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

Hamed Khorsand - BWS Financial Steven Frankel - Dougherty

Greetings and welcome to SeaChange International's Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mary Conway, Investor Relations.

Thank you, Jeremy and good afternoon, everyone, thank you for joining us. SeaChange released results for the second quarter of fiscal 2019 ended July 31, 2018 today after the market closed. If you would like a copy of the release, you can access it on the IR section of our website at investors.seachange.com. With me on today's call are Ed Terino, Chief Executive Officer; and Peter Faubert, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before Ed begins, I would like to remind you that information we are about to discuss today may include forward-looking statements, which are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks are outlined in our SEC filings, including our Annual Report on Form 10-K, which was filed on April 16, 2018, and our most recent Form 10-Q, which was filed on June 11, 2018. Any forward-looking statements should be considered in light of these factors. Additionally, this presentation contains certain non-GAAP or adjusted financial measures as defined by the SEC. We have provided a reconciliation of these measures to the most directly comparable GAAP measures in the tables attached to the press release. And with that, I'd like to turn the call over to Ed for opening remarks.

Thank you, Mary, and good afternoon everyone. We are glad you could join our call this afternoon. Let me start by outlining what I will cover in today's call. First, I'll explain why we missed our expectations for Q2. As we shared in the preliminary results -- press release recently. Second, I want to share additional insights on key wins in the quarter as well as those that are expected in our fiscal Q3. Third, I will update you on our pipeline for the second half of fiscal 2019 including a summary of key opportunities that we believe will enable us to achieve significant revenue growth in the second half of fiscal 2019 compared to the first half of fiscal 2019. Let me state at the beginning that our pipeline remains very strong and that we remain confident about our long-term opportunities for revenue growth. And then fourth, I'll update you on some positive developments with our product roadmap that will also contribute to near-term revenue opportunities. So let me start with our Q2 results and why we missed our expectations. First, while we did close transactions with our core products in the service provider market segment, some transactions that we expected in Q2 did not happen during the quarter and were delayed. These delays resulted from customers moving more slowly on video platform investment decisions because there was little urgency to make an upgrade or expand their video platform and our customers opted to prioritize other investments outside of their video delivery ecosystems. Second, as we've broadened our product offering, we are pursuing market opportunities outside of our traditional service provider market segment including broadcasters and content owners, as well as wireless carriers and ISPs. In the second quarter we expected several multi-million dollar transactions to close in these new market segments with new customers, many of which were dependent on new channel partnerships as well. Unfortunately, we require more time and effort to close these transactions. While we've already closed some of these transactions, we expect the remainder to close in Q3. Third, we booked two transactions that were significant in terms of revenue but due to the timing of their closing late in Q2, we were unable to recognize any revenue from these transactions in Q2; these bookings will contribute to Q3 revenues. While we are obviously disappointed with our topline results this past quarter, we remain confident in the company strategy. As a reminder, this strategy is based on three areas of innovation; cloud-based deployments, mobility, and personalized video consumption targeted to service providers, content owners and mobile carriers using SaaS pricing. More importantly, we are seeing evidence in our pipeline that this strategy is gaining traction in the marketplace. Further, we believe that we have a number -- the number and size of opportunities required to increase sales, especially with our new cloud platform portfolio, PanoramiC, even if it takes a bit longer than we originally anticipated. More of these pipeline opportunities are based on SaaS pricing, so that will have some adverse impact on our immediate revenue recognition over the next several quarters. Given the delay in closing transactions in new markets through new partnerships, we will lower our full year revenue guidance as outlined in our press release which Peter will discuss shortly. We are also taking additional cost reduction actions to optimize cash and ensure that the company is cash flow positive on a revenue run rate on $17.5 million quarterly. In Q2 2019, we did record about $7.5 million of bookings where little of these bookings are reflected in our Q2 revenues. A few examples include; we were successful in booking a multi-million dollar transaction with a Tier 1 service provider in North America to update and refresh their spot advertising platform. We were successful in booking a new customer in Eastern Europe for a new video solution that they plan to offer to their network of Tier 3 and Tier 4 service providers. While this transaction is for an initial requirement to mobilization phase; if successful, this customer has the potential to generate an excess of $1 million of revenue over the next 6 to 12 months and more revenues beyond that. We also booked $1 million in advertising software and equipment with the Tier 1 Telco that needed to expand their advertising platform due to the growth of their advertising activity. With respect to transactions that were delayed during Q2, as I stated, we have already closed several of them in Q3. First, we have closed a transaction with a new customer that is a Tier 1 mobile carrier in Asia to provide a spot advertising solution for their OTT platform. We also have several deals, all in excess of $1 million that are expected to close in September; two of them with new logos. One is a PanoramiC platform with a mobile wireless carrier for an IPTV and OTT platform. And the other is for a similar IPTV and OTT platform for a large broadcaster. A third opportunity we expect to close in September is a multi-million dollar booking with a Tier 1 service