SeaChange International, Inc. (SEAC) Q3 2022 Earnings Call Transcript

SeaChange International, Inc. (NASDAQ: SEAC) Q3 2022 earnings call dated Dec. 14, 2021

Corporate Participants:

Peter D. Aquino — President & Chief Executive Officer

Christoph Klimmer — Senior Vice President & Chief Revenue Officer

Michael Prinn — Chief Financial Officer

Analysts:

Steven Frankel — Colliers Securities — Analyst

Rommel Dionisio — Aegis Capital Corp. — Analyst

Presentation:

Operator

Good afternoon and welcome to SeaChange’s Fiscal Third Quarter 2022 Conference Call for the period ended October 31, 2021. My name is Hillary and I will be your operator this afternoon. Joining us from the company is President and Chief Executive Officer, Peter Aquino; Chief Financial Officer, Michael Prinn; and Senior Vice President and Chief Revenue Officer, Chris Klimmer.

After the market close today, SeaChange issued its financial results for the fiscal third quarter in a press release, a copy of which is available in the Investors section of the company’s website at www.seachange.com. Before we begin today’s call, I would like everyone to please take note of the Safe Harbor paragraph that is included at the end of today’s press release. This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements that management will be making today.

As indicated, forward-looking statements are based on management’s current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks and uncertainties are also outlined in the company’s SEC filings, including its Annual Report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors.

Additionally, this call contains certain non-GAAP financial measures, as that term is defined by the SEC and Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, SeaChange has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company’s earnings release issued today. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of SeaChange’s website.

Now, I would like to turn the call over to SeaChange’s President and Chief Executive Officer, Peter Aquino. Sir, please proceed.

Peter D. Aquino — President & Chief Executive Officer

Thank you, Hillary. This is Peter Aquino, CEO of SEAC. Before we begin with our prepared remarks today and focus on the third quarter, I like to announce that we will not be addressing any rumors related to any SEAC transaction that is circulating in the news. I appreciate your consideration as it’s not appropriate for us to provide any commentary today. So, with that let me turn it over to the operator to begin our prepared remarks.

Good afternoon, my name is Peter Aquino and I’m the new President and CEO of SeaChange International. We had a solid third quarter and I consider a good marker for jumping-off point to reinvent SEAC for the long term. I’ve been a quick study here on the opportunities ahead of SeaChange, given my deep experience in Technology, Media and Telecom or TMT. In fact, I was a customer of SeaChange when I ran RCN from 2004 to 2010, more than a decade ago.

For nearly 30 years, SEAC has delivered cable TV back office support in VOD, pay-per-view and ad insertion and has a long-lasting core competency in delivering video and advertising software to the whose who global client base in cable, telco, satellite and now the exciting migration towards cloud-based streaming. As tailwinds and trend shift from linear to OTT, everything we do needs to be the best of both worlds. Our new roadmap not only includes software upgrades for our existing customer platforms and VOD and pay-per-view, but more importantly, leads us to double our efforts to leverage our capabilities to develop SaaS products for content and advertising in a growing TAM for both.

The good news for SEAC is that our opportunity goes well beyond North America. There are numerous use cases for our capabilities in content distribution and programmatic advertising. Through our experienced software engineering team, SEAC operations and motivated sales teams distributed worldwide, our pipeline of new deals is exponential. Our job is to get there one way or another, that is organically or by considering strategic initiatives. We are great partners and believe that we can accelerate our ability to capture future growth opportunities where others through scale.

Looking ahead, we have a head start with three new focus areas that are natural extensions of our traditional linear and ad insertion business, and I consider it less of a pivot and more of a lean in to the areas that we have significant upside. The three product areas are StreamVid, advertising rev shares on streaming in our new product that we call Xstream. First, StreamVid was launched this year and is expected to be a SaaS workhorse for us for years to come. Stream iL and Popcornflix are the first two examples of new logos that we recently closed. StreamVid is a white label offering whereby we package content into a customized app to be distributed everywhere on any device.

