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Executives

Bill Styslinger - President & Chief Executive Officer

Kevin Bisson - Chief Financial Officer

Yvette Kanouff - Chief Strategy Officer

Martha Schaefer - Director of Investor Relations

Analysts

Greg Mesniaeff - Needham & Co.

Chris Glancy - Associate Analyst

Todd Mitchell - Kaufman Brothers

Greg Mesniaeff - Needham & Co.

SeaChange International Inc. (SEAC) F2Q10 Earnings Call September 1, 2009 5:00 PM ET

Operator

Good afternoon. Eye name is Christian and I’ll be your conference operator today. At this time I’d like to welcome everyone to the second quarter fiscal year 2010 earnings conference call. All lines have been placed on mute to present any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

I’ll now turn the call over to your host Ms. Martha Schaefer, Director of Investor Relations. Madam you may begin.

Martha Schaefer

Thank you, Christian. Good afternoon everyone and thank you for joining us. SeaChange released results for the second quarter fiscal 2010 today at the market close. I apologize for the delay in the release we did have some logistical issues. In that release we gave further information concerning our acquisition of eventIS.

We also publicly distributed our prepared remarks with our earnings release and we’ll focus on your questions on this call today. If you do not have this material, please go to the Investor Relations page on our website www.schange.com to download both the release and the remarks.

I welcome your comments and suggestions related to the format of our earnings call and anything else we can do to improve our communications with you. As always I’d like to remind you that the information we’re about to discuss may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on current expectations, but 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 14, 2009 and a forward-looking statement should be considered in light of those factors.

Any redistribution, retransmission or rebroadcast of this presentation in any Form without the express written consent of SeaChange International is prohibited. Bill Styslinger our CEO and Chairman is in the Netherlands today with Erwin Van Dommelen of eventIS and joining us by phone, there maybe a slight delay I apologize in advance with the phone lines.

Here in action, we have Kevin Bisson, our CFO and Yvette Kanouff our Chief Strategy Officer and I guess Christian at this point I’d like to just open the call for Q-and-A. Could you give instructions again please?

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Greg Mesniaeff - Needham & Co.

Greg Mesniaeff - Needham & Co.

Can you give us some more color on the renewal of the licensing arrangement with Comcast in terms of which markets it covers or whether it’s, what the pace of refresh or deployment would be overtime?

Yvette Kanouff

The agreement that we have is for which is upgrade ability of all of their software across all of their systems at the corporate levels agreement that we have with them and so we typically go through what their plans are and work our releases in conjunction with them, so that they can release their software several times throughout the year.

Greg Mesniaeff - Needham & Co.

There’s no specific timetable set at this time? As far as which markets, get upgraded first and then followed by which other ones?

Yvette Kanouff

No, and it’s not specific to that in terms of our agreement either. They have full flexibility to do whatever markets they need for their corporate planning.

Operator

Your next question comes from Chris Glancy - Associate Analyst.

Chris Glancy - Associate Analyst

I was just wondering Verizon seems like it’s a pretty big opportunity for you guys obviously and I’m just trying to get a sense for as they built out their wireless network, at what point can we look to announcements from Verizon and where can we see you guys fitting into the process putting the VOD servers into their networks? I guess the question is at what point in their build out are you guys their putting your product?

Yvette Kanouff

Well, it’s a public information that we are a part of their video-on-demand network, and so we do have places where we have our software technology and our video server technology in their cites. As far as their detail of their rollout and correlating that to exact, what server is where, I mean Verizon just doesn’t do that. So that’s not any kind of level of detail that we publicly been able to talk about.

So I think as far as what, Verizon is comfortable with us saying, is that they are a customer, a large customer of ours and that we have software and hardware deployed that’s about as far as I think we are allowed to go with it.

Bill Styslinger

I think we’ve said in the past and continue to be. This year we received a number of large orders from Verizon and thus far the only software and hardware use of VOD is SeaChange.

