Monica Gould - IR, The Blueshirt Group Steve Craddock - Chairman Ed Terino - CEO Tony Dias - SVP and CFO Tony Dolph - SVP Marketing

Steven Frankel - Dougherty & Company Jaeson Schmidt - Lake Street Capital Markets Mike Kampinsky - Noble Financial Hamed Khorsand - BWS Financial Matthew Galinko - Sidoti

Greetings and welcome to the SeaChange International Fiscal 2016 Fourth Quarter and Full Year Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I’d now like to turn the conference over to Monica Gould, Investor Relations for SeaChange. Please go ahead.

Thank you. Good afternoon, everyone and thank you for joining us. SeaChange released results for the fourth quarter of fiscal 2016 ended January 31, 2016 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 Steve Craddock, Chairman of the Board of Directors, Ed Terino, 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 Steve begins, I’d like to remind you that the information we’re about to discuss today may include forward-looking statements, which are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in our SEC filings, including our Annual Report on Form 10-K, which was filed on April 07, 2015. Any forward-looking statements should be considered in light of these factors. Additionally, this presentation contains certain non-GAAP or adjusted financial measures as defined by the SEC. We have provided reconciliation of these measures to the most directly comparable GAAP measures in tables attached to the Press Release. And with that I’d like to turn the call over to Steve for opening remarks.

Thank you, Monica. And thank you everyone for joining us today. Before we talk about the quarter, I wanted to take this opportunity discuss with you. Our announcement today that Ed Terino has been appointed Chief Executive Officer of SeaChange affective April the 06th, 2016. Ed succeeds Jay Samit, who was terminated without cause by the Board of Directors. On behalf of the Board, I wish Jay well in his future endeavors. I was recently elected Chairman of SeaChange’s Board. In the months that followed, we reviewed and stepped our progress related to the initiatives that Jay came to SeaChange to undertake, particularly our acquisition of Timeline Labs, which included NewCoin and our expansion into the over the top or OTT market. The Board came to the conclusion that we were not getting the financial results that we expected from many of these initiatives and that the capital required to continue to fund Timeline and NewCoin in 2016 would not be in the best interest of the shareholders. In addition, the Board determined that the opportunity for SeaChange in terms of revenue growth and profitability was much stronger with our core business. With Ed’s hiring in June of 2015, we are seeing excellent progress in SeaChange strengthening its market position and its core business through a newly developed product roadmap that includes product upgrades and new product innovations for 2016. Further, through the hiring of several key members of the leadership team, SeaChange is strengthening itself as a software Company and transitioning its core products to operate in a cloud environment. As a result of these developments, the Board determined that a change in leadership at this time was in the best interest of the shareholders, the customers, partners, and employees. For those of you who are not familiar with Ed Terino, Ed is a technology industry veteran who joined the Board of SeaChange in 2010. Last year Ed was also appointed the role of Chief Operating Officer and has been responsible for software development, sales and services, globally. Over the course of his career, Ed has had numerous senior executive positions predominantly in the software industry. He was previously CEO and CFO of Arlington Tankers, where in 2008 he led a strategic merger with General Maritime. Ed was also the CFO of three software companies, including Nordic Technology Group of self service application and software vendor that was later sold to Oracle, Atlex the CRM and business intelligence solutions provider that was acquired by IBM and Celery Solutions, an enterprise software company. Moreover, he served on the Board of Directors for software and technology companies including Extreme Networks, S1 Corporation, Phoenix Technologies Limited and EBT international. As a long time member of our Board, Ed is animally familiar with our business, our strategy, and our industry. And over the years, we have benefited significantly from his three decades of experience operating and growing a range of technology companies. Having worked closely with Ed for several years final first hand that his understanding of our business, the opportunities and the challenges, the second to none. I speak for the entire Board when I say he’s the ideal person to drive SeaChange’s strategic initiatives and growth plans at this time, and we’ve very pleased that he has agreed to take on this very important role. So with that, I’d like to turn the call over to Ed for some brief remarks. Ed?

