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SeaChange International, Inc. (NASDAQ:SEAC)

Q1 2015 Results Earnings Conference Call

June 05, 2014 05:00 PM ET

Executives

Monica Gould - MD, The Blueshirt Group LLC

Raghu Rau - Chief Executive Officer

Tony Dias - Chief Financial Officer

Analysts

Mike Kupinski - Noble Financial

Todd Mitchell - Brean Capital

Steven Frankel - Dougherty & Company

Beth Lilly - GAMCO Investors

Operator

Greetings, ladies and gentlemen. And welcome to the SeaChange International Fiscal 2015 First Quarter Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Ms. Monica Gould, Thank you, Ms. Gould. You may begin.

Monica Gould

Thank you, Jane. Good afternoon, everyone, and thank you for joining us. SeaChange released results for the first quarter of fiscal 2015, ended April 30, 2014, today after the market close. If you would like a copy of the release, you can access it on the IR section of our Web site at www.schange.com/ir.

With me on today’s call are Raghu Rau, Chief Executive Officer; and Tony Dias, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before Raghu begins, I’d like to remind you that the information we’re about to discuss today may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements 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 4, 2014. Any forward-looking statement should be considered in light of these factors.

Additionally, this presentation contains certain non-GAAP or adjusted financial measures as defined by the SEC. Per SEC requirements, we have provided a reconciliation of these measures to the most directly comparable GAAP measures in tables attached to the press release.

Any redistribution, retransmission or rebroadcast of this presentation in any form without the expressed written consent of SeaChange International is prohibited.

And with that, I’d like to turn the call over to Raghu.

Raghu Rau

Thank you, Monica, and good afternoon everyone. Welcome to the SeaChange earnings call for the first quarter of fiscal 2015. On today’s call, we will review our first quarter performance, provide an update on our recent traction and discuss our outlook for the remainder of fiscal 2015.

During the first quarter SeaChange recorded revenue of 24.3 million down 32% from the fourth quarter of fiscal 2014 led by a 49% decline in product revenue. Due to lower sales volumes and increased investments in R&D we generated a non-GAAP operating loss of $0.22 per basic share. Our first quarter results reflect the short term challenges that we outlined on our fourth quarter fiscal 2014 earnings conference call. We have included significant declines in legacy product revenues, delays in receiving timely customer acceptances for new products and push out of anticipated orders.

In addition we continue to invest in R&D to further enhance our next generation software product to support new and existing customer requirements these investments along with lower sales volumes have impacted near term profitability. We believe that these investments will create long-term value by strengthening our next generation products and increasing our market opportunity. However, we are taking actions to reduce our discretionary costs and incremental costs related to the roll out of some large development projects.

Our increased R&D efforts are focused primarily on further enhancing Nucleus to extend our leading position and stand as best video gateway software and offer substantial capability features and functionality above and beyond the industry Reference Design Kit.

We have already delivered over 1,000 features in Nucleus which are currently in field trials with live subscribers and have a roadmap of several hundred additional features that we will introduce over the coming quarters. Let me briefly describe some of the key features that differentiate Nucleus from vanilla RDK solutions.

First, Nucleus supports all of the major system on a chip vendors including Broadcom, STMicro and Intel. Similarly Nucleus is integrated with all major conditional access vendors including, Nagra, Irdeto Verimatrix and CableCARD. Importantly, Nucleus includes an application framework for launching and integrating third-party applications and guides. Nucleus enables localization for Europe, Japan, the U.S. and South America and is designed to work with multiple languages. Nucleus enables fast channel changes by utilizing multiple tuners in the set-top box to offer a substantial improvement in performance.

Other key features include parental controls and personalization including bookmarks, user profiles and recommendations as well as home network connectivity, power management, cloud-based scheduling and many more.

Now, I would like to review some of our recent progress with respect to acceptances and additional design wins. Despite our near term challenges, we have made noteworthy headway on a number of fronts, specifically during the first quarter, we received acceptance related to Adrenalin from two service providers that was previously delayed.

Since the end of the first quarter, we have begun to receive orders from three large U.S. service providers that were anticipated earlier. Moreover, we anticipate the first commercial deployment of Nucleus by a large multi-country service provider in the second half of fiscal 2015. We also achieved an additional design win with this customer for both Nucleus and Adrenalin as part of the service provider’s plan to enhance its offering in a second European country. In addition, our next generation products continue to generate significant interest from service providers globally.