Chris Glancy - Associate Analyst

Kind of switching gears here on the operating side for the first quarter, the Media Services segment. Gross margin is lower due to, looks like you guys were beefing up some headcount and developing some in-house video processing capabilities. When do you expect to see the benefits of those in-house capabilities? What kind of gross margins are we looking at going forward? Are we going to look at mid-teens like we’ve seen in recent history or can we go higher from there?

Bill Styslinger

Yes, I think we explained clearly over the last couple of quarters that our Media Services business unit has made a concerted effort to bring previously outsourced video production in-house primarily for the reasons you mentioned, which is margin expansion. We think we can do it lot cheaper, a lot better and also satisfy our customers better. That effort by and large was completed at the tail end of the second quarter.

So the release indicated today, we’re expecting margins to increase rather significantly in the second half of this year, and we believe the margins going forward can be at least as good if not better than what they have historically been at video services.

Chris Glancy - Associate Analyst

One last question and I’ll defer to someone else. The acquisition that you announced this morning, I don’t know too much about it. I haven’t really gotten through the entire press release, but just wondering is this a kind of a cost focus here, are there any product overlap or just an attempt to get into new geographic market altogether?

Yvette Kanouff

It’s certainly not only about the overlap on the geographic market expansion. I think that as we mentioned in the prepared remarks, there’s a great opportunity generally in Europe and eventIS is well positioned there. It does give us the local expertise that we need in order to expand in that market and that’s an important thing for us to maintain and keep strong there.

So we expect as that market grows that eventIS and SeaChange grow with it, but separate of that, there’s a lot of focus that we collectively have to put on the future enterprise level software for the three-screens. So as we deliver not just out of local networks, but out of regional networks and out of national networks to offer cell phone, video as well as PC video and television video, there’s a lot of work to do there.

So what we planned to do is really work together to be able to build this enterprise level software collectively not just with eventIS and SeaChange, but also using our investment in ZQ in China, our Mobix acquisition in London and our San Mateo Liberate’s facility and really build this whole three-screen enterprise level software. So there’s an element.

Actually I think, in the prepared remarks, there’s a link to a diagram that kind of shows all of the different building blocks to an end to end network and which ones we now have collectively with this acquisition of eventIS and that’s really the big picture that we’re looking at.

So, yes, it’s important for Europe, they’re well positioned in Europe. That’s a great opportunity for us and we look forward to expanding with that market expansion, but also the bigger picture of the strategic view of where we need to go. eventIS is a key part of that, no doubt.

Operator

Your next question comes from Todd Mitchell - Kaufman Brothers.

Todd Mitchell - Kaufman Brothers

I wonder if we can get some maybe more color on this eventIS acquisition. I can’t see your release. Forgive me if I’m asking the obvious, but it seems to me you speak of in the press release two things. The layer of software that they’re bringing to you and the idea that maybe it would be immediate advantage from deploying your servers with their existing customers where they’re going out with other servers.

So my first question is on this acquisition. How does the software components that they’re bringing to you differ from your existing one just in sort of core functionality spell it out for an kind of explanation, and the second is I guess would be how broadly are they deployed?

Can you give us some kind of information in terms of the number of VOD enabled households, is that eventIS has? I know that the German and Dutch market. I think those are how many deals. Can you give us just some more, show us what the ecosystem looks like right now?

Yvette Kanouff

Todd, I’m happy to do that and I think the first question first, which is how the software differs is really an excellent one. So I’m glad you asked it, because I think it is important to point out. You could at a high level say eventIS build software, SeaChange build software. So what’s the difference between the two and I think there’s a significant difference in that.

The European market is not the same as the market in the Americas and so we’ve been very successful here and we have great partners here. We have over a 100 integration that we’ve done in the various Americas markets. With companies like TV Guide, and GuideWorks and a lot of work in general with Gemstar, with Scientific-Atlanta, with Motorola, and so on.

We have very strong and good partnerships to build end-to-end systems for video-on-demand in all of the Americas. In Europe, those partners are very different and so the integrations would happen with companies like Nagra, like NDS, like Axel Springer, and it’s a different list of integrations. It’s a different amount of work. It’s a different amount of focus, and then of course there’s the different languages, and cultures country-to-country.

