existing customer. I'll first 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 second 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 into adjacent markets. Starting with our new product traction, we're pleased to announce that our Nucleus video gateway software was launched by Liberty Global in Austria in the second quarter, marking three consecutive quarters of new market launches, again with no additional development work on our part. Our Latin American Nucleus deployment remains on track and we were yet again awarded additional contracts for Nucleus that will further extend our footprint with this customer across new markets. In the second quarter, we completed the delivery of our Adrenalin multiscreen software for our new Canadian customer, which you may recall from last quarter's call was a major competitive win for SeaChange, reflecting the displacement of the previous VOD platform provider. Moreover, we continue to make good progress on further diversifying our customer base beyond our core cable customers. During the second quarter, we expanded our advertising sales into an existing large North American Telco customer with the delivery of new features to support HD advertising. In addition a major North American satellite operator purchased our asset flow content management system. With this win we now have secured two of the top North American satellite operators as customers. Furthermore, we secured new contracts for our timeline offering that have extended our customer base for this offering beyond the broadcast television market. Finally, we continue to respond to a large number of OTT opportunities globally. During the second quarter, we began to see increased interest from mobile providers looking to add new Tiers of service to their bundle including premium video and I am delighted to announce that we recently signed our first OTT agreement with a U.S. prepaid mobile service provider. To address this increased interest, we will be attending CTIA in Las Vegas, September 9 through 11, in addition to IBC in Amsterdam September 10 through 15. As you may be aware, IBC is the world's largest trade show focused on the creation, delivery and management of content, while CTIA is the largest wireless show in the Americas. In summary, we continue to execute on our growth objective and are very excited about the many opportunities ahead. This continued progress strengthens our conviction in our strategy to accelerate growth in the business, return to profitability 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 third quarter and full fiscal year. Tony please go ahead.

Thank you, Jay. I'll start by reviewing our second quarter results before providing an outlook for the third quarter and full fiscal year 2016. Second quarter fiscal 2016 revenues rose 20% sequentially to $27.9 million and came in at the high end of our guidance range while our operating loss came in sequentially smaller than we anticipated. Product revenue more than doubled from the first quarter to $7 million, driven by increased momentum in new products and accounted for 25% of total revenue in the quarter. New product revenues nearly quadrupled sequentially and rose 50% year-over-year accounted for approximately 91% of the total product revenue in the second quarter compared to 53% in the first quarter of fiscal 2016 and 48% in the prior year quarter. As Jay mentioned, the increase in new product revenue in the second quarter was led by a new customer deployment of our Adrenalin and asset flow products as well as the delivery of additional advertising features to an existing Telco customer. Legacy revenues declined 87% year-over-year account for 9% of total product revenue. For the first six months of fiscal 2016 legacy revenues declined by approximately $5 million in line with our guidance of full year decline in the range of $7 million to $10 million. Service revenues totaled $20.9 million, an increase of 5% sequentially and a decrease of 1% over the prior year quarter. Maintenance revenues accounted for 49% of service revenues in the quarter up from 47% in the first quarter and down from 57% in the prior year quarter. Maintenance revenues declined from a year ago due to decreases in the legacy watt streamer related maintenance. However we expect to be getting recognizing maintenance revenues Nucleus licenses beginning in the third quarter which will offset the decline in legacy related maintenance revenue. Sales in international customers rose to 43% sequentially and 35% year-over-year and account for 58% of total revenue in the second quarter compared to 40% in the prior year quarter. This growth was driven by Adrenalin customer win in Canada, we disclosed in the first quarter. As a result this large Canadian operate became at 10% customer in the second quarter for the first time, letting Global and Comcast continue to be our two largest 10% customers. Our blended non-GAAP gross margins increased from 44% in the first quarter to 53% in the second quarter driven by the growth in product revenue. Product gross margins increased to 78% from 47% in the first quarter. Service gross margins remained flat with the first quarter at 44%, an increase from 42% in the same quarter of last year primarily due to high professional services revenue. Non-GAAP operating expenses decreased to $15.9 million from $17.1 million in the first quarter of fiscal 2016 and $18.5 million a year ago, primarily driven by a decrease in R&D expenses, reflecting the implementation of the vast majority of our previously announced streamlining efforts. We generated non-GAAP operating loss of $0.04 per basic share substantially better than our revenue guidance and the prior quarter loss of $0.20 per basic share as well as the loss of $0.08 per basic share in the prior year quarter. We ended the quarter with cash of approximately $72.8 million and no debt, cash balance was elevated in the quarter due to working capital needs related to the timing of our customer deliveries and invoicing towards the end of the second quarter. However we expect to be cash neutral in the third quarter and generate cash flow in the fourth quarter. Turning to our outlook for the third quarter and full fiscal year we anticipate third quarter revenues to be in the range of $27 million to $29 million and non-GAAP operating results to be in the range of a loss of $0.10 per basic share to a loss of $0.04 per basic share. For the full year we continue 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. With that I’d like to hand the call back to Monica. Thank you.