Thank you, Steve. Good afternoon everyone, and thank you for joining the SeaChange call today. It’s been a true privilege to serve as a member of the Board, almost six years and as COO of the Company over the last nine months. Now, as CEO, I am excited to be able to complete improvements throughout the organization that will enable SeaChange to return to revenue growth and profitability. Since I joined SeaChange as COO, I have made my interaction with SeaChange customers globally, a top priority in order to better understand their requirements today and how SeaChange can better serve and support their future needs. Likewise, our customers are gaining a better understanding of the strategic value of SeaChange’s full product portfolio in development direction. As a result, our customers’ perception of SeaChange’s value proposition is clear. SeaChange is a market and technology leader empowering service providers and content owners to distribute their video on a massive scale to hundreds of thousands of assets to millions of subscribers with mission critical reliability. Overall, I’ve been encouraged by my engagement with our customers. Further, I believe the SeaChange has better technology than our competitors and we are better able to meet our customers’ current and future needs. Clearly, our number one challenge is execution. Based on my engagement with customers, it is no secret that the consumption of high quality video access, new vertical markets in mobile devices continues to explore. SeaChange is very well positioned to capitalize on this opportunity by enabling content owners and service providers, both inside and outside of our traditional markets to further monetize video assets through multiple delivery platforms and business models. With a linear broadcast, VOD, time shifted or OTT, SeaChange is today helping service providers and content owners, large and small, go to market with subscription, transactional and advertising base revenue models. Based on the exciting reality of anywhere anytime video consumption, our strategy for the Company is as follows, innovate new products to help our customers monetize their video assets. While we’re excited about some new products announcements that we are planning for this year, we will not be discussing these new products today, other than to say that we are planning one product announcement for June. Leverage our existing products by offering them to customers in a cloud environment. This will reduce our customers' cost of ownership while increasing their time to market or decreasing their time to market thus allowing SeaChange to pursue sales opportunities with service providers and content owners that are not able to put on premises offerings today. Broaden our customer base by winning new service providers and content owners on the strength of SeaChange's core competency in video back office, content management and advertising. Expand our business with our Rave cloud based OTT product offering which provides turnkey end to end solutions for content owners looking to monetize their video assets. Increase our penetration into existing customers with complementary products and new releases of our core products. Expand the use of partners including resellers and system integrators to enhance our market opportunities in geographies where we have limited sales coverage and in adjacent markets such as hospitality, education, government and healthcare where content owners are seeking to expand distribution and monetize their significant asset catalogues. I've also spent a significant amount of time with our global organization and operations. When I became COO last year we committed to a plan to become a better software company which means strengthening our product management capability and establishing product roadmaps that result in software development that generate innovative new products as well as new product releases that contain features and function enhancements for our installed customer base. It also means strengthening our solutions architecture capability and improving our professional services delivery model. We were also committed to leveraging our R&D investments to introduce more products while lowering development cost, improving time to market and enhancing quality. Our new products will help customers more effectively manage and monetize video content while helping to transition their video delivery infrastructure to the cloud. Overall we made significant progress on becoming a better software company in the second half of fiscal 2016. As we enter fiscal 2017 with product roadmaps and product release schedules established, we are shifting our focus to improving our go to market capabilities through improved marketing and sales execution. We're expanding our sales capability by building out an inside sales, lead -- a inside sales team to increase lead generation and help drive revenue growth along with hiring a dedicated OTT sales team. We're also enhancing our product marketing efforts and strengthening regional sales coverage for our core products in core markets. We expect it will take another quarter or two for these sales and marketing resources to ramp up. We expect to see a positive contribution from these efforts by the fourth quarter of fiscal 2017. We've also recruited several new senior management team members over the past nine months, to improve critical practices and customer focus, including product management, marketing, services and administration. I maintain the utmost confidence in the entire team's ability to drive our continued success and enhance the Company's leadership position. Also I've discovered that our employee talent pool runs deep and I clearly see that we have an opportunity to realize the potential of our team to amplify product innovation, optimize operational efficiency and improve our customer experience. The strategy and actions that I've outlined are intended to drive SeaChange’s intermediate term financial model that we are introducing today including attaining consistent double-digit year-over-year revenue growth in achieving double-digit operating margins. In summary we are targeting gross margins in the range of 63% to 65% with R&D in the range of 20% to 22%, sales and marketing in the 20% to 22% range and G&A expenses in the 10% to 11% range resulting in operating margins in the 10% to 13% range. In order to provide greater clarity on our business and how we'll achieve revenue growth in fiscal 2017, we will begin reporting our revenues in greater detail on a quarterly basis, beginning with our fiscal first quarter 2017 earnings call. Our plan is to present revenues and in some cases revenue bookings broken down by the following categories, product revenues, professional service revenues, nucleus revenues, cloud revenues, and support and maintenance revenues. With that I'll turn the call over to our CFO Tony Dias to walk you through our financial results and provide you our outlook for the quarter and full fiscal year. Tony, please go ahead.