provider for a new video platform. With respect to our pipeline, we continue to see a very solid list of revenue opportunities for the second half of fiscal 2019. Using the midpoint of our revised guidance and including the revenues we've already booked that we expect to recognize in the second half of fiscal 2019, we estimate that we need approximately $25 million of additional revenues to be booked and delivered in fiscal 2019. As we enter Q3, our total second half fiscal 2019 pipeline is greater than $100 million. We have identified a subset of this pipeline that we believe includes opportunities likely to close in Q3 and Q4 valued at more than $40 million. Included in the near-term pipeline a several seven-figure transactions with new and existing customers. While some of our second half pipeline opportunities are through partners for new customers, a majority are direct sales with existing customers for upgrades and expansions of their video platforms. This includes several SeaBridge and SeaContent upgrades, as well as several spot advertising upgrades. In addition, we expect Liberty Global will make additional purchase related to their one back office initiative in the second half of fiscal 2019. We also have several PanoramiC opportunities in the second half of fiscal 2019. I also want to note some trends we saw during the quarter that give me confidence about our long-term revenue growth. What we are seeing especially in terms of new customers is that first, our platform portfolio is very highly regarded as a natural solution that addresses customers pain points by bringing together all the elements they need. This advantage however, as I mentioned upfront in my comments, can also cause them to require lengthier proof-of-concept evaluations and thus longer sales processes than our previous solutions. We believe that once we have customers operational with our newer products, we will see an acceleration of the sales process from what we are experiencing today. Another trend that we have observed in the quarter is that we and our channel partners are firmly aligned on both pricing and overall go-to-market strategy for our video solutions, particularly PanoramiC. In addition, we solidified a number of technology alliances during the quarter and as we go-to-market with these partners, we can compete more aggressively and respond to customers end-to-end needs more completely. Regarding indirect sales, our strategy to leveraged channel and system integration partners is resulting in meaningful pipeline opportunities. As we become more successful in consummating [ph] transactions with these partners, this should lead to more market opportunities through these partner relationships. Now let me shift to our product roadmap. Our product roadmap continues to be based on three technology tenants; personalization, mobile delivery and cloud-based solutions. Next week we will be demonstrating products and hosting customers and prospective customers at the International Broadcasting Conference in Amsterdam, our biggest marketing event of the year. Following IBC, we will participate in the Liberty Global Technology Summit as a level one sponsor near Liberty's headquarters in Amsterdam. At IBC, we will be demonstrating innovations through our products in all three areas including spot advertising as part of our PanoramiC solution, and enhanced SeaContent solution that provides greater ability for personalized consumption of video assets, and an IPTV solution that utilizes Android TV for service providers. Further, we will demonstrate how we have transitioned our SeaBridge solution to the cloud. With respect to other product roadmap developments, PanoramiC is now available for general release, and we are planning to deliver PanoramiC operating in a SeaChange managed service environment by January of 2019. PanoramiC is a pivotal step forward embodying the SeaChange Seaflo [ph] portfolio of solutions linked together with complementary best to breed elements from trusted partners like ATEME, ATES Networks, Broadpeak and castLabs among others; and delivered on a platform as a service or pass basis. PanoramiC is a turnkey fully integrated delivery platform with a powerful set of standardized functionalities and multiple monetization models. Because PanoramiC is delivered as a platform, as a service; it generates revenues on a subscription basis, further transitioning to a subscription-based revenue model. We continue to anticipate that the impact from the launch of PanoramiC will begin to be reflected in the second half of fiscal 2019 with a fuller impact in fiscal 2020 and beyond. Other product roadmap developments include virtualizing our ad insertives [ph] for Sea ads, enabling customers to significantly reduce the cost of hardware for their spot advertising platform. We are now working on virtualizing ad splicers to significantly reduce hardware cost for this element of customers advertising platforms. These roadmap deliveries are creating Sea ad pipeline opportunities in the second half of fiscal 2019 and beyond. We have launched a new release of SeaBridge that provides current Adrenalin 6X customers with an improved capability related to time shift TV and network TV IR capabilities. We have a new version of our SeaContent planned for delivery in early 2019 that will provide customers with expanded meta-data enrichment capability along with an improved workflow user interface to enable customers to expand deployments of SeaContent throughout their organizations. In Q3 we are releasing a new version of Sea view that provides an improved user interface, as well as expanded capabilities related to Android TV for service providers. Lastly, before I hand the call over to Peter to review our financials, I want to briefly discuss some additional measures we are taking to improve our cost structure. As noted in the press release, we have implemented cost reduction initiatives that we anticipate will lower our annualized expenses by approximately $6 million when they are completed in Q3. Most of these reductions will come from streamlining and consolidating engineering, professional services, technical support, and general and administrative areas of the business; all locations will be affected by these reductions. Peter will share more details about the program but I want to underline our firm intention to regain operating profitability later this year. We remain confident in our strategy to drive long-term growth from the benefit of all of our shareholders, customers and employees. With that, I'll hand the call over to Peter.