Over the last several weeks, we attended two major trade shows, the Cable Show in Los Angeles at the end of April and ANGA COM in Germany at the end of May. During the course of these events, we demonstrated our solutions to 30 service providers in the cable, telco and satellite sectors globally.

In Los Angeles, more than half of our meetings were with providers from outside the U.S. In addition, we hosted large tour groups from Japan’s Cable TV Association and the RDK’s service provider tour.

Our discussions included senior level representatives from corporate management along with video engineering and advertising operations management. Combined, these service providers represent more than 80 million subscribers globally.

Our demonstrations featured our latest Nucleus video gateway software Nitro multi-screen user experience, Adrenalin multi-screen television platform and Infusion advanced advertising platform as well as our recently introduced Cloud Adrenalin SaaS offering. Cloud Adrenalin offers a robust echosystem of three integrated partners including content providers which enable the service provider -- which enable the service to be plug-and-play thereby easing integration requirements and reducing time to market.

Our service offering is targeted at Tier-2 and smaller service providers and is currently being evaluated by Algar Telecom in Brazil. This is a first of several parties that have expressed interest in our cloud offering which provides some compelling video experiences.

Become await from these recent trade shows very encouraged about the opportunities before us and the strength of our next generation product portfolio. Based on these discussions and the progress we have made since our fourth quarter earnings report, we anticipate sequential revenue growth and improvement in our profitability in each of the remaining quarters of fiscal 2015.

I will now turn the call over to Tony to walk you through some of the financial details of the quarter and provide more specific guidance on our outlook for the second quarter and full fiscal year. Tony, please go ahead.

Tony Dias

Thank you, Raghu. I will start by going over the first quarter results before providing an outlook for the second quarter and full fiscal year. For the first quarter fiscal 2015, total revenues declined 32% sequentially driven by delays in customer acceptances and push outs of expected orders along with legacy product declines. As a result total product revenue in the first quarter decreased 49% sequentially to $5.1 million with new products accounting for approximately 55% of total product revenue.

Service revenues declined 25% sequentially to $19.3 million in the first quarter and account for 79% of total revenue. We recorded very strong service revenue in the fourth quarter due to an acceptance we have received on large systems integration project that did not occur in the first quarter. Maintenance revenues remain steady on an absolute level but increased as a percentage of service revenue.

Our blended gross margins decreased to 46% on a non-GAAP basis from 51% in the fourth quarter reflecting the lower mix of product revenue in the quarter. Non-GAAP operating expenses rose sequentially from 17.3 million to 18.4 million reflecting our increased investments in R&D in support of new and existing customers that Raghu mentioned earlier.

We generate non-GAAP operating loss of $0.22 per basic share compared to operating income of $0.02 per diluted share in the fourth quarter. International sales rose, international sales accounted for 45% of total revenues in the first quarter compared to 60% in the fourth quarter. Our balance sheet continues to be very strong, we closed the quarter with cash balance of 116.6 million. During the first quarter we utilized 3.5 million in cash to repurchase 339,400 shares of our common stock under our $25 million stock buyback authorization. Last week the Board increased the stock buyback authorization to 40 million and extended the plan termination date from January 31, 2015 to April 30, 2015.

Now I would like to turn to the outlook for the second quarter and full fiscal 2015. We anticipate the second quarter revenue will be in the range of $26 million to $30 million, and non-GAAP operating loss to be in a range of $0.10 to $0.20. For the full year we anticipate revenues in the range of $125 million to $135 million and non-GAAP operating results to be in the range of a net loss of $0.12 per basic share at the lower end of our revenue range to net income of fully diluted share basis of $0.10 per share at the high end.

Due to our net operating losses we do not expect to be a cash payer domestically for the remainder of the full fiscal year. Thank you. With that I’d like to turn the call back to Monica.

Monica Gould

Thank you, Tony. Jane could you please provide instructions for the Q&A session?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Mike Kupinski with Noble [Financials]. Please proceed with your questions.

Mike Kupinski - Noble Financial

Hi, thanks for taking the questions. So, a couple of questions here I guess if you look at the latest results, the impact it questions the ability of the company to deliver on it double-digit revenue and cash flow growth potential. Are you changing your outlook in terms of fiscal -- you (inaudible) year three of transition that you can deliver on double-digit revenue cash flow growth? And then I guess the question is that, it seems like you’re getting a lot of the design wins and things are starting to happen but we haven’t seen like the revenues are flowing and I was wondering are you seeing pricing pressure or what are the -- are there other things that work here other than just getting the design wins and things like that?

