SeaChange International, Inc. (NASDAQ:SEAC) Q3 2023 Earnings Call Transcript

SeaChange International, Inc. (NASDAQ:SEAC) Q3 2023 Earnings Call Transcript December 12, 2022

Operator: Good afternoon and welcome to SeaChange’s Fiscal Third Quarter 2023 Conference Call for the period ended October 31, 2022. My name is Shamali and I’ll be your operator this afternoon. Joining us from the company is Chairman and Chief Executive Officer, Peter D. Aquino; President, Chris Klimmer; and Chief Financial Officer, Kathleen Mosher. After the market closed 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 statement 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 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’d like to turn the call over to SeaChange’s Chairman and Chief Executive Officer, Peter D. Aquino. Sir, please proceed.

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Peter Aquino: Thank you, operator. Good afternoon, everyone. This is Peter Aquino, Chairman and CEO of SeaChange International and welcome to our third quarter call. Our momentum to strengthen our software platform continues and we are now hitting on all cylinders. Revenue growth was very strong, up 16% year-over-year and 13% sequentially. Profitability and cash generation continues as we record another quarter of positive EBITDA and increased our cash balance to nearly $15 million with no debt in the balance sheet. And our new SaaS and fast channel software products are now taking hold and producing incremental growth revenues now reflected in this quarter. Our transition towards providing our customers with streaming services and software to support their smart TV operating systems such as the project we announced last quarter would VIDAA in Hisense is clearly the momentum that we could build on.

All of this is now translating into improved financial performance for SeaChange resulting in double-digit revenue growth. We continue to leverage our embedded expertise in video and ad tech to power Over-the-Top services for all of our customers. Our rich history of supporting MSOs, telcos and content owners allows us to upsell many of our customers with IP-based services that ride increasingly advanced broadband networks, not only in the U.S., but around the globe. Streaming content over wireless or wireline is being powered by SeaChange in North and South America, Europe and EMEA. We are truly an international software company with the bulk of our 100-plus software engineers working out of our office in Warsaw, Poland and we’re so very proud of our team there, as well as all of our employees around the world.

Many of our customers in the hose of the video industry are depending on us to seamlessly enable their move to the streaming world, while we diligently support their large deployments of traditional VOD in that insertion. Our embedded core business produces great baseline of cash flow as we reinvest that same expert team into everything streaming for connected devices. This is our future. This quarter is a great example of the impact of our revenue composition shift towards growth products. For example, new stream VID sales to content owners and software development for VIDAA specifically, contributed towards our high value mix, accounting for over 70% of new sales this quarter. We are managing our go-to-market efforts to continue to sell growth products.

SaaS and streaming software products are not only high value in terms of expected multiples for these revenues, but tend to be more recurring in nature as well, which is a great business model. In addition, SeaChange’s progress and consistent revenue growth, while rightsizing our cost structure has been fueling better cash flow and this is exactly the profile that we’ve been striving for and we could do even better. Our effort to promote profitable organic growth continues to be job number one. Simultaneously, we continue to look for ways to be opportunistic to gain scale. We continue to explore strategic and transforming ideas, as well as commercial opportunities with players in our space. Market timing for M&A is very difficult for most at this time in this current environment but we will aim to be prepared when the opportunity to transact arises.

The good news that SeaChange changed a strong liquidity profile and a relevant video platform to sell and support this allows us to execute our organic program without much disruption. And as most would agree, the best time to discuss strategic alternatives and maximize values when the company is in a position of strength, along with improved capital markets. In the meantime, we have a large TAM and tailwinds in our favor for what SeaChange delivers and we aim to capture as many opportunities as possible to keep SeaChange moving in the right direction. So with that, let me pass the call over to our President, Chris Klimmer to take a deeper dive into our operations. Chris?

Chris Klimmer : Thank you, Pete, and good afternoon, everyone. Thanks for joining us today. Q3 was yet another strong quarter for SeaChange, as we continue to grow our top line and transition our business to a more sustainable level of profitability, while delivering increased value to our new and existing customers. During Q3, we continued to execute on our strategic growth plan centered around three main pillars. First, renewing and strengthening our long-term relationships with our existing base of longstanding TV operator customers, which has resulted in multiple long-term support renewals and several system upgrade bookings. Second, increasing our recurring revenue baseline with high-margin SaaS-based deals, and third, creating a new and extended product portfolio and services that can help our customers to maximize their returns across all TV and streaming channels, while also increasing end-user stickiness and engagement.