Thank you, Ed. Good afternoon, everyone. I'll start by reviewing our second quarter results before providing you with an outlook for the third quarter and discussing our updated guidance for fiscal year 2019. We entered the second quarter of fiscal 2019 with $5 million in total backlog, excluding maintenance and support. We booked new business of $7.5 million during the quarter and ended the quarter with a backlog of $7.7 million. As Ed stated, we continue to have a strong pipeline with significant opportunities that we can realize this fiscal year, even if a little later than we have anticipated, and that provides us with the confidence that we will deliver revenue growth in the second half of fiscal 2019. Total revenue in the second quarter was $11.9 million compared to $17.2 million in the second quarter of the prior fiscal year. We had a number of deals with product deliverables that were delayed during this fiscal year's quarter, this resulted in lower product revenue compared to last year. We continue to work towards closing those transactions in Q3 of fiscal 2019. In addition, we continue to transition towards subscription deals and expect a number of these deals to close in the second half of this fiscal year. These deals although not contributing much to the top line for this fiscal year will increase our backlog as we exit this year and will result in more predictable recurring revenue stream in fiscal 2020 and going forward. Total product revenue was $1.5 million in the second quarter or 12% of total revenue, compared to $5 million in the year ago quarter or 29% of total revenue. Video platform software revenue was $0.5 million and accounted for 36% of total product revenue compared to $3.6 million or 71% of the total product revenue in the second quarter of last fiscal year. Total service revenue in the second quarter was $10.4 million or 88% of total revenue compared to $12.2 million or 71% of total revenue in the second quarter of last fiscal year. The decrease in services revenue was driven primarily by the delay in closing of new business in the second quarter this year. As expected, maintenance revenue contributed to the decline driven by further decommissioning of legacy hardware as well as the migration of subscribers off of our Axiom legacy video platform. We continue to see opportunities to upgrade our advertising customers from legacy hardware based advertising platforms to our next-generation virtualized advertising software. Video platform professional service revenue was $3.4 million compared to $3 million in the same quarter of last fiscal year. Maintenance revenue totaled $7 million or 59% of total revenue and 67% of total service revenue compared to $8.7 million or 51% of total revenue and 72% of total service revenue in the second quarter of last fiscal year. Revenue from international customers of $6.8 million in the second quarter represented 57% of total revenue compared to $10.2 million or 59% of total revenue in the prior year quarter. One customer comprised more than 10% of our total revenue in the second quarter of this fiscal year with Liberty Global contributing 19%. Excluding our non-GAAP charges in the second quarter of fiscal 2019, non-GAAP gross profit margin was 54% in the second quarter compared to 63% in the prior year quarter. The lower gross margin in Q2 fiscal 2019 were the results of product mix as fewer high margin software licenses were delivered during the quarter. In addition, with lower professional services revenue during the quarter, we saw the impact of fixed cost professional service resources pressuring service margins as well. We expect product mix and services utilization to normalize, and that our margins on a normalized basis will return to the low to mid-60% range in the back half of this fiscal year. Our non-GAAP product gross margin in the second quarter was 67% compared to 74% in the prior year quarter. The decline was driven by product revenue having more of a hardware component in this year versus more peer software licenses in the product deals in the prior year's quarter. Non-GAAP service gross margin in the second quarter was 53% compared to 59% in the prior year quarter. This decrease was driven by less revenue generated by the fixed cost resources that I mentioned earlier. Non-GAAP operating expenses in the second quarter were $12.9 million, up from $11.9 million in the same quarter of the prior year. Contributing to the higher expenses were ongoing investments in internal projects related to the adoption of new revenue recognition guidance, as well as the implementation of software to increase the efficiency of our coding processes. In addition, we have invested in marketing initiatives and we have increased our overall sales and marketing resources over the same quarter of last fiscal year. We will be implementing additional cost savings initiatives in the third quarter as I will describe momentarily with the goal