Thank you, Ed. I'll start by reviewing our fourth quarter results before providing an outlook for the first quarter and full fiscal year 2017. For the fourth quarter fiscal 2016 total revenue is $27.2 million down 5% sequentially and below our revenue guidance due in part to delays in projects and postponed purchase decisions. During the fourth quarter we successfully completed the restructuring program we announced last year. We now goal to achieve annualized cost reductions of $11 million. This enabled us to increase gross margins while substantially reducing our operating expenses year-over-year. We believe these actions will contribute to SeaChange returning to profitability on full year basis in fiscal 2017. Product revenue was 5.6 million for the fourth quarter while 21% of the total revenue compared to 6.2 million in the prior quarter and 10.4 million in the year ago quarter. The decline in product revenue year-over-year was primarily driven by lower revenue from our legacy advertising and VOD server products and lower product revenue from a large European customer that was accepted during the fourth quarter of 2015. For the full fiscal 2016, legacy revenues declined by approximately 9.9 million from fiscal 2015 to 3.5 million. As we go forward we do not expect legacy revenues declines to adversely affect our revenue performance in the future. Service revenues totaled 21.6 million or 79% of the total revenue, a 4% decrease sequentially from 22.6 million and a 4% increase to the prior year quarter from 20.9 million. Maintenance revenues totaled 9.9 million in the fourth quarter or 36% of total revenues in the quarter compared to 10.7 million in the third quarter and 10.9 million in the prior year quarter. Professional services revenues totaled 11.7 million or 42% of total revenue compared to 11.8 million in the third quarter and 10 million in the prior year quarter. Sales to international customers accounted for 58% of total revenue in the fourth quarter or 15.8 million compared to 59% of 16.9 million in the third quarter and 56% or 17.5 million in the prior year quarter. We had one customer in the quarter which accounts for 35% of the total revenue. Our blended non-GAAP gross margins were 57% in the fourth quarter which were flat compared to the third quarter and 52% in the prior year quarter. Product gross margin was 78% in the fourth quarter compared to 75% in the third quarter and 74% in the prior year quarter. Service gross margins increased to 52% in the fourth quarter from 51% in the third quarter and 41% in the fourth quarter of last year. The increase in margins was driven by higher Nucleus Service revenues due to the higher utilization of Nucleus Service resources. Non-GAAP property expenses for the quarter decreased 3% sequentially to 15.5 million and were down 14% from 18 million a year ago due to lower headcount related costs. R&D expenses decreased to 28% of total revenue in the fourth quarter from 29% of total revenue in the third quarter and 33% a year ago. Over the course of fiscal 2017, we expect total operating expenses to continue to decrease as a percentage of revenue, primary driven by lower R&D and G&A expenses. In February 2016, we implemented cost saving options associated with our Timeline Lab operations. In addition with Jay Samit's termination, these actions will result in annual cost savings of approximately $7 million. We generated non-GAAP operating earnings of breakeven per share compared to earnings of $0.01 per diluted share in the third quarter of fiscal 2016 and up from a loss of $0.05 per basic share in the prior year quarter. We ended the year with cash and cash equivalents of approximately 71.1 million and no debt. We generate cash from continuing operations of $600,000 compared to cash usage of 1.2 million in the third quarter. For the full fiscal year, the cash decreased by 34.2 million of which 17.8 million was used for the acquisition of the ongoing operations of Timeline, 11.5 million for working capital needs, 3.2 million for severance and 1.4 million for capital expenditures. Without Timeline our cash burn from operations for the full-year would have been less than $1 million. DSOs numbers for the fourth quarter were 84 days up from 78 days in the third quarter. Now I'd like to turn to outlook for the first quarter and full fiscal year. We anticipate first quarter fiscal 2017 revenues to be in the range of 20 million to 22 million and non-GAAP operating results to be in the range of a loss of $0.18 per basic share to a loss of $0.26 per basic share. For the full-year, we expect revenues to be in the range 110 million to 120 million and non-GAAP operating income to be in the range of $0.05 to $0.15 per fully diluted share. Due to this cynical nature of our projected fiscal 2000 first quarter guidance, we expect our cash position to decline but for the full-year we expect to be cash flow positive. As I discussed, we introduced intermediate term goals that include obtaining consistent double-digit revenue growth and operating margins in the range of 10% to 13%. With that, I'll hand the call back to Monica. Thank you.