So I do think that even though at a high level software is here and software is there, it’s very focused on the regions and that’s why it’s really important for us to keep that focus and to keep them separate. So I hope that answers the first part of your question. Before I go to the second, is that what…?

Todd Mitchell - Kaufman Brothers

I guess so. My question is this a core kind of VOD back office platform?

Yvette Kanouff

Yes, it is.

Bill Styslinger

It’s also linear, which have been fresh point of view.

Todd Mitchell - Kaufman Brothers

Does it extend the functionality in any direction, where you are not currently?

Yvette Kanouff

Yes, very much. So the thing is in the European market because they’re based on DVB, the Digital Video Broadcasting open standards and the environment there is that there’s a software requirement in cable networks to take all of the information about programs and manage that, manipulate that, and offer that to the program guide that would be available on your television set or your set-top box and then that ties in with the video-on-demand programming information.

Together you can do really nice things like start over, network DVR, some of these great opportunities that exist, that are great revenue opportunities for us and great cost savings opportunities to the operator. So eventIS has taken it from that perspective, which is different from what we have had traditionally in the United States and so they do have a different product offering because of that linear tie end and a lot of Medidata management.

Bill Styslinger

Todd, I think that when you mentioned the Harmonic’s in Germany. I just have to point out that, when all is said and done the degree, particularly cable domination and with some success and more success starting in IPTV. It’s easier to pick up the countries that don’t dominate in Europe and there’s not many particularly big ones I mean they dominate Germany.

Todd Mitchell - Kaufman Brothers

So the key difference here is that there is a little bit more of it I don’t know how to describe it, but sort of it more of over the top integration there as opposed to closed end system here and this is a software platform not designed for that more so?

Kevin Bisson

We came from the point of view and modified our systems from the ingresses of asset design for VOD right and moved it on to application such as start over in touch. Their point of view is taking linear application and essentially looking at it from adding real-time VOD application.

Todd Mitchell - Kaufman Brothers

Then the second part of my question was really, so that’s great and strategic and I get that, but is there an opportunity kind of in the near term to take eventIS sort of book of business and start pitching deals with SeaChange servers and…?

Kevin Bisson

It’s already happening today has been a great day here in Europe.

Todd Mitchell - Kaufman Brothers

Is there anyway that you can now that the third part of this question is, can quantify that either in terms of a revenue opportunity on the server side or in terms of enabled household universe?

Kevin Bisson

We considered tonight actually listing out those accounts or countries by number of enabled subscribers and didn’t follow through and we don’t have the answer for you but we can do that.

Todd Mitchell - Kaufman Brothers

One last question and I’m sorry to go on and on, but is the dynamic in Europe is that you got a couple of fairly sophisticated platforms, I think like virgin on the cable side and then it’s basically still fairly in terms of rollout of enabled houses and the big competitors are telecom IPT ones?

Kevin Bisson

It’s true both telecom and cable right by and large compared to the US cable operators in terms of size and maybe virgin still at quite a logic in Europe. I mean the opportunities also in front of us for VOD growth in Europe and now the eventIS we get highly skilled developers, highly skilled technical support of inauguration how it skilled technical sales are inauguration. It’s just really exceptional set of skills into this software and account concentration.

Todd Mitchell - Kaufman Brothers

Your two kind of key competitors in that market is Microsoft and maybe Comcast.

Kevin Bisson

I hate to kick somebody when they are down, but I would say Comcast is not doing that well. There’s a few accounts that are dedicated to Microsoft, but I don’t see any expansion of Microsoft going on. The bad news is they want potentially future big accounts. The good news is they don’t seem to be getting too many accounts.

Todd Mitchell - Kaufman Brothers

I notice, I just initiated on you guys and this is a company that I came coming across thinking I don’t know anything about this company and who is this, so I think its probably a pretty good deal.

Kevin Bisson

We have plenty of competition, but if still.

Operator

Your next question comes from Greg Mesniaeff - Needham & Co.