Raghu Rau

Right. To answer the first part of your question, no, our long-term business model remains unchanged. We believe that after this transition is over and we’ve -- these three new products that we have launched and deployed and adoption takes place, we can still achieve the long-term model that we talked earlier about which is, 15% operating earnings as well as double digit unit growth.

One of the things as you know in terms of Nucleus, the revenues happen after adoption. When these -- even though we have these design wins, most of what we are able to recognize today is restricted to the services component of the revenues related to customization and special features that may be required by a particular operator.

However, as these -- as Nucleus roles in the set top boxes to the homes of the operator, that’s when we get some additional licensing revenues and that will go on for an extended period of time. What we are pleased about is the fact that besides the first country, the second country is now going to be launched with -- in a Nucleus. And so that gives us some encouragement that there is some long-term opportunity here besides some of the other design wins that we’ve previously announced.

In terms of the pricing pressure, no there is -- we haven’t seen any particular pricing pressure, there is always a pressure, but that’s primarily related to the budgets that the operators have. And so we have to work with the budget that they have. And so that’s really the issue, it’s not that the competitive pressures that we are seeing from any of our competitors.

Mike Kupinski - Noble Financial

And in terms of the Nucleus, it seems like the hope is that your lead times will kind of shorten I guess as companies roll out or you start rolling out the products in Europe and so forth, if the lead times become a little bit shorter and that margin improves specifically as you already have so many hundreds of thousands of different feature set running on the product already but you don’t have to go through this for the next design win and so forth. What are the prospects that you can start getting a little bit visibility that maybe these new design wins are taking all the feature sets that are already developed and maybe the customization work and the lead times to roll out and deploy are actually shortening?

Raghu Rau

Yes. In the first case, with one of our large customers for Nucleus, the requirements were more than 2,000 features, and we received, we signed the contract sometime in around end of January 2013, and it’s taken -- as I said, in the second half of this year it is going to be commercially deployed. So it has taken an extended period of time and we did -- we can work even before signing of the final contract. So that has been an extended period of time. We have delivered as I said more than a 1,000 features. We still will deliver as we go along even more features. And those -- that feature set is in fact being reused by another potential large operator. And so we believe, we have a really good opportunity to be selected by them too and that will reduce the time between launch.

However, these are different countries and each country has some customization. So it’s not going to come to down to couple of months, it will still be between maybe 6 to 10 months before we launch another major operator, based on that customization and country requirement, but it will be definitely lower than before.

Mike Kupinski - Noble Financial

Thank you for answering. And then I have one other question, in terms of -- I am pleased that you actually increased your share repurchase authorization and I was just wondering that I was kind of hoping that maybe would go a little bit farther than the 40 million but certainly that’s a step in the right direction. What would be the reason why you wouldn’t buy back even more stock especially given the results, it looks like you have a little weak with stock today -- tomorrow, are you still looking at potential acquisitions to hold in feature set for a fiscal capabilities or what are the uses of cash outside of the stock repurchases at this point and the investments that you are currently already anticipate making?

Raghu Rau

Right. We don’t anticipate making any large bet the company kind of acquisitions. However, we are looking at some small tuck-in acquisitions. We’ve also made an investment as you probably see from our balance sheet of $2 million in our service provider which is going to provide pay TV services, so working with the existing TV ecosystem and very excited about the possibility of really changing the way people watch TV using some of the technologies that this company is working with and the technologies that we will provide this company.

Mike Kupinski - Noble Financial

Okay, thank you. That’s all I have for now. Thanks.

Operator

Thank you. Our next question comes from the line of Todd Mitchell with Brean Capital. Please proceed with your question.

Todd Mitchell - Brean Capital

Yes, thank you. So, I guess the question here from me is really, you have a fairly long lead time business with customers that tend to string you out. What can you tell us, give us greater comfort with your guide in terms of the sequential growth across the rest of the year and the ultimate capability for the company to generate revenues, about the sizing of customers where you have surety that you’re going to be used in their infrastructure and also I guess what can you tell us. Let’s just start there, I mean kind of can you give us some kind of quantification of what the pipeline looks like?