Thank you, Tony. Shira, could you give instructions for the question-and-answer session queue please.

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

I will start with a clarification I thought I heard in the opening remarks that part of the reason for Jay’s termination was the focus on the OTT market wasn’t paying off. But later in Ed’s comment, I heard multiple references to Rave. So where are we on the Rave business if still a core part of the go forward strategy and what is differently to try to get something out of those assets?

Well hi Steve, this is Ed. Let me just respond by saying that we do have a pipeline of Rave open these opportunities. We continue to build that pipeline we weren’t very successful in the past quarter and really winning any business. And we have well over a dozen OTT opportunities and we’re going to continue to pursue that market, we think that market has great potential. I think Steve’s comments were really related more to what we were doing with TLL in NewCoin and then we weren’t getting the kind of traction there that we expected. I think with respect to the OTT space, there is clearly a focus on what I consider large opportunities and not really a bottoms up go-to-market plan. And we are developing go-to-market plan that will allow us to really pursue many more opportunities in the OTT space. And as I said, we’re hiring a dedicated sales team we’re developing kind of sales tools, for the sales team will need. We’re developing a pipeline through lead generation and we expect that this business will be a growth part of our business in fiscal 2017.

Okay. So we should look forward to some progress in fiscal ’17 on that, that’s [Multiple Speakers].

Absolutely.

One of my many frustrations in following SeaChange over the last couple of years is Nucleus looks great on paper, but other than Liberty, you don’t have a lot to show for it. Could you give us an update on, first of all what’s going on at Liberty any material products during the quarter? And what expectation should we have or additional wins, but Nucleus especially in light of Comcast taking your software and licensing it to Cox & Shaw is there any revenue you can get from those customers?

Sure, this is great question. I will just tell you that, I have spent a significant amount of time working with our Nucleus business. As you may know, we had a lead person in that business who left our company and it required me to put more time in that business than I probably expected when I walked in the door. I think our opportunities with Nucleus are great. We have a very great opportunity with Liberty Global, we’re working with them on several different projects and our revenue outlook relative to Liberty Global continues to be strong. There are other opportunities, we’ve actually had another European company that we’ve been able to deliver a sort of first phase product that hopefully they will begin field testing in the next 30 days and we hope to launch, see that product launched for their customer base sometime this year. There are other big opportunities with respect to we have fairly significant in home opportunity within Asia-Pac operator and we also are looking to other ways to try to leverage our capabilities with Nucleus. All that being said, I want to be clear about the outlook here, there has been some sort of, I think misunderstanding about the level of license revenue that we will be able to drive from Nucleus. I don’t believe the Nucleus is going to be a huge license revenue generator for us. Some of the numbers that I have read in prior conference call scripts and prior earnings reports. I don’t think there is Liberty to blame for those numbers. I do think there is a lot of software development and non-recurring engineering work and there is license revenue to be realized. But it’s not at the magnitude of generating $3 to $5 per setup box, that is, the software is installed on it. So let me just stop there and see if you have a follow-up.

Well absolutely, so were we misled year both prior CEOs that was the contract terms that you had or has Liberty kind of changed its approach and to get rolled out, you’re going to have to go to more of the Comcast model, because I got to stop there, because it is significant.

So clearly, I don’t want to get into too many specifics about what our customers are doing. But I would say that there is a movement towards more internal development with our support that won’t result in licenses the way I think it’s been communicated previously.

So I guess now I struggle with how do you get to double-digit growth when that looks like your easiest path to growth, your double-digit growth kind of based on new products that you’re not talking about today that are delivered till later?