With StreamVid, we are SEAC inside. This allows specific customer content to be discovered, curated and consumed. Our team is now gearing up to sell this new service more rapidly and considering business segment targeting, including entertainment, healthcare and education. We currently offer a previous version of this software product to a major healthcare provider and expect to migrate everyone to the new StreamVid SaaS platform.

Second, we all know that advertising has a huge TAM globally and the more targeted it can be, the more valuable it can be to our clients. Ad selection and customization in the streaming world can maximize channel real estate and provide real-time data to our customers to monetize. We’re also shifting our business model to what I call Development Plus, meaning that, we will work with operators to develop the SaaS platform and also share in the upside through revenue share arrangements.

Historically, SeaChange would simply provide the hardware and software and be done. Now, we’re aiming to be — now we’re aiming to be part of the upside. Specifically, we closed our first revenue share deal with a large national satellite provider to test our ability to monetize advertising real estate within the lineup. We are very excited about this development with our partner and consider this to be a significant avenue for growth for SEAC down the road.

And last but not least is our newest product that we’re branding Xstream. This is a current capability that is being repurposed and aimed at the smart TV industry. The trend towards zero set-top boxes is here and advertising funding content or apps placed on any device lends its way to free advertising supported TV or fast channels. SEAC is uniquely qualified through our highly skilled software team to partner with content aggregators, who are already in discussion with smart TV players. We are being very proactive in this area and look forward to reporting back to you on our progress on Xstream.

So, at this point, let me turn it over to Chris, to give you some more examples of our product use cases and accomplishments in Q3. Chris?

Christoph Klimmer — Senior Vice President & Chief Revenue Officer

Thank you, Pete and good afternoon, everyone. I would like to spend the next several minutes providing an update on our progress in each of our business segments and on the significant market opportunities on the horizon. At a high level, I remain very encouraged with the advancement of our key sales and marketing initiatives that position SeaChange for long-term growth as a valuable player to the cable, streaming and ad tech spaces.

Starting first with our cable and operator TV business, which has always been one of our core competencies and remains a key driver of our future success. As many of you know, we have a long track record of delivering value to clients in this space, which include Tier 1 operators such as Verizon, AT&T and Liberty Global where we are deeply embedded in their operations. You may have seen our announcement in late November of our multi-million dollar contract renewal with one of the largest MSOs in the US, which provide high-margin recurring revenue over the next two years for the company. We have been working with this MSO for over a decade now, demonstrating the longtail of these business engagements.

Within cable, we are also working diligently to secure license upgrades, professional services projects and support extensions. These types of opportunities not only provide continued revenue, but also can help us streamline our efforts on costs to support various customer deployments, while we upgrade our footprint to the latest software versions. Within advertising, we are highly focused on securing meaningful market share in this massive multi-billion dollar TAM by being more than just a back office supplier, which we have been in the past and by allowing us to achieve more upside through revenue sharing arrangements.

We are seeing early signs of success in this market and new business model, as we recently picked up a new logo in advertising with BEAM, a cable and broadband provider serving Eastern Alabama. We were selected to replace its aging linear broadcast and insertion platform with our advanced ad platform, providing robust ad insertion capabilities for the cable TV business as well as providing a pathway for its Next Gen television streaming operations.

A very important development in our advertising business that I am incredibly excited about is the recent agreement with a nationwide US satellite operator for a long-term recurring revenue share deal. While it is too early in the roll out to discuss specifics of monetization expectation, this is the exact type of deal we aspire to accomplish more of going forward that leverages our capabilities and relationships to enter as a large TAM with a Tier 1 customer. We are encouraged with our progress converting customers to a new revenue model and look forward to executing similar deals that provide SeaChange with significant upside as we perform for our customers.

Now, moving onto streaming where there are two main points that I would like you to take away from this call. The first is that we’re seeing a lot of traction in the streaming market as content orders continue to go Direct-to-Consumer. We believe we have some of the best technology with a rapid cycle time that can allow the customer to quickly come to market and I’m proud to say that we have an outstanding pipeline of streaming enablement opportunities globally.