Since our last call in September and in line with our strategic growth plan, we have executed on numerous accomplishments, which I want to spend a couple of minutes highlighting. As we announced last week, SeaChange was selected by Fox Sports Mexico to power their next-generation streaming service with our comprehensive streaming enablement platform, StreamVid. We believe we won this deal as we have the best technology to support Fox Sports Mexico’s three key business objectives, which include, maximizing content monetization with flexible subscription packages and targeted advertising, retaining existing and acquiring new customers with the highest quality of service on all major device platforms, as well as increasing user engagement by improving user experience and simplifying content discovery.

For those of you are newer to our company, StreamVid is a cloud-based, Over-the-Top or OTT streaming enablement platform that provides content owners the ability to deliver unique, highly scalable and personalized streaming services and to handle rapid user growth. Our new partnership with Fox Sports Mexico serves as further validation of not only the growing need for a platform like StreamVid, but also of SeaChange’s unique capabilities in the market. This agreement with Fox Sports Mexico is a Software-as-a-Service engagement where SeaChange will benefit from FOX’s success in growing their viewership base and increasing their subscription and ad revenues. It therefore supports our strategy of growing higher margin and recurring revenues. Sticking with the topic of sports, we recently expanded our services agreement with Grupo TeleCable, the leading cable provider in Ecuador to help support the streaming of the FIFA World Cup event in Qatar.

Our cloud architected technology has proven to enable Grupo TV cable to support large increases in concurrent subscriber load and combines with our ability to enable an engaging sports experience with our flexible user interface. Lastly, we have completed a major development phase for VIDAA, the leading provider of operating systems for connected TVs in an ongoing project to help them build out their own dedicated streaming and free ad-supported streaming TV or FaaS services. As a result of completing this major phase, VIDAA can now launch the SeaChange-based streaming service on the millions of VIDAA powered connected TVs across the world, providing a premium experience for connected TV viewers and outstanding monetization options with SeaChange’s ad insertion service for targeted ad insertions across FaaS channels.

We expect VIDAA use of the SeaChange-based streaming service to be launched no later than Q1 with a potential impact to revenue as soon as Q4. Now looking ahead at the outlook and future growth opportunities for SeaChange. I’d like to point out two major organic growth catalysts we are focused on. The first catalyst is growth in the connected TV markets. As we’ve seen in recent trends, consumer eyeballs continue to shift towards streaming on connected devices and especially to the large screen. In this paradigm shift, there is growing demand for technology vendors like SeaChange that can help content owners realize their connected strategies and optimize their monetization opportunities. We believe our longstanding relationship with many Tier-1 operators as well as our growing international footprint with content owners, including positive reference cases make us an ideal partner for many of these players.

The second catalyst in mass advertising. In addition to the consumer shift towards streaming of connected TVs, we’ve also seen a trend in consumers shifting away from subscription-based business models to free ad-supported content. We believe that with our unique technology to help operators and content owners alike to protect existing and build incremental ad revenue streams, we are extremely well positioned to grow our market share in this growth sector of our industry. By extending our product and service portfolio for existing customer base and by winning new logos that adopt ad-based business models, we can begin to increase our market share and capitalize on this new growth sector, driven by changes in consumer preferences. That concludes my prepared remarks.

I’ll now turn the call over to our CFO, Kathy Mosher to cover the financials. Kathy?

Kathleen Mosher : Thanks, Chris, and good afternoon, everyone. Turning to our financial results for the third quarter of fiscal 2023, compared to the second quarter of fiscal 2023. Total revenue for fiscal Q3 2023 increased 13% to $8.3 million from $7.3 million in the prior quarter, driven by increases in service revenue. Product revenue for fiscal Q3 2023 decreased 27% to $2.2 million or 26% of total revenue, compared to $3 million or 41% of total revenue in the prior quarter. The decrease in product revenue was primarily due to decrease in licenses revenue. Service revenue for fiscal Q3 2023 increased 41% to $6.1 million or 74% of total revenue, compared to $4.3 million or 59% of total revenue in the prior quarter. The increase in service revenue was primarily due to an increase in professional services revenue driven by the acceptance of completed work by multiple customers.