Well, I think the way we get to double-digit growth is becoming a better software company. SeaChange historically has been more of a services company. It hasn’t really taken on the behavior of creating roadmaps and building products and product releases and upgrades and going out and having not only its existing customers but new customers adopt these products. So I think what we’re focused on and if you look at our last year 10-K or even our more recent financials, you can see that there’s been this tremendous decline in revenues overall for the Company and all that decline is coming near our product revenue. And the reason our product revenue has declined is because we haven’t created enough either new products or enhancements to our existing products to generate more product revenues for us. So it's not a magic bullet with Nucleus, it's all of our products that we need to build out and sell as products to generate that double-digit revenue growth.

And let me just sneak in two quick one, so you talked in multiple conference calls about shifting Adrenalin to the cloud model and a change in pricing and trying to force the customers to adopt. Can you update us on the success or failure of that strategy?

Well, I haven’t talked about that in previous calls. This is my first call. But I think we have quite an exciting opportunity with our core products operating in the cloud. I think the way we go to market with this is we want our customers to have a choice. If they want to run, they are our products, in a public cloud, we want to be able to enable that. We think there is a lot of customers who can’t afford an on-premises installation of our products, but yet, would love to have the capabilities and the capacity our products offer. So, by providing both a public cloud or a private cloud solution, it gives customers a lot of choices. Certainly being in the cloud gives them a lot more flexibility to realize the benefit of enhancements and upgrades and that helps us in generating more license revenue.

And then just two quick financial ones, so I look at your guidance and have trouble bridging the deep loss in Q1 to the full year number. What changes materially as we go through the year? Operating expense dollars dropped significantly to make that bridge from the deep loss to profits for the year, or is it margin improvement on the gross margin level?

So, it's three things. We are going to achieve revenue growth as we go through the second through fourth quarters. We are going to improve margins by optimizing our cost of goods sold and we are going to reduce operating expenses by optimizing our operating expenses particularly in the area of R&D.

And then item last, DSOs continues to rise by my calculation they’re 122 days. Is this a terms issue or a collection issue?

Yes, 122 today’s includes an unbilled receivable less, if you exclude the unbilled our DSOs are closer to 84 days as I mentioned on the script. Yet, it is still the tie and I think we will optimize that and we have a couple of customers that we will make collections on that will decrease that DSO. And we expect that to improve over the year.

Steve, I would just add something and that is that again part of operational excellence is about managing working capital. And we’re going to try to improve the ways we manage working capital at SeaChange and obviously cash is king and we want to reduce our DSOs and we’re going to make every efforts to try to do that.

Thank you. Our next question comes from Jaeson Schmidt from Lake Street Capital Markets.

Just touching based on the full year guidance. Just curious what’s giving you confidence that things are going to really start picking up in the July quarter? Is it just that some of these purchase decisions that have been delayed, you have good visibility that those will start to kind of come to fruition later? Or can you just talk about your general confidence and your visibility for the year?

Sure. Well, the first thing is, as I said in my comments, we are coming into the year kind of short staff relative to our marketing and sales effort. And we’ve begun to obviously bring in resources and expand the resources we have in-effect improve our funnel and improve our pipeline. That being said, we do have a number of new product innovations as well as existing product programs to try to drive revenue growth. A couple would include, Axiom to Adrenalin migrations. So we have a legacy product. We still have a number of customers who are operating that product. We put a program in place late last year to try to drive some of those customers to migrate to our Adrenalin platform and we were successful in getting about a half dozen of those customers to adopt Adrenalin and implement Adrenalin. We have a number of other customers that we're currently working and we hope to be able to get more of those customers to migrate including a few sort of Tier 2, Tier 3 customers that may represent some nice revenue opportunity for us. That's one example. Another example is we have a really great advertising product that does linear ad insertion as well as bought ad insertion. We really haven't penetrated our Adrenalin customer base as fully as we would like. And we have a campaign to try to do that and drive more sort of adoption of our advertising product in our current Adrenalin customer base. Another example would be upgrades, historically the company has not really focused on product releases each year and it’s done a lot of the enhanced customers through statement of work activity. We're going to be announcing multiple releases for our Adrenalin product and we believe that customers will want to upgrade to those releases because of the feature and function set [technical difficulty] included. Most of the features and [technical difficulty] we're adding to Adrenalin are designed to drive revenues for the operators, so we think these are features that they'll want. We also have had some really great success with some asset management type products [technical difficulty] management type products that we’ve been getting traction in adjacent markets like Telco, and we think that we can broaden that marketing campaign and drive revenues for that product. So it's not any one thing, it’s really a whole bunch of things. And I think with the increase in resources in our marketing and sales organization we expect to see a much stronger second half than the first half.