Raghu Rau

Sure. As you recall Todd, last quarter we did not gave specific guidance for this quarter, for Q1. However we have been more specific in providing some guidance now. Some part of that reason is that we know what the extent of the legacy decline is and we have now a better, more visibility in terms of some of the new design wins and the roll out of those new design wins. We’re expecting to sign within the next 60 days at least two fairly multi-million dollar contracts. And therefore we believe we have more visibility and that’s why we’ve given more specific guidance.

In terms of the overall pipeline and the opportunity we have the 50 million Adrenalin. And Adrenalin now has been chosen by operators who serve about in excess of 50 million subscribers. So, and you look at the revenue model for Adrenalin you’ll have besides the license fee and you pay more as you get more subscribers you also get upgrades. You’ll get capacity increase in capacity licenses and you get services revenue for any new integrations or special features and so with this very large base that we have now secured and we are going to build up, we think there is some long-term value here.

And so, that’s how we see this and as you know Nucleus, we’ve already announced 5 design wins, we believe we will win at least another couple before the end of this year. And that will give us probably in excess of 30 million subscribers as well.

Todd Mitchell - Brean Capital

Can you tell us in terms of the 50 million subscriber base for Adrenalin, the number of operators? And can you tell us some sort of quantifiable level, what the licensing into that 50 million has been sold already?

Raghu Rau

Yes. This represents about 46 operators. I don’t have with me, because we’ve been selling Adrenalin since fiscal 2013. And I don’t have the total revenue that’s being sold. But even if we have sold some revenue recognized, some revenues from a particular operator, there is an opportunity to continue as that operator grows as they increase, putting multi-screen, you will get more subscriber or want to expand different in the geographies within the network. All those are revenue generating opportunities for us.

Todd Mitchell - Brean Capital

Okay. And in terms of the existing customers that you’re working with now can you tell us how many customers that you have done installations and now have pending customer acceptances?

Raghu Rau

The two acceptances that we -- there were four acceptances that we, as mentioned in Q4 that we did not received, of those we have received two of those acceptances in Q1, two we have still not received we expecting to receive that in Q2. There are more acceptances in this quarter that you know we expect, and that’s why we have given you a range in terms of what we expect for Q2.

Todd Mitchell - Brean Capital

Okay. So four in a row, two came and two did not, are there other significant, is there somewhat you could tell us the number of acceptances you would expect over the remainder of the year?

Raghu Rau

There would be a number of acceptances throughout the year, I mean I would say probably in the range, and Tony correct me if I am wrong, but probably another three or four every quarter.

Todd Mitchell - Brean Capital

And in the pending acceptances, I guess, and that would my last question, can you tell us if there are -- how many of them are both Adrenalin and Nucleus features basically?

Raghu Rau

Adrenalin and Nucleus features will be three.

Todd Mitchell - Brean Capital

That is very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Steven Frankel with Dougherty & Company. Please proceed with your questions.

Steven Frankel - Dougherty & Company

So let me just drill down a little bit on the acceptances that were delayed with adjusted two of the four from Q4 or were there more deals that you are planning on in Q1 that got pushed further into the year?

Raghu Rau

Right, from Q4 they were four of which we received two and two we have not yet received, we expect in Q2. In Q1, there were further acceptances that we did not receive and those were another three acceptances which we didn’t receive. We also didn’t received -- we received some orders but we were not able to install them in time because the customer was not yet ready and so which is happening in this quarter.

Steven Frankel - Dougherty & Company

Okay. So you had a total of five adrenalin installations that you would have thought would have occurred in Q1 but didn’t, correct?

Raghu Rau

Let me do the math here. Yes, I think you are about right.

Steven Frankel - Dougherty & Company

Okay. And last quarter you were confident that this constant delays in acceptances was going to settle down by Q3 and then you would be back to normal. Do you still feel that way or should we just get used to the fact that these deals are going to take longer than they -- you would have thought?

Raghu Rau

Yes. What will change Steve is that the integrations related to working, interworking with other parties’ products, since we by now we would have integrated but a large majority of those that will change. But there is another dynamic here is that when an acceptance is typically provided that’s also when the maintenance window starts, the clock starts ticking. And sometimes if an operator has not yet commercially launched because for whatever even some of their reasons, they tend to delay the acceptances. We don’t have much leverage over that. So to a great extent, I think the issue will be mitigated but sometimes to the extent that there is a launch that hasn’t happened, we could see some, more delays even after Q4, in Q4 and beyond.