Greg Mesniaeff - Needham & Co.

The first one is looking at eventIS could you describe any platforms that eventIS brings to the table that you can introduce into the US market, or is it primarily an acquisition designed for the European market?

Yvette Kanouff

Yes. I can actually. There’s one that really stands out, and that is, because eventIS has done so much development for the broadcast market, there is broadcast troubleshooting software or product I should say that they have built where they capture broadcast programs so that when something goes off air you can actually see what happened and evaluate the stream at that time to technically go back and troubleshoot what is it that made this program go off air.

That’s something that could be use anywhere in the world. We plan to really take a look at that package and immediately add it to our broadcast system sales. So there are things that we’re looking at that are just easy to add on to what we have including in the U.S.

Greg Mesniaeff - Needham & Co.

Then on the topic of diagnostic software, one of your competitors has for a long time had a platform that they have been using for audience measurement and data mining I guess of viewing patterns and behavior. My understanding is, you guys have been working on some similar platforms. Can you talk about that and tell us what you have been working on and perhaps or close to maybe launching in the U.S. market?

Yvette Kanouff

Two components actually: One of which is data mining and information storage, which goes into understanding what customer history exists. Then the second one being behavioral analysis and recommendation, so going through the data mining and being able to recommend to a subscriber what it is that they might be interested in based on certain characteristics of the content and how that maps to other content just like it combined with new way history of the subscriber.

So those are two areas that we spend very focused on that we think have a good future. As far as launching those, for obvious reasons a lot of interest in that throughout the world, not just in the United States. I think in general, people look at that. There are a lot of things that we have to be considered of with different countries for privacy laws and make sure that subscriber information is protected just to the subscriber, but that’s moving forward with a significant amount of interest, definitely.

Greg Mesniaeff - Needham & Co.

Is that an application that would ride on top of Axiom or that would be a standalone platform?

Yvette Kanouff

It rides on top of something, because it requires the data mining information and then what we’ve also done is integrated with third parties so that if there’s more information that’s outside of Axiom that we can integrate with that too. For example, again everything, think of the three-screen. If there’s information about web viewing of that customer or different things that they view on different platforms you want to tie all of that together.

So we do have Axiom based information as well as third party based information that would give recommendations and the real platform it rides on is your client, is your cell phone or your television set, and that’s where we look at the real platform where it sits.

Greg Mesniaeff - Needham & Co.

You mentioned the wireless device. Could you give us an update on Mobix?

Yvette Kanouff

I’m happy to or you can Bill, whichever?

Bill Styslinger

Mobix, I think we signed our first new kind of video-on-demand application for Mobix. We’re moving to a subscription service. We’ve add Mobix video lineup quite a few, more interesting assets from our relationships with the Hollywood studios, and we expect it’s gone slower than we expected, but we have a great deal of confidence in it and we see a pickup.

The other thing is that, Mobix has proven us to be not just a service for serve your telephones, but the technology there for us providing an integrated three-screen presentation is there also going to be very useful.

Yvette Kanouff

I’d like to just add one comment to what Bill said, and that is earlier we talked about eventIS and the importance of that to the strategy of SeaChange overall, not just the European market and the same applies for Mobix.

I think that there’s been so much activity with Mobix around the world and then various operators outside of the European market that whole three-screen vision of how to share offers and advertising, develop content with one common back office and multiple platform, is applicable in all of our markets. So hopefully from your perspective, you’re seeing how they all come together to one big large platform. It’s nice to see happen.

Operator

Your next question comes from Todd Mitchell - Kaufman Brothers

Todd Mitchell - Kaufman Brothers

Just a quick, I promise. In the three-screen integration, with models do you think is going to be faster to market and all you can eat Comcast providing you all three or do you think it’s going to be an integration from multiple providers in the same market?

Yvette Kanouff

It’s an interesting question. I mean, I wish I had the crystal ball as to what was going to win, but what I see is, that there’s different approaches that are taking hold in different markets at different rates. So in some cases, we have a big mobile subscriber base. We’re seeing things continue to stay somewhat separate in other market.