Okay, that's helpful and regarding your comments on the execution issues, do you think it was mainly just you guys not having enough staff to go after the opportunities or do you think the sales strategy was incorrect in the past, can you just provide more color there.

Sure. It wasn't, I don't think it was either of those. I mean fundamentally SeaChange has operated as three separate companies. We did acquisitions over five years ago, we bought a European business, we bought a business in California, the Nucleus business and fundamentally these businesses were operated as separate standalone businesses. And we really were never able to leverage our organization globally. One example was technical support. Our Nucleus customers have not been able to call into our technical support organization in either Europe or in the United States to basically have -- address their issues, if they had any issues. So what we've done is we've created really one organization and we've created global leaders in that organization we have a global leader for services, we have a global leader for product management, we have a global leader for engineering. And by doing this we're able to leverage resources across the globe. I'll tell you today that two of our best solution architects in the company are in Europe with one of our major customers helping them to architect the next generation back office. So it's more a function of how to run an organization like a software company on a global basis.

Okay. And then last one from me and I'll jump back into queue. How should we think about a timeline to get to the target operating model?

As I said an intermediate timeline to me is two to three years, so that would be fiscal '18, fiscal '19 and hopefully sooner, meaning fiscal '18.

All right, thanks a lot guys.

Thank you, our next question comes from Mike Kampinsky from Noble Financial.

Thank you for taking the questions, I have a couple here. First of all can you talk about the changes in the revenue recognition model for Nucleus you know just a little bit of color on now how we are -- look at how you recognize revenues there?

So the Nucleus revenue model is predominantly a non-recurring engineering model, where we have a statement of work that are based on a scoping of requirements and a staffing of resources to deliver those requirements. I'll let Tony talk about how we recognize the revenue but generally every time a customer wants to get sort of a set of enhancements or wants to do a launch of a product there will be a statement of work created and that statement of work becomes the basis for revenue recognition.

And for revenue recognition we use the percentage of completion methodology, where in a percentage of completion methodology we estimate the number of hours it will take to complete that SOW of that milestones and then every quarter we track our actuals against that estimate, and depending how far along we are that's the percentage we recognize the revenue on that statement of work.

Does that answer your question?

It does, thank you, but then the question is, what then defines the opportunity with the likes of Liberty as it rolls out your products to all of their set tops. I mean obviously before we were thinking that it was going to be on a per set top box basis, but now it sounds like it's on a project type basis and they can roll it out to as many set tops they want. Am I missing something there?

Well, certainly I can't speak for how Liberty plans to roll out there in home gateway. I will tell you that a lot of these major Tier I operators have a real challenge to roll out 22 million set top boxes, and a lot of their customers are on legacy set top boxes. So I think [technical difficulty] related to the Comcast is if they've already rolled out about 20% of their subscribers into X1. So the answer -- it is true that most of the revenues will come from statements of work and project revenues. I think that there is a very robust pipeline of revenues on a project basis with that customer. And I think as long as we continue to deliver quality products in a timely manner, we'll have a good long-term relationship with that.

So how many FTEs do you have in sales and how many did you have a year earlier and where do you anticipate those numbers to go?

We had about 20 quota carrying people and we're going to try to double that number and probably get up to about 35, as we work through the year.

Okay and then in terms of R&D spending going forward in light of the new product initiatives any thoughts on that?

Well could you elaborate a little bit more?

Yes, we're just wondering you had mentioned that you're planning to announce new products one beginning in June and so forth. I was just wondering what your R&D spending might be for fiscal 2017 and going forward?