Revenue from our international markets in fiscal Q3 2023 was $3.6 million or 44% of total revenue, which compares to $4.6 million or 63% of total revenue in the prior quarter. Revenue in our U.S. market for fiscal Q3 2023 was $4.6 million or 56% of total revenue, which compares to $2.7 million or 37% of total revenue in the prior quarter. Looking at our margins, gross profit for fiscal Q3 2023 was $5.2 million or 62% of total revenue, compared to $4.8 million or 65% of total revenue in the prior quarter. Product gross margin for the fiscal third quarter of 2023 was 26%, compared to 72% from the prior quarter due to a significant increase in the amount of third-party goods for several customers that typically carry a lower margin and brought down the average product to margin.

However, this was offset by strong service gross margins of 75%, compared to 60% from the prior quarter. Looking at our expenses, non-GAAP operating expenses for the fiscal third quarter of 2023 were $5 million, an increased from $4.8 million in the prior quarter. GAAP loss from operations for fiscal Q3 2023 totaled $3.7 million, compared to a $6.5 million loss in the prior quarter. Note, we recorded a noncash impairment loss on goodwill during the second and third quarters of $5.8 million and $3.3 million, respectively. Note that at quarter end, we no longer had any goodwill recorded on our balance sheet. As a percentage of total revenue, GAAP loss from operations for the third quarter of fiscal 2023 was negative 44%, which compares to negative 89% in the prior quarter.

Non-GAAP income from operations for fiscal Q3 2023 totaled $152,000 or breakeven per fully diluted share, an improvement compared to $11,000 or breakeven per fully diluted share in the prior quarter and our second consecutive quarter of positive non-GAAP income. As a percentage of total revenue, non-GAAP income from operations was 2%, compared to less than 1% in the prior quarter. GAAP net loss for fiscal Q3 2023 totaled $3.7 million or a loss of $0.07 per basic share. This was an improvement compared to a net loss of $6.5 million or a loss of $0.13 per basic share in the prior quarter. Non-GAAP net income for fiscal Q3 2023 totaled $134,000 or breakeven per fully diluted share, compared to a non-GAAP net income of $52,000 or breakeven per fully diluted share in the prior quarter.

Turning to our balance sheet. At quarter end, we had $14.5 million in cash and cash equivalents, which is an improvement, compared to $14.3 million at the end of the prior quarter. We continue to have no debt on our balance sheet. 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 by the end of the week. I will now turn the call over to Jeff Grampp from Gateway Investor Relations to moderate the question-and-answer session for presubmitted questions.

Jeff Grampp : Thank you, Kathy. This is Jeff Grampp of Gateway Group SeaChange’s Investor Relations advisors. I will now read out the top questions that we received at our firm from investors ahead of this call. The first question is with the stock price at this level for an extended period of time, much like many micro caps, what actions has the company taken with respect to NASDAQ?

Peter Aquino : Thanks, Jeff. First of all, I believe that the share price of the company doesn’t really reflect the assets or the strong financial and operating results that we discuss here today. And I am a real believer and I’ve been a buyer of the stock personally in the open market this year as I believe SeaChange is an attractive investment. But specific to the NASDAQ listing, we filed an application on December 6 to be listed on NASDAQ’s Capital Markets tier that better matches our peer group and this will have no practical effect on the trading of our stock. However, this will provide the company with a six month extension to get our stock price up through execution despite broader market conditions to meet NASDAQ lister requirements. This is exactly what a lot of micro caps are doing today as we speak. So as time progresses, we’ll provide regular updates as necessary to keep everybody informed. .

Jeff Grampp : Thank you, Pete. The next question is for Chris, which products or services do you expect to be the most meaningful revenue contributors for SeaChange looking ahead, understanding that the sales process can be somewhat lumpy?

Chris Klimmer : Thank you for this question. So, first I think that the performance over the past five or six quarters, where we have posted steady quarter-over-quarter top line growth, shows that we have been successful across all our key revenue streams, products and services alike and that we have diversified our revenue structure. This is true for our core operator business and our services business all the way to our new product lines that generate SaaS revenues for us. In terms of these products that we are very excited about here at SeaChange, I would start with StreamVid, our comprehensive streaming enablement platform that offers a multitude of options to attract viewers and monetize content. Another exciting market for us is free ad-supported streaming TV or FaaS where we can support operators, content owners and TV platform providers to provide streaming services and monetization capabilities through ad insertion.