There’s much more aggressive behavior. I mean you look at markets like Canada, where operators have a history of having three-screen offerings. I mean that’s a wide open market to see great technology evolution in a really quick basis.

Then you see other market, which has been more focused on one of the three-screens where it’s moving a little bit slower, but from our standpoint we just don’t want to have to bet on one versus another. So we know that we have to have these very large enterprise level delivery networks and software management solutions and so whichever way is going to go. That’s what we’ve been focused.

Todd Mitchell - Kaufman Brothers

Is the content provider also going to be a component in driving the business model here?

Yvette Kanouff

I think, yes. They clearly have a big role and especially as the business models come together to your first question there as to how it’s going to work. Is it going to be all you can eat, can you share the content, can you really through it around from device-to-device, can you really pause it on one device and pick it’s up on another, if you bought it here, do you get to watch it on another one free because you now have ownership.

All of that involves rights management and the rights management is becoming so complex. I’m going to have to say that’s definitely a key part of it. So it’s nice that we’re close to that with our ODG business and continue to stay in close contact with this, but there’s so much changing there and with the evolution of over the top services and what’s going on with Houston and it’s interesting to watch.

Todd Mitchell - Kaufman Brothers

How do we get more visibility to watch it?

Yvette Kanouff

I mean, I think that the content providers are pretty open in comments and about what it is that their concerns are. I think they’ve also been very upfront about, what it is that they’re trying, they’re clearly talking about at events and speaking opportunities about the fact that there is a business model that comes out of this somewhat and we’re all building it.

How do advertisements fit in? There’s so much discussion about what could be, what might be, what’s being tested? I think if you continue to stay up with a lot of those presentations and events, I think that everybody is being very upfront about what’s going on, and that’s probably the best way.

Operator

Your final question comes from Greg Mesniaeff - Needham & Co.

Greg Mesniaeff - Needham & Co.

Just looking at your P&L for the quarter, it appears that OpEx levels are pretty much consistent to where they’ve been recently, and I remember on the last call or maybe the call before that, you were talking about off shoring some of your R&D efforts. I think to Eastern Europe and maybe some other places and I’m wondering if and when that will yield some OpEx reduction on OpEx levels, particularly, on the R&D side?

Kevin Bisson

What we see happening with our off shoring is building a lot of future applications that are potentially high risk at a low cost. Meaning that if we did them in the U.S. maybe cost $10 million and the uncertainty around what’s the revenue is and when the return is could be too high really actually to make that kind of investment. We feel, we’d like to have this quite broad picture that Yvette described earlier filled in.

What you are seeing about R&D this year, last year, and next year is roughly with the expansion of aggressive offshore facilities, which there are two large offshore facilities: One in Beijing and one in Manila. Beijing is 150 or 160 Software Engineers and I think the Manila one is up to about 100 Software Engineers and the Manila also has a substantial component of technical support, which operates a 12 hour shift oppositely basically U.S.12 hour shift.

So there are economies that are being gained here, but we’re not looking to sharply reduce the more expensive operations staff and so much as to redirect it to either fairly conservative development operations or leadership of the offshore operations. So what I think you can see is growth in revenue with minimum growth in R&D.

Operator

(Operator Instructions)

Bill Styslinger

Okay. I take it from the silence that we’ve exhausted the questions and I would like to thank you for dialing with us tonight. We probably didn’t do as well, because the advertisement business across the world hasn’t done as well as we’d like in our advertising related business is there in recession in broadcast and in hotels as well, but our core business of VOD is still going quite well.

I think we’ve added a substantial here with eventIS in a number of different ways. The atmosphere here in Europe VOD, that I am finding is quite good. So I think you’ll see in the second half a much stronger performance. I look forward talking to you about it in 90 days. Thank you very much.

Operator

Ladies and gentlemen, this does conclude the second quarter fiscal year 2010 earnings conference call. You may now disconnect.

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Source: SeaChange International Inc. F2Q10 (Qtr End 31/07/09) Earnings Call Transcript
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