of decreasing our quarterly non-GAAP operating expenses to below $12 million per quarter on a normal run rate basis. Post these cost savings initiatives and with the expected revenue growth in the second half of this fiscal year, we expect to return to profitability and positive cash flow by the fourth quarter of this fiscal year. Our non-GAAP operating loss of $0.18 per basic share compares to a non-GAAP operating loss of $0.03 per basic share in the second quarter of last fiscal year. Turning to our balance sheet, we ended the second quarter with cash and cash equivalent of approximately $35 million and no debt compared to approximately $49 million at the end of the first quarter of this fiscal year. As we enumerated in the preliminary results press release, the cash decrease in the past quarter was driven by funds used for operations during the quarter, onetime uses of cash related to the payment of bonuses relating to our performance in fiscal 2018, and cash paid for taxes in The Netherlands, as well as some unfavorable working capital fluctuations during the quarter. Deferred revenue of $8.5 million declined from $11.3 million as of April 30, 2018 driven primarily by continued delivery of maintenance and support contracts with customers. Days sales outstanding excluding unbilled receivables was 92 days at the end of the second quarter of this fiscal year compared to 111 days in the second quarter of last fiscal year. Including unbilled receivables, days sales outstanding totaled 132 days in the second quarter compared to 136 days in the second quarter of last fiscal year. Our unbilled receivables were $5.3 million in the second quarter of this fiscal year compared to $4.3 million in the second quarter of last fiscal year. The increase reflects professional services work delivered during the quarter for which customers were not yet billed. We have completed the evaluation of goodwill and other long-lived [ph] assets and have concluded that there is no impairment of those assets as of July 31, 2018. Looking ahead in fiscal 2019, we now expect that product revenue including SaaS revenue will contribute approximately 30% of total revenue for the year. We now expect maintenance revenue to be approximately 40% of total revenue in fiscal 2019. Lastly, we continue to expect professional services revenue to contribute approximately 30% of total revenue in fiscal 2019. Over the course of fiscal 2019, we expect a growing portion of our product and service bookings from the pipeline will be subscription-based business models. These opportunities represent large multi-year revenue opportunities as I've described, and they reflect a combination of direct deals, as well as those driven by SeaChange channel partners. By winning these opportunities we will significantly increase our backlog and recurring revenue going forward. At the same time, the mix of transactions between subscription and perpetual licenses could impact the timing of revenue recognition for products and services in the short-term. Before I discuss guidance, I want to share more details about the cost savings initiatives that we will implement in the third quarter of fiscal 2019. Overall, we anticipate this program will produce annualized cost savings of approximately $6 million when it is completed. The primary elements of the program are as Ed stated, staff reductions across all our functions and geographic areas, and we expect that it will be completed by the end of the third quarter returning us to profitability in the fourth quarter. Moving to our outlook for the third quarter and fiscal year 2019. Based on the first half results, the deals have slipped from Q2 as I've referenced, as well as our pipeline and other actions that we are taking, we anticipate that revenue for the third quarter of fiscal 2019 will be in the range of $16 million to $20 million, and that the non-GAAP operating results will be in the range of a loss from operations of $0.05 per basic share to operating income of $0.04 per fully diluted share. For the full year, we have updated our guidance and now anticipate that revenue will be in the range of $70 million to $75 million. As Ed stated, we have multiple large licensed revenue opportunities in our pipeline today, many of them SaaS or platform as a service, and a number of large deals that slipped from Q2 and are expected to close this month. In addition, our sales team has increased it's focus on what it needs to do to win these and similar opportunities in the back half of this fiscal year. I will remind you that our revised full year revenue expectations are supported by a subset of the total opportunities available to us. We are now anticipating non-GAAP operating loss in the range of a loss of $0.15 to $0.04 per basic share for the full year fiscal 2019. We are also focused on attaining operating profitability by year end once again. With that, I'll hand the call back to Mary. Thank you very much.