Well again, I think we said in our comments that we expect our R&D spending to go down as a percentage of our revenue. I think we did a great job of reducing it in fiscal 2016 and we expect to continue to see a trend down. You might say, well, how are you able to innovate new products while you’re reducing your R&D spending. And the answer is through really improvement in efficiency. I mentioned earlier about having global organizations, so you can leverage global resources. So we have development resources in Europe, in India, in Manila, in California and in Massachusetts. Now we're able to really leverage all those resources. By doing so, we get optimization of the resources and can actually develop the software for less money, less cost.

And just a couple of questions last, the SEC obviously has noticed a proposed rulemaking to give consumers more choices in set top boxes and I was just wondering, have you -- can you give us an update on where they stand on that proposed rulemaking and then also have you run the opportunity or whether or not you think it will actually hurt your business going forward, if this proposed rulemaking goes into effect?

Well I think that a lot of people have expressed concerned about this or anybody who is involved in delivering video through set top boxes. I think that the timeframe for this transition is not tomorrow, it's not this year, it’s not even in the next couple of years. So it's really a long-term change that will take place. And frankly, I think we're positioning ourselves to be in-effect set top box agnostic, we're positioning ourselves to be able to deliver our in-home gateway capabilities across multiple devices. So I think one of the things you'll be hearing about from us is that, we're actually looking to go beyond what we've been doing with Nucleus and RDK. We want to continue to support that. We want to continue to build that business, but we want to really look at the world that doesn't require a set top box in the future.

But you anticipate the cable operators cutting back on their budgets if this does go into effect that they might want to wait to see how, how they plan to put this into effect in their own systems, in other words that where it might be disruptive in the next couple of years before this -- through the implementation period?

No, not in all, I think in fact here are some many threats to the cable operators for alternative sources of video that they have to keep on investing and they will continue to keep in investing in their platforms to deliver competitive offerings to their customers to their subscribers. And I can tell you personally I am seeing that in a number of the customers that I visited.

And the last question is, do you guys still have a share repurchase authorization?

I believe we do not. It’s expired.

[Operator Instructions] Our next question comes from Hamed Khorsand from BWS Financial.

I guess the first thing is, what you haven't addressed is, why was there a shortfall in the quarter compared to the guidance that you gave, what was the execution dilemma in Q4?

It was a couple project delays and couple decisions on purchases, we just pushed out a couple quarters. That was the main reason. We didn’t lose anything.

Okay. As far as the -- this is the second CEO change, I mean is there a feel like you guys have lost just momentum in product development, we’re changing strategies every year and a half now. So I’m just trying to gauge if this strategy will work?

I wouldn’t say that we’re changing our strategy. I think our strategy all along has been to be a leading technology provider for monetizing video with our back office platform, our advertising platform. And we recently introduced our Raven TT platform. So I don’t think there is a significant change in the strategy going on. And frankly as I said in my comments, I believe, we have the best technology to meet our customers' needs relative to the massive amount of video assets, they want to deploy and the massive number of subscribers, they want to deploy them to and what we have seen is that a lot of our competitors cannot stand up platforms that will support what their customers want to do and we’re having success of going into those environments and replacing them And I won’t talk specifics, but I think that this is a really positive indicator for where we are able to move with the company.

Well, I mean Jay was talking about trying to monetize the products that you already have and now with the strategy changes to products -- developing new products and then obviously internal development and you already had Comcast come out last week and talk about streaming video TV service that looks like they’re just, they’ve internally developed that SeaChange doesn’t have. So there’s a lot of risk here as far as what kind of revenue opportunity is available to SeaChange and it looks like you guys have missed a lot of opportunity as well?

Again, I don’t think we said that we’re not succeeding or we’re not able to generate revenues. You said that we said we’re generating these new products. These new season products are complementary to our existing products. So our goal is to sell these products to our existing customers but also sell them on a standalone basis to new customers. So that’s not really a significant deviation of our strategy.

And last question, how comfortable are you guys with the guidance, how much, are you handicapping given that there could be push outs from customers as far as getting to profitability this year?

Well, I think --.

What the risk that is going to keep you up at night?

Well, again I think that, I look at the company today is a value play and a value proposition. And I think that we’ve been able to demonstrate that we can reduce our expenses. And if you really look at our results for fiscal 2016, we actually -- we’re not that far from profitability after you strip out a lot of the extraordinary types of items. For example timeline lapse. So I think as we enter the year, even if you look at a flat revenue performance year-over-year. I feel very confident that we’re going to be able to optimize expenses and achieve profitability.