Steven Frankel - Dougherty & Company

Okay. And do you believe the legacy business bottomed in Q1 or is there another step down factored into your Q2 guidance?

Raghu Rau

There is a legacy decline factored to the Q2 guidance as well. As we’ve stated it’s really the first three quarters that we will see most of the legacy declines and after that it becomes fairly minimal.

Steven Frankel - Dougherty & Company

Okay. And when I look at your full year guidance, it seems to take a significant -- either a significant improvement in gross margin in Q3 and Q4 or significant reduction in OpEx to get the positive earnings for the full year given where you’re starting between Q1 and Q2. How’s that going to play out, or how do you get to that higher number in earnings?

Raghu Rau

Right. The big change there is going to be higher product revenues. I mean the problem as you saw in Q1, I mean the product revenues were only $5 million, a bit more than $5 million. And so that is going to change even a bit in Q2 but more markedly in Q3 and Q4. That’s going to be the big driver. The OpEx will make a small difference but the big driver is the increased product revenues and particularly new product revenues.

Steven Frankel - Dougherty & Company

Okay. And could you give us any more detail, and you said three U.S. operators have given you orders in Q1, which products and how material are those orders?

Raghu Rau

Yes. These are fairly significant combined is in excess of probably $3 million. And these are related to primarily to our advertising product. It’s a new software release which gives them some additional functionality in the case of two of these; in one case, it’s also related to other services.

Steven Frankel - Dougherty & Company

And can you ship that new release before year end, or there might be some ongoing?

Raghu Rau

No, it’s going to be shipped, but we can recognize revenue only if it’s -- after it’s installed in those various sites. So, it’s between Q2 and Q3.

Steven Frankel - Dougherty & Company

Okay. And you talked in the past about some significant decisions that customers were evaluating around next generation access points and set top boxes and those depended on a Broadcom chip. What’s the timing like of that chip in these new set top box designs? Is it still something that should be resolved in Q2?

Raghu Rau

Yes, the timing of the chip, we believe it’s still on track for June of next year. We were looking at four of those opportunities; unfortunately one of those opportunities has dropped out. It was related to some economic difficulties that are happening in that country. They still want Nucleus, they still want Adrenalin. However, there is some -- it’s a Latin American country which is facing some economic difficulty and currency issues. And so that’s not happening now. That has been delayed. However, the others are still active and we are working with them and we are hopeful that we will be able to secure some additional design wins.

Steven Frankel - Dougherty & Company

Just a follow up, I thought the Broadcom chip was due in June of this year, like this month, it’s not due until June of next year?

Raghu Rau

No, it’s June of 2015.

Steven Frankel - Dougherty & Company

Okay.

Raghu Rau

It’s 74-45 chip.

Steven Frankel - Dougherty & Company

Okay.

Raghu Rau

That’s 4K and multiple tuners.

Steven Frankel - Dougherty & Company

Okay. That’s all I have for now.

Raghu Rau

Thanks.

Operator

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Unidentified Analyst

Hey, it’s actually [Waheed] on the line. On the last call, you guys had said that you expected R&D expenses to go down this year, and this quarter they went up. Can you clarify why that happened?

Raghu Rau

We did not say it was going to go down this quarter, we said that after some of the large development projects were completed, we were going to be reducing the incremental cost in R&D and that is likely to happen only in the fourth quarter.

Unidentified Analyst

Okay. But fourth quarter, are you still saying it is going to be down for the year or not?

Raghu Rau

It is going to be -- no, the overall is not going to be down for the year compared to the last year, if that was what your question is.

Unidentified Analyst

Yes, that’s the question?

Raghu Rau

Yes. No, it will be the incremental cost and we haven’t quantified that as yet, will be reduced.

Unidentified Analyst

Okay. And on the share buyback, how much of the last facility was used, I mean on the last authorization, how much of that was actually done?

Raghu Rau

Yes. We had put in a 10b5-1 plan and based on the parameters of that plan, we acquired about $3.5 million worth of our stock, about in excess of 333,000.

Unidentified Analyst

So why increased it to 40 million now, why not just finish that out?

Raghu Rau

The 40 million is inclusive of that amount.

Unidentified Analyst

Right, so why not just finish the 25 and then when you get closer to completing the 25, do the 40, increases the 40?

Raghu Rau

I think the Board’s intention was just to have [up all that right] to be able to go ahead and opportunistically buy a stock.