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

[Operator Instructions] Our first question comes from the line of Hamed Khorsand from BWS Financial.

So starting off, was there anything actually lost in between Q2 and Q3 as far as what you were hoping to land or is it just more of a timing issue?

Yes, there were some smaller deals that were lost but most of it was just delays.

And then, can you just clarify when you were talking about your OpEx this past quarter being high because of certain events, wouldn't that naturally meaning go to over $12 million; so one of these added on restructuring cost reductions reduced even further?

We were continuing to see the required investment in some projects that are taking longer to complete, those are winding down in Q3. So that will inherently reduce operating expenses but yes, the further costs savings initiatives that we'll implement in Q3 have the goal of taking the quarterly OpEx run rate below $12 million a quarter. And we expect to achieve that by the fourth quarter of this year.

And then on the full year guidance and if I look at what you did at the first half and the Q3 guidance, it implies that Q4 -- I guess a nice bump from Q3, what kind of clarity do you have that you can provide that kind of confidence in the Q4 number?

So historically we've always had very very strong Q4, we get two benefits in Q4, one is that as some of our customers are ending their fiscal year, they have excess budget money, especially CapEx money that they look to spend. But then, we also get the benefit that is enter the next fiscal year we close our year in January 31, we get the benefit of them spending some of their money that is budgeted for next year. I think the number would be in the mid-20s, certainly with some of the opportunities we have that are seven-figure deals, we feel that this is definitely achievable in the fourth quarter.

And my follow-up question is, has anything changed as far as the timing of these deals are inherently that needs you guys to change up how you assume these deals close as far as the timing basis? I mean, do we have another slip-up in Q3 or Q4, that's what I'm trying to understand, I mean has anything changed in the business due to that?