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

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Steven Frankel from Dougherty.

Good afternoon. Jay I’d like to dig into Rave a little more. First of all could you tell us anything additionally about may be the timing of this prepaid mobile customers offering or what it might look like?

Yes, so it will launch in the beginning of next year. It’s mobile and it’s up to our partner to announce those details shortly.

And it’s some sort of Rave's share on your part or how are you going to get paid on this deal?

Hopefully very well. Again I’m not in a position to share details at this moment.

Okay. Another question on Rave, you talked a last couple of quarters about a lot of interest in this product, a lot of customer discussions, it's great to see this win, but what happened with the rest of those discussions? Have these deals been awarded to others or they still have a lot of balls up in the air?

So, again, great question. The good news is we have not lost any of these trials or proposals to any third parties. What is more commonly happening is the market is evolving, so people are rethinking and retooling what they’re doing. You may have seen various people announcing different things out there that it changes from when they announced to when they launched and everybody is being spy counters by trying to figure out what they are launching. We continue to work with partners. The good news is as we have more trials out there, there are more places and more instances for people to kick the tires to get comfort with the quality of both what the consumer sees and the detailed analytics that we built on the backend, so they can drive the business.

How many trials do you have currently ongoing?

Four.

Okay. And then on Nucleus, Comcast has been very vocal on how the X-1 has reduced churn and I would say you guys deserve at least some of the credit for that maybe all the credit for that. Liberty is obviously happy. They keep rolling out. Yet you don't seem to have other customers signing up. What's happening with the rest of the world? Why don’t they feel the same way as these two lead dogs?

I think it’s more of a timing of when people announce what they’re doing.

Okay. I'll take that as a good news and then lastly any update on the BBC and their potential launch of array of powered site?

Yes the keyword there is imminently.

Okay. And then just lastly Tony, I missed the maintenance number, could you give that to me again and…

In the amount it was a percentage of our service revenues, which was -- let me see what that, was about 49% of the service revenues.

And what was that in Q1?

Q1 it was -- I am sorry. Let me look at it. Steve while we're looking that up just to give you more color on your BBC question, we do expect to begin recognizing revenue in the third quarter when BBC launches.

Right.

And it's 47% in Q1?

Thank you very much.

Thank you, Steve.

Thank you. Our next question comes from Greg Mesniaeff from Drexel Hamilton.

Yes thank you for taking my question. Can you give me some indication about when you look at your legacy cable MSO customers, what is the conversion or refresh run rate that they're currently experiencing as they go from Axiom to Adrenalin?

What's the question? Can you repeat that question?

Well yes, the question is can you give me some indication as to what some of your legacy customers are doing as they look to upgrade or move beyond Axiom?

So let me do the qualitative approach. So we still have about 40 customers, 40-ish still using Axiom. We’ve made it more painful by making more expensive for them on the support to continue it kind of like nudging them into the 20% rate. And when you look at Steve pointed out earlier, the success at reducing churn, the single biggest issue affecting cable providers profitability that's the other inducement to move them into the Adrenalin world. So…

But is there some kind of metric or conversion…

Converting what to what, that's where I’m not following the question.

I guess from Axiom to Adrenalin.

So they give up Axiom and they go to Adrenalin.

Right. But at what rate has that been happening. Is there any kind of quantitative data point you can or metric you can give us?

Well, I can tell you that we have not lost any of the Axiom customers and we've upgraded all the big -- all the major Axiom customers to Adrenalin at this point. And we still have over 40 Axiom customers we tend to be in Tier 3 and Tier 4 range. And we’re working with those customers at this point to provide them a solution either an Adrenalin solution or Rave solution to convert those as well into Adrenalin. So those who could benefit the most, move first.

Got you. And then if you look at the timeline of the conversion of the installed base where are you in that process? Are you in a fifth inning? Are you -- where would you say you are at this point?