We recently entered into an agreement with a new streaming customer whose special interest SVOD service we expect to launch in late Q1 or early Q2 of our next fiscal year, with the exact launch date depending on the customer’s finalization of their content strategy. Second, I’d also like to point out the extension of our StreamVid product to now support access to gaming content. This product extension came at the request of a customer and turns StreamVid into a true multi-aggregation service platform that provides a unified immersive user experience for the discovery of all types of content, including third-party content such as games.

The customer, a large Middle Eastern telecom company, entered into a paid proof-of-concept agreement with us and we anticipate the customer the role the offering out to subscribers, resulting in a more material agreement with SeaChange. The creation of this product enhancement provide SeaChange with another valuable offering that we are starting to market and expect healthy demand as we demonstrate our capabilities.

The last thing I want to cover is a new opportunity we’re developing in the free advertising supported television segment or FAST. FAST is a consumer trend of replicating the traditional linear TV experience on connected smart TVs with personalized targeted advertising, which we believe creates a host of opportunities for a technology provider, such as SeaChange, where we can leverage our core competencies in streaming and advertising. Under the brand name Xstream, we are currently building an offering to target a concrete opportunity within the FAST market, while simultaneously having discussions with large players in this market, as we progress towards future monetization opportunities. We will keep you apprised of future updates as we expect finalizing our go-to-market offering in Q1 of our next fiscal year.

That concludes my prepared remarks. I’ll now turn the call over to Mike. Mike?

Michael Prinn — Chief Financial Officer

Thanks, Chris, and good afternoon, everyone. Turning to our financial results for the third quarter of fiscal 2022. Total revenue for fiscal Q3, 2022, was $7.2 million, an increase of 9% compared to the prior quarter and an increase of 44% compared to the same quarter last year. The sequential and year-over-year increase in total revenue was primarily driven by a material increase in product revenue, which was slightly offset by a decline in service revenue.

Product revenue for fiscal Q3, 2022 increased 30% to $3.5 million or 49% of total revenue compared to $2.7 million or 41% of total revenue in the prior quarter. Service revenue for fiscal Q3, 2022 decreased 5% to $3.6 million or 51% of total revenue compared to $3.8 million or 59% of total revenue in the prior quarter. Revenue from our international markets in fiscal Q3, 2022 was $3.0 million or 42% of total revenue, which compares to $2.8 million or 43% of total revenue in the prior quarter. Revenue in our US market for fiscal Q3, 2022 was $4.1 million or 58% of total revenue, which compares to $3.7 million or 57% of total revenue in the prior quarter.

Looking at our margins. Gross profit for fiscal Q3, 2022 was $3.7 million or 52% of total revenue compared to $4.1 million or 63% of total revenue in the prior quarter. Product gross margin for the fiscal third quarter of 2022 was 54% compared to 74% from the prior quarter. Product gross margin was impacted by substantial network extension project, which included our hardware component and professional services. Service gross margin was 60% compared to 55% from the prior quarter.

Looking at our expenses, non-GAAP operating expenses for the fiscal third quarter of 2022 decreased 6% to $5.1 million from $5.4 million in the prior quarter. They also decreased 23% compared to the third quarter of last year. We are pleased with the significant cost reductions we’ve achieved, which lowers the revenue needed to obtain a break even point and is a direct result of the efforts put forth in improving operating efficiencies.

GAAP loss from operations for fiscal Q3, 2022 totaled $2.0 million, an improvement of $0.5 million from the loss of $2.5 million in the prior quarter. As a percentage of total revenue, GAAP loss from operations for the third quarter of fiscal 2022 was negative 28%, which compares to negative 38% in the prior quarter. Non-GAAP loss from operations for fiscal Q3, 2022 totaled $1.4 million or loss of $0.03 per basic share, which is relatively consistent with the loss of $1.3 million or a loss of $0.03 per basic share in the prior quarter. As a percentage of total revenue, non-GAAP loss from operations was negative 19% compared to negative 20% in the prior quarter.