Lastly, we should not forget about our ability to expand and deliver for our longstanding relationships with Tier-1 telcos. This market still delivers strong revenues and margins for us. Essential for us to build value and drive innovation across all of our product lines is our center of engineering excellence in Poland. You may remember that we have more than 100 full-time in-house video software engineers that help us to realize innovation along our tech roadmap and to accelerate the expansion of our product portfolio. For example, we have just recently filed two provisional patent applications for products that will enable our customers to further personalize the viewing experience on their platforms and to measure and stimulate engagements.

Thank you.

Jeff Grampp : Thank you, Chris. The last question we received is for Kathy. How should investors think about the company’s ability to grow revenue and achieve positive EBITDA?

Kathleen Mosher : Thanks, Jeff. We have been encouraged with our operational performance that has generated strong top line revenue growth, while our costs have remained relatively stable and more efficient during this timeframe, allowing us to generate positive EBITDA for two consecutive quarters. Further, we’ve been encouraged with our results year-to-date with revenue of $22.3 million, up 19% over the prior year period, while non-GAAP operating costs of $14.5 million has decreased 10% over the prior year period. We remain optimistic about our future revenue growth capabilities and do not expect our cost profile to change materially over the near and medium term and therefore feel good about our ability for an EBITDA breakeven or better outlook.

Jeff Grampp : Thank you, Kathy. This completes the pre-submitted Q&A session. I will now turn the call to the operator to continue the Q&A session for today’s listeners.

Q&A Session

Operator: And our first question comes from the line of Nehal Chokshi with Northland Capital. Please proceed with your question.

Nehal Chokshi: Yes. Congratulations on the solid results, sequential increase and free cash flow generation there. And the FOX Sports Mexico is a strong testament to the tantalizing opportunity that you talked about of subscription content moving towards advertising. Can you discuss the evolution of that deal? And the potential for that deal to replicate across other properties of Fox, as well?

Chris Klimmer : Thank you, Neal. Let me take this question. So essentially, the evolution of the deal is based on a very strong sales effort in the region. You may know that we have sales teams locally also in Latin America and the focus here, especially with selling the streaming platform and the services that the platform entail is to help content owners that have a premium content proposition to reach their subscribers directly to go direct to consumers with the full flexibility across all of the monetization models that are possible in streaming. Fox is a good example – Fox Sports Mexico is a good example that shows how our platform allows high-tech monetization model. They will go to market both in the subscription model, but also use our ad insertion capability.

And I think it’s a testament not only of our ability to be the great technology vendor to premium and Tier-1 media and content companies, but also to our ability to help that content to be monetized across business models, across platforms and eventually, hopefully also across territories.

Nehal Chokshi: So would you say that your Latin American team is the star of your overall sales team?

Peter Aquino : I think we have a very, very good global sales team. Latin America has shown very, very good results over the past couple of quarters. We believe that the market in Latin America is in a perfect state where more direct-to-consumer content propositions push to the market and with the good reference stations that we have there now with a good footprint with a strong sales team and of course, is our product, I think we’re in a very good position that we need to be successful in this market.

Nehal Chokshi: So, what’s the ability, you believe, to replicate the success in the Latin American market to other markets then?

Peter Aquino : So we do see some push in other markets as well. I just want to highlight the VIDAA engagement within revenue. So, VIDAA is also a global company, but the main operations in Europe and EMEA to be precise. So we have a very strong footprint across our main markets, which are Latin America and North America and EMEA. To replicate this particular engagement in Mexico to maybe on the sports bodies or sports it’s something that we’re actively working on right now and we hope to show first results in the sports sector over the next quarter or two.

Nehal Chokshi: Excellent. Thank you for taking my questions.

Peter Aquino : Thanks, Nehal.

Operator: Thank you. At this time, this concludes our question-and-answer session. If your question was not taken, please contact SeaChange’s IR team at seac@gatewayir.com. I would now like to turn the call back over to Mr. Aquino for his closing remarks.

Peter Aquino : Thank you, operator. Well, we appreciate your interest in SeaChange and look forward to our future communications. Have a great evening, everyone. Thank you.

Operator: And thank you for joining us today for SeaChange’s conference call. You may disconnect your lines. Thank you.