Well I think it’s a difference between quantitative and qualitative. So the big giant guys are all on to the new platform.

Okay.

We have a lot of little guys that…

Are holdouts.

Moving at a pace that they can afford.

Okay. Got it, okay, but you expect that process to kind of run at scores over some estimated period of time right?

As we said, the remaining customers are a de minimis part of our overall revenue.

Right and we expect that what we have told them as we end the life Axiom and within two years. So they have to make a transition and a decision within the next two years so in calendar '16 and calendar '17.

Okay.

Given that we have enough time for them to make a decision, which version they want to go with.

So they can do their CapEx planning basically and also OpEx.

Okay. Understood and then just one quick question on the balance sheet. What were the DSOs in this quarter?

Typical DSOs in the summer tends to be around 90% as I know European customers or 90 days, sorry not 90%, 90 days.

Okay.

Our European customers tend to quantification little bit in the summer.

Okay. So they were 90?

It was 90.

And what does that compare to the previous quarter?

I think the previous quarter we were in the 80s.

80s okay. All right. Thank you.

Thank you. Our next question comes from Todd Mitchell from Brean Capital.

Hi, thank you. I’m wondering if you could just give us some numbers in terms of customers for different products. Can you tell us at this point the total number of Adrenalin end customers and/or the total number of their sub-base?

We've said we’re over 50 at this point and this sub-base is on axis a little over $50 million.

Okay. And can you tell us how many Nucleus customers there are and what their sub-base is?

I think there is nine Nucleus customers and their sub-base is $30 million, I think we’ve said.

Okay. And can you tell us of the $50 million or of the 50 Adrenalin customers are all of these active license payers at this point or is anybody still to be fully converted?

Now they're in various stages of deployment at this point.

Can you give us the number of customers that have been deployed?

Top of my head, I would say it’s probably little bit in excess of 50% of those.

Okay. And can you tell us if there were any -- how many deployments when live in the quarter?

I don’t know off the top of my head to be truthful.

Were there deployment in the quarter that were incremental?

Yeah there were a lot, yes.

Okay. And same on Nucleus, how many of the nine have been deployed and were there any deployments in the quarter?

Obviously we’re still -- we are deploying Nucleus so as we talked about. We continue to expand with Liberty Global footprint that launched. We talked that they lost in Austria as well.

Right, right, but did you have any deployments of anyone other than incremental markets with LGI?

No.

Okay. And of those nine all were deployed or how many are deployed?

I would say one is deployed.

One is deployed. Got it. That’s helpful. And then…

But one is made of four properties right, so one of those is actually four.

Okay. Got it, that’s helpful. And then on the other side of the house, can you flush out the comment that you made that you’re starting to move timeline out of the broadcast? What does that mean?

Traditionally, so what has happened is and you and I have spent some time on this. The amazing amount of data that in real time timeline can provide people by taking the social analytics and tying it for broadcasters tends to be of use and valuable to adjacent industries to broadcasters. And so in addition to the three letter network that have been buying it, some other people come to us and we’re using it in new and novel ways that are generating revenue.

Okay. So timeline is essentially that is generating a data and analytics service for somebody either ones to advertise or wants to program, is that the sort of the way to think of that?

You’re thinking it the correct way.

Okay. Okay and can you tell us in the context of Rave you've talked about the potential to win broadcast stations who want to become kind of more robust regional websites. You’ve talked about the traction you’re getting with some of the mobile operators. And then at the other end of the spectrum you have BBC. This is basically another way of asking you a question the other guy asked earlier, but market positioning is Rave going to positioned. Are you finding it positioned as -- why aren’t you winning the HBOs in the world? Is that a different platform? Are they looking for something?

No, no.

How do you see the market segmented for that product, that would be helpful?

So on the HBO point, HBO started their discussions with MLB long before SeaChange ever said the word Rave, okay. So that happened before I was here, but that is exactly the type of customer that we’re having conversations with. From three letter guys to that whole -- it’s in the news every day. Media companies are looking at their future. Broadcasters are looking at it, network, device makers, what was interesting to us is the speed at which the mobile industry has seen voice data and text drive down where there’s not a differentiator. So voice, data, text and video suddenly becomes a core competency that mobile providers need to provide.