GAAP net loss for fiscal Q3, 2022 totaled $2.1 million, which compares to $0.2 million of net income or break even on a fully diluted share basis in the prior quarter. If you recall last quarter, we recorded a one-time non-cash $2.4 million gain on the forgiveness of our PPP loan. Non-GAAP net loss for fiscal Q3, 2022 totaled $1.5 million or a loss of $0.03 per basic share compared to a non-GAAP net income of $1.5 million, or a gain of $0.03 per fully diluted share in the prior quarter.

Turning to the balance sheet. At quarter-end, we had $17.6 million in cash and cash equivalents and no debt, which we believe, puts us in a strong financial position to execute our growth strategy the remainder of the fiscal year and beyond. This completes my financial summary. For a more detailed analysis of our financial results, please refer to today’s earnings release as well as our 10-Q, which we plan to file at the end of the day tomorrow.

I will turn it back to Pete now to wrap up before we move to Q&A. Pete?

Peter D. Aquino — President & Chief Executive Officer

Thanks, Mike. So, as I mentioned, we are exploring a variety of strategic alternatives and these will open doors for SEAC to gain scale and we hope to accelerate value creation for our shareholders with the — with these methods. There are two ways to grow, as you know, organically or inorganically, and we’re focused on both paths to accelerate growth. When we have something to share and report to our shareholders, we’ll do so.

So, I want to set up that before we take Q&A and Hillary, we’ll take some questions.

Questions and Answers:

 

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Steven Frankel of Colliers. Please proceed with your question.

Steven Frankel — Colliers Securities — Analyst

Good afternoon. I just want to try to triangulate between this quarter’s performance and the barge contract renewal that you announced a while ago. How much revenue from that agreement was recognized in the quarter and was most of that responsible for the uptick in maintenance that we saw?

Michael Prinn — Chief Financial Officer

Hey, Steve, it’s Mike. So, it was probably less than $500,000, so that contract was multi-million multi-year, but that one is — the entire contract is spread out over, I believe a two-year period.

Steven Frankel — Colliers Securities — Analyst

Okay. So, what accounted for the large uptick in maintenance sequentially?

Michael Prinn — Chief Financial Officer

That was one piece, but the other uptick was in kind of the hardware component in product revenue. So, that one was up significantly. Again, that when we touch on the call was a network infrastructure upgrade with a strategic customer. So, that was kind of a one-time third-party hardware pass-through.

Steven Frankel — Colliers Securities — Analyst

And I assume [Indecipherable], so that was third-party hardware?

Michael Prinn — Chief Financial Officer

Correct.

Steven Frankel — Colliers Securities — Analyst

And that in part would lead to the gross margin pressure?

Michael Prinn — Chief Financial Officer

Yeah, that’s why you saw I think a 50% something compared to 72%.

Steven Frankel — Colliers Securities — Analyst

Okay. And where is backlog? That was a number you guys were comfortable giving out in past quarters. Where is backlog at the end of Q3?

Michael Prinn — Chief Financial Officer

Yeah, there’s not much change, but I think we’re going to stop kind of reporting that on consistent basis. The backlog that we used to report was driven by kind of the framework business model that we had and as we kind of look forward and you think about some contracts that might be significant for us with the revenue share contract, there really isn’t anything to kind of put in backlog. So, we had around $25 million last quarter. It’s around the same, but I don’t think we’re going to kind of continue to give a detailed breakdown of that quarter by quarter.

Steven Frankel — Colliers Securities — Analyst

Okay. And in StreamVid, you said you’ve got at least one more customer that’s going to launch in the next couple of quarters and — and maybe a little more detail on the pipeline there.