The way I would answer your question is, we're really going after different market segments. So we have our traditional market segment of service providers, and I would say in that market segment we have a lot more predictability, we know the customers better; and I think that that is an area where we feel confident that we can predict closure rates. With respect to some of the new market segments we're going after, as indicated in our comments as well as in the core second quarter, we thought we had a read on the timing and what the hurdles were and we just saw it stretch out for different reasons; some related to it being a new relationship for us with that customer, others where we had partners involved and the partner was a new partner to us, so that's just dragged it out. A third factor is there would -- maybe more hurdles to jump over around proof-of-concept, one deal we've already closed in Q3 was in Asia and we thought we closed the deal in Q2 but it ended up that we had to do a lab test environment to demonstrate to the customer how the software would work and we did that and we did get the deal but it didn't happen in Q2. So there are series of factors but what's clear is that when we're dealing with new logos, new market segments and some of the partners we work with, particularly channel partners, that is just taking longer for those reasons.

Our next question comes from the line of Steven Frankel from Dougherty.

Peter, maybe if I missed exactly what you said about professional services, gross margins in the back half of the year; kind of -- where do you think those are going to be? And why are they improving?

So Steve, just related to the revenue growth that we expect in the second half of the year and professional services; what we noticed in Q2 was that with lower revenue and the fixed costs that we still have in the professional services organization here, it did put pressure on margins during the second quarter but we expect with the revenue growth in the second half of the year those margins should be back upto the 30% to 35% range that we've seen historically.

I'm sorry, are you talking about the service gross margins? Does historically been in the -- okay, so -- but on a consolidated basis what does that mean for service gross margins -- back to the rates that you saw in the back half of last year?

Yes, so including maintenance and support which have very consistent margins in the 70% plus range, we should see those rates on a overall services basis returning to where they've historically been.

And then the follow-up on the prior question; I guess that the big unknown [ph] is your level of confidence that these deals that slipped can close this quarter as opposed to continuing to slip because you didn't talk about this transition to FAS also playing an element here and impacting the way the customer thinks about it. So why are you confident in the next two months that you can close a decent number of these transactions?

I think a big part of it is that there is revenue opportunity for the customer. I mentioned in my comments, some of our service providers, the deals that we have with them is not an immediate revenue benefit topline to them by upgrading their back office platform or that type of thing, there is with advertising. But in some of these new opportunities there is clearly a revenue benefit, so for example, one customer is basically implementing an IPTV and OTT platform to further penetrate their geography with content that they own that they distribute through broadcast channels. So with that revenue opportunity there is an incentive for them to make the investment and we believe that they will -- that particular case that they will decide to move forward with the project.

And is there anything that's changed competitively in the last 90 days?

Not that we can see. We did -- in a couple of situations [indiscernible] these were new logos, and tried to at the eleventh hour, certainly -- changed the decision but that didn't happen. So we aren't seeing -- I mean it's a very competitive marketplace and pricing is extraordinarily challenging in terms of competitive forces but we aren't seeing any competitors cleaning up so to speak in the marketplace.

And then in terms of Liberty, what kind of window do you have on their rate of license consumption and confidence level that they would come back to the well before the end of the year?

I think very high. We have dedicated resources servicing that customer and I think we have a pretty good visibility into their consumption pattern and we have obviously ongoing conversations with both the business people, as well as procurement people related to their plans for future deployments.

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

So thanks again for joining us this evening. While we've encountered some challenges in the past quarter, we are really pleased with the progress we've made in terms of launching an exciting and truly innovative solution portfolio, a brand new identity and a growing pipeline. We have adapted our sales and marketing approach to benefit our new products in markets including relationships we've developed with key partners in important geographies around the world. With all these elements in place including the additional cost reductions that we've discussed today, I'm confident that we can achieve improved top line and bottom line financial performance for the remainder of this fiscal year. Thanks to everyone for joining us today, and for your continued support and interest in SeaChange. Have a great evening.

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