Unidentified Analyst

Okay. I guess I am a little confused, you don’t seem to have that much visibility on when you are going to turn a profit and you aren’t turning a profit now but you are increasing your share buyback.

Raghu Rau

No we have visibility until the second half of this year where we do expect higher profitability over the year before including higher revenue and higher profitability.

Unidentified Analyst

Okay. Are you going to get to the higher profitability by just increasing revenue or are you looking at ways to control cost?

Raghu Rau

We are looking at both, as I mentioned in my prepared remarks earlier, but primarily by increased revenue.

Unidentified Analyst

Okay. And maybe I missed it but did you say what percentage of this quarter’s revenue were at legacy business?

Raghu Rau

Beg your pardon, I missed that.

Unidentified Analyst

What percentage of revenue was legacy business?

Raghu Rau

Of the total product revenue, legacy was about 48%.

Tony Dias

45%.

Raghu Rau

Yes, 45%.

Unidentified Analyst

45?

Raghu Rau

Yes. Correct.

Unidentified Analyst

Okay. Thank you.

Raghu Rau

Thanks.

Operator

Thank you. Our next question comes from the line of (inaudible) Capital. Please proceed with your question.

Unidentified Analyst

Thanks for taking my questions guys. I just want to make sure I get some clarity on guidance. Based on what we just did in this quarter and what you have talked about for next quarter the midpoint implies let me call it 52 million in the first half then looking to the full year implies high 70s call it 78 million. So you are basically telling us there is going to be a 50% increase in revs second half of this year versus first half?

Raghu Rau

Based on the next point, yes.

Unidentified Analyst

Okay. And then…

Raghu Rau

And that’s really because it’s over a really small base if you look at the product revenues in the first two quarters, it’s a really small base.

Unidentified Analyst

Well and so that’s sort of what I wanted to ask about if we’re going to go up 50% in the second half over the first half, but our product revenues which are running about, sorry our service revenues which are running about $20 million a quarter say relatively steady that means our product revenues have to go up something by like the factor of 3x in the second half versus the first half, is that what you’re talking about?

Raghu Rau

That’s correct.

Unidentified Analyst

Okay. That’s all. I just want to make sure I was doing the math correct. And then…

Raghu Rau

But remember that’s of a very small base.

Unidentified Analyst

No I am well aware it’s a small base I just wanted to make sure I mean 3x increase in product revenues second half over the first half sounds aggressive, but I think it’s great if we can do it, I just wanted to make sure. And then the previous caller was asking a little bit about the rationale behind increasing the buyback authorization, over what period had we acquired $3.5 million worth of shares?

Raghu Rau

All in the last quarter.

Unidentified Analyst

Okay, so in the last quarter. So we’re not exactly buying shares back at a particularly aggressive rate, I mean actually I can do the math this quickly, but our $25 million authorization were taking seven or so quarters, seven or eight quarters to get through it, why move it from 25 up to 40 if we are not being very aggressively just signaling affect?

Raghu Rau

No it’s possible that we can be more aggressive now, but we have extended the period from end of January to the end of April.

Unidentified Analyst

No, I know but I guess I am saying I think what the previous caller was getting of that was if we’re only buying 3.5 million a quarter we don’t really need to move it from 25 to 40. So and the Board could have put in a new authorization at almost any time. So I think I am trying to understand what the messages you’re trying to send us and what you’re seeing that we’re not necessarily seeing? And whether or not you really do plan being more aggressive? Because if we get to the end of this quarter, you’ve only bought 2 or 3 million shares, then it’s going to I don’t know, just going to be confusing messaging about why you needed to move it up but you’re really not buying very quickly.

Raghu Rau

Yes. I think since we believe that each quarter is going to be better than the previous quarter, both in terms of revenue and profitability, it was good to have the opportunity to be able to buyback more of our stock.

Unidentified Analyst

Okay. That’s fair. What you are seeing or what the Board is seeing is this is the truly inflection point? I hope you will be a lot more aggressive in the market and not just buyback 3 million or 4 million shares but a lot more than that, my guess is if you survey you shareholders, they will say the same thing. But I appreciate you taking the questions and listening to our point of view.

Raghu Rau

Yes. Thank you.

Operator

Thank you. Our next question comes from the line of Beth Lilly, GAMCO Investors. Please proceed with your question.