Christoph Klimmer — Senior Vice President & Chief Revenue Officer

Steve, this is Chris. How are you? So, we’re building the pipeline towards StreamVid and Xstream. Those are two — our two focus points to, to build the pipeline right now. I’m very confident that we’ll convert a lot of these pipeline opportunities into deals over the next couple of quarters. The two that we have converted, a good deal, so they’re true SaaS deals, while the one is still, basically, has an opt-out for the customer after a proof-of-concept phase. The other one is a committed FAST deal. So, we’re really looking forward to not only generate additional recurring revenue from these deals, but also, as I said in the — in the remarks, to extend the product portfolio. So, that’s really exciting for us.

Steven Frankel — Colliers Securities — Analyst

Okay. And then [Speech Overlap] just a — sure.

Peter D. Aquino — President & Chief Executive Officer

I was going to answer your question, go ahead.

Steven Frankel — Colliers Securities — Analyst

I’d say from a philosophical standpoint, you guys have been graded cranking the expense structure down to preserve cash. But at some point I would think, if you have large opportunities in front of you and you believe you can grow this business, don’t you think you need to start to aggressively grow marketing and sales expense?

Peter D. Aquino — President & Chief Executive Officer

Yes, I basically was reading your mind because I was going to jump in with the transition, if you will, Steve from the legacy work that SeaChange would normally do in updating software for linear cable and spot advertising to more of a recurring model. And the guys frankly, had made a lot of progress even before I came and starting that move towards what I would call sustainable recurring business. And in the two areas that we’re really focused on not only — not only streaming but things that are streaming plus advertising like in the FAST channels are really an interesting spot for us.

If you think about the future of no set-top boxes, we have a really nice role to play with some of the players. So, yeah, if we can continue to grow, it would be more variable in nature because software development towards very specific customer needs and projects is going to be variable. So, I think we’ll float together probably the way you’re thinking about it and we should be talking less about hardware sales, if you will, and more about cloud-based deals that are really more strategic for our company and provide nice future. So again, I got here a quarter ago and I walked into a shop that was already pivoting if you will, or at least leaning into the things that they can do. I think with leadership and a little bit more of a vision of or a commitment towards those future products is all we really needed to do and the rest, like I said, is going to be incremental gains until we can figure out there’s something strategic to do to accelerate our scale.

Steven Frankel — Colliers Securities — Analyst

Okay, great. Thank you.

Operator

Our next question is from Rommel Dionisio of Aegis Capital. Please proceed with your question.

Rommel Dionisio — Aegis Capital Corp. — Analyst

Good afternoon and thanks for taking my question. So, just taking to the consumer comments in the commentary and the Q&A as well, I just wondered are you assuming sort of labor cost pressure or difficulty in hiring? It sounds like you guys are making that pivot from trim cost, streamline the infrastructure, comprehensive restructuring to growth mode and as you’re sort of making that transition, I just wondered if you’re seeing difficulty in hiring or labor cost pressure, any that obviously, in a somewhat tight labor market? Thank you.

Peter D. Aquino — President & Chief Executive Officer

This is Pete, Rommel. Nice to meet you. I just came back from Warsaw and the competition for highly skilled talent is there. The good news is we have a great team in place, has been in place for quite a while and we have a new CTO that we’re really proud of that has worked with us before. So, SeaChange has a lot to offer in terms of maintaining a great sales force and also giving them great projects to work on. The competition for talent and pricing is, is natural for all software development, especially out of Europe. But from our standpoint, we have a good team. It’s highly motivated and we have a good comp plan that we continue to monitor and make sure it’s market based and we look forward to really being very productive, especially out of our Poland team.

Rommel Dionisio — Aegis Capital Corp. — Analyst

Great. And congratulations on the quarter. You guys are doing a great job. Thanks.

Michael Prinn — Chief Financial Officer

Thanks, Romm.

Peter D. Aquino — President & Chief Executive Officer

Thank you.

Operator

Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Aquino for closing remarks.

Peter D. Aquino — President & Chief Executive Officer

Thank you, Hillary. We really appreciate your attention today and we look forward to providing updates as we go along. Thank you again, and have a great evening.

Operator

[Operator Closing Remarks]