Yes. I’m just trying to, I’m having difficult and a lot of investors going to have difficulty and believing that you can achieve growth given the new revenue model, you’re proposing for Nucleus. And the push out that you got in Q4 and the Q1 guidance, I mean you’re giving us a lot to believe and now you change up CEO that’s a lot for investors to digest in one day. Right?

I’m not proposing a new revenue model for Nucleus by the way. That’s the revenue model we’ve had and that’s the revenue model, we’ll continue to have.

Okay. Alright. That’s it for me. Thank you.

Thank you. Our next question comes from Matthew Galinko from Sidoti.

I guess the first one is, so with the new sales force push into sort of smaller OTT opportunities. Can you help me understand what singing a handful of those will do to your margins and is that consistent with and how you see your gross margin guidance evolving?

So I think the goal is to try to build a customer, a referencable customer base and demonstrate that we can actually outperformed competition related to our OTT offering. We feel very confident that it’s a superior offering. So the goal as we’ve gone out to market, one of our challenges has been we don’t have a lot of referencable account. So if we build from the bottom up, we actually believe that we can then position ourselves to pursue larger opportunities.

Got it. And so maybe on that topic. You mentioned that SeaChange has maybe have been overly focused on the high end of OTT opportunities. I’m assuming that push back is part of what you can hearing, but are your opportunities at the high end of the market lost at this point, or are customers still in evaluation mode?

No, there are several fairly sizeable deals that are still in the evaluation mode. It’s just that that isn’t really how you scale a business. And we need to build it from the bottom up and that’s what we’re going to do.

And can you talk to me, how you see the market size and how it shakes out between large, small, mid-size opportunities there in OTT?

I really don’t have that data available in terms of the market size.

Sure.

We have our SVP of marketing here who’s been actually focusing on our go to market, so I’ll let him address it.

Sure. So this is Tony Dolph speaking. I am not going to talk to the total size of the OTT marketplace. I think it's suffice to say that it's very large and that everyone from the largest operators, Telcos, MSOs are involved with initiatives here, But it's much broader than that. So when we look at the marketplace, we do see those large operators getting involved. We also see studios like Lionsgate or many others involved in this and it goes right through aggregators and smaller enterprises that are starting to bring specialized TV to audiences OTT. So, we think that there is a high, mid and relatively low level of users here. And we’re well positioned, we believe, to address many-many of those. We could certainly get into some more detail at a later day, but this is a broad opportunity.

I would add that it's hard to quantify it, because frankly there is so many undefined market opportunities. For example, I mentioned education and healthcare, and government, hospitality, there are a lot of organizations that have video assets that they want to distribute to a broader audience and also want to try to monetize. But that really hasn’t been totally quantified in the data that I’ve seen.

And then in terms of your revenue guidance for the year, can you give any more detail on how that shapes out between cloud and product?

Yes, as I said, we will break that down on our first quarter call. I mean it's something that we definitely want to provide more transparency and clarity into what our revenue breakdown is. But we’re not going to do that today.

Thank you [Operator Instructions]. Our next question is a follow up from Steven Frankel from Dougherty & Company.

I am going to beat the dead horse one more time. So, are you saying that all along the Liberty agreement was like Comcast and there was not a per set top box license fee that you were to realize?

I wouldn’t say all along. I would say that in the midst of the implementation and it was certainly I think before I joined the Company. I think there was a decision taken that more the development would be along the lines of how Comcast approach things.

And in the past quarter, have you done any follow on business like that with Liberty? Are they still spending money with you for enhancements for NRE work?

Yes, they are quite a lot.

Okay, it is what it is, not pretty. Thank you.

Thank you. At this time, we have no further questions. I will turn the call back over to Ed for closing comments.

Thank you. Well, everyone thanks for joining us today and for your continued support and interest in SeaChange. We’re looking forward to the opportunity to meeting some of you at upcoming events like the National Association of Broadcasters Conference in Las Vegas in two weeks. We will show some of our latest products and innovations and we can have a more thorough conversation. Have a great evening and good night.

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