Beth Lilly - GAMCO Investors

Good afternoon. [Technical Difficulty] in terms of delays in new product acceptance. So can you just step back and talk about the changing landscape in the cable industry and the consolidation and different cable companies changing hands. Do you think that’s playing into this slowdown or this -- not slowdown, but just to the dynamics?

Raghu Rau

I may have missed first part of your question, because you were cutting out. Can you repeat your question if you don’t mind?

Beth Lilly - GAMCO Investors

Sure. So my question was, the dynamics in the cable industry that occurring with the different cable companies being bought and consolidation occurring, is that playing into the delays that you are experiencing in your product revenue?

Raghu Rau

For the first time, we are seeing this in this quarter. And this is related to certain expansions that were going to happen with one of our existing customers; they wanted to upgrade to the next generation product, it was an advertising product and because of the consolidation and the fact that some markets may change and go to [Spanco] for those markets. We have seen a slowdown. And eventually it is still needed -- need that expansion for increased capacity, but we are seeing a slowdown associated with the uncertainty around that. Other than that, we have not seen that consolidation has affected us in anyway.

Beth Lilly - GAMCO Investors

Interesting, okay. And then my other question is, you have been very clear to layout your business model in terms of double-digit top-line growth and getting the company to 15% operating margins. And you originally had targeted that 15% operating margin by 2015. So, I am guessing that goal is off the table, but it sounded, but early on in the call one of the questions was are you still sticking by the 15% operating margin. So, can you address when you think you will be able to hit that target?

Raghu Rau

Yes, we have said that it’s a long term goal. But having said that, I think we would be prepared to give guidance at the end of this year about specifically about next year. We will not give guidance for next year right now.

Beth Lilly - GAMCO Investors

So just so I can be clear and understand what you are saying, you haven’t taken that 15% off the table for next year, but you are also not reconfirming that, is that a fair way of stating that?

Raghu Rau

That’s a fair way of stating it, correct.

Beth Lilly - GAMCO Investors

Okay, alright, terrific. Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of [Carter Dunlap with Dunlap Equity Management]. Please proceed with your question.

Unidentified Analyst

Yes, just two things, one, a follow up. In the discussion or the answer to the R&D question, I thought in a conversation we had about after the October quarter that one of the conversations was that there was a fair amount of contract labor in the R&D line and it would be fairly easy to bring that -- those headcounts, or those either reassign or down. So you are saying that they are going to stay at this level or flat from say the Q1 level through Q3?

Raghu Rau

Till Q3, yes; Q4 that’s what we call the incremental cost. That will come down in Q4.

Unidentified Analyst

Okay. Do you have any way of sort of bracketing what the go forward R&D spend per quarter would be when this bulge of priorities is passed?

Raghu Rau

No, we have not been specific about that product.

Unidentified Analyst

Okay. And the other question is sort of a general one on sort of market development. The perception I got from my seven hours on the booth floor of -- booth of the Cable Show was that a lot of the trends that we have been talking about and expecting to see from talking to other vendors and maybe some other operators are underway but then a lot of people are sort of putting them together let’s à la carte as opposed to a prefix solution that you guys may offer. And definitely I got the sense that a lot of activity was going on that wasn’t necessarily at the same sort of hesitant pace that we’ve been hearing about. Can you comment, I mean is there a portion of the market that’s moving ahead and doing it as I say by piecing together point solutions and we’re sort of waiting on the ones who are doing at the SeaChange way?

Raghu Rau

No, the larger service providers have to have premise-based systems which do what our products do. Some of the smaller, let’s say the content providers or if they want to go direct over the top, they have some point solutions. But it’s not the large service providers who can do without a back office or an ad insertion product.

Unidentified Analyst

And they can’t get those parts from other, again sort of if you will component solution rather than more like a turnkey solution?

Raghu Rau

For the large operator, it’s very difficult to be able to do that unless they build it themselves Comcast or Time Warner.

Unidentified Analyst

Okay. Thank you.

Raghu Rau

Thanks.

Operator

Thank you. (Operator Instructions). It appears there are no further questions at this time. I would like to turn the call back to Raghu Rau for closing comments.

Raghu Rau

Yes, I’d like to thank all of you for joining us today and for your continued support and interest in SeaChange. Thank you and have a great evening.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: SeaChange International's (SEAC) CEO Raghu Rau on Q1 2015 Results - Earnings Call Transcript
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