Okay. And when you look at the segmenting or the positioning in the market, how do you look at the competitors? Do you look -- there’s no one that really has a what I would call a back office toolkit that you do. Is that the right…

There’s -- so no one has a 20-year history, three technical MEs and Telco Grade MSO quality backend that can deliver billions of things reliably, okay. So with that going in as our advantage, we’re focused at what I think of as the top of the pyramid of who are the partners that will survive the next several years of chaos. There will be a lot of people jumping in trying different things and for most of those, it will be some capital destruction until they figure out where the market is, who the consumers are, what the proper pricing is. So we want to make sure that we’re partnered with the big and the best that have to win. So a great example is I highly will make a forward statement that I believe the British Empire will still be existing five years from now. So the BBC will still be in business five years from now and they’re good partner and they have to come up with the right strategy in OTT. That’s why they were a great partner and all by the way British content plays globally. So that’s the type of footprint. Other people that are trying to find a foothold in here are signing up a conference call like we’re doing today and making it available on a phone and calling that OTT. We’re not interested in that size, the bottom piece of the business.

Okay. And is there another sort of competitor in the marketplace at where it would be, I don't know a company like a CDN that's going to add it as a value layer and it's an adjunct to their core business? Is that particularly when going after the larger entities, is that…

For a market this big, it will be false to say that there won't be others entering. What becomes the real question is who drive these new opportunities and then what pieces do you add on and partner and we have a very key piece, but we're also flexible and we design rate with APIs that we can tie into other pieces and other parties. So I think you'll see interesting cooperation in the space including us cooperating with others to provide new innovative solutions that the market demands, but no one company has the solution for.

Okay. Okay. Thank you. I'll let someone else go.

Thanks Todd.

Thank you. [Operator Instructions] Our next question comes from Juan Bejarano from Noble Financial.

Hi, good afternoon and thank you for taking my questions. Congrats on the progress.

Thanks Juan.

No problem. So most of my questions have been asked, but just kind of following up on BBC, are you hearing or do you feel that a lot of potential clients are waiting to see what the BBC -- their solution looks like before making decisions?

Absolutely people want to be able to kick the tires and BBC is a very visible and known as a very tough account to get, probably the most diligent given their size and how many executives are involved in every decision and as I said, the BBC's launch is eminent.

Okay. Got it. And just want to clarify on the Adrenalin opportunity, so right now you have 50 Adrenalin customers that represent about 50 million subscribers and they're not fully -- you're not fully penetrated within these 50 million subscribers because there are different stages of roll out. Is that correct?

Yes.

Yes.

Okay. And I thought you were -- are you at 50% of those subscribers? I thought it was more like 25%?

In the past we've said we were about 25%, so it really becomes why are we saying 25% up? So is it of the number of the people or the number of their potential subscribers. So on the potential TAM for this product, if that's what you're getting at, we're much lower than 25% today.

Okay. And how long do you think that it will take for you to reach let's say 100% or $50 million or will you ever reach 100% of $50 million?

I've learned that I don't control the pace at which my customers modernize. It's a great question. We all knew that.

We can say, obviously we've seen customers where they've deployed it in one of their properties and they see the benefit of Adrenalin very quickly and they stop deploying it to their other properties as well once they see the benefit of Adrenalin.

It's Tony. I want to give as an example, we have one customer that had many installations of Axiom.

Correct, we talked about one of our big customers having in excess of 30 different Axiom deployments out in the field and with Adrenalin we were able to provide just two deployments. We were able to centralize the functionality in two major locations for them, which also saved some obviously tremendous OpEx.

Great. Got it. That's it for me. Thank you.

Thanks Juan.

Thank you. [Operator Instructions] Our next question comes from Matthew Galinko from Sidoti.

Hey guys. Thanks for taking my question. Called out a win or achievement of all your dense advertising solution in North America. So I was just curious if that was the first major deployment you've had in the region and how you see that pipeline developing?

No it's not the first major deployment. No, it's within existing customers. They've now added on other capacities with our advertising solution.

I think the way to see it is our product continues to grow in relevance as we continue to support new functions and new needs of the marketplace.

Got you. And so do you see, not asking to provide specific guidance on it, but do you see opportunities through the balance of this year or next to push more of that into the North American region?

Absolutely, I think it's a good product and I think there are other opportunities with other customers, existing customers even with this product.

And I believe as we watch the various incarnations of OTT, advertising will play a major role in OTT.

Excellent. Thanks. That's all for me.

Thank you. At this time we have no further questions. I'll turn the call back over to Jay Samit for closing comments.

I would like to thank all of you for joining us today and for your continued support and interest in SeaChange. Have a great evening and enjoy your holiday weekend.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.