You can't blame investors for hitting the eject button following SeaChange International's (NASDAQ:SEAC) Q4 2016 results. I believe that Hamed Khorsand, an analyst from BWS Financial who covers SEAC, summed up the April 06 earning's conference call the best by stating during the Q&A portion, "…you're giving us a lot to believe and now you change up the CEO, that's a lot for investors to digest in one day. Right?" And Hamed is absolutely correct. This isn't a one-course meal so let's take each plate one at a time and hopefully we'll have some room for dessert.
Was Mr. Samit Too Much Sizzle and Not Enough Steak?
It has only been slightly over four months since Jay Samit, who had been entering his second year as CEO with SeaChange, was boasting a solid third quarter performance marked by revenue at the top of their guidance range, a return to operating profitability for the first time in seven quarters and one quarter ahead of plan. Also, as he noted in the Q3 2016 earnings conference call, the company had just won the Fall 2015 Technology Services Industry Association Star Award for best practices in the delivery of customer success. This award represented how small companies, like SEAC, could complete in certain areas of business against giants like Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL).
Everything appeared to be on track, and Samit, an entrepreneur who is considered a leading expert on "disruption" and innovation, seemed in the perfect position to be multiple steps ahead of the curve. As his personal biography touts on his website "Samit accurately predicts the future because he is constantly working with those who create it." Unfortunately, he couldn't see as far ahead as the next quarter. Although, there was a vague moment of premonition on the Q3 call, when asked by Steve Frankel, an analyst with Doughterty, "And do you think by the time we get to the April call, you will have a - kind of you'll know what the fate of NewCoin is, whether it's going to go to the next stage or not?"
Mr. Samit simply answered, "Yes, absolutely."
On cue, that fate was absolutely delivered with his termination as well as that of the NewCoin initiative. And, as investors, we are once again reminded how fluid and experimental advancements into relatively fresh markets, like OTT (over the top), truly are. For those new to SEAC and the term OTT, it is essentially the delivery of film and TV content via the Internet.
Introducing Edward Terino, the New CEO
The charts always weave a great tale and SEAC's was no exception. Since the December 2015 highs until the lows of this week, SEAC's stock price had plummeted nearly 50%. Without having to crunch any numbers, something clearly wasn't working. So, perhaps for a few investors, Samit's sudden involuntary path to the exit door might not have been that much of a shock. The company was resolved to act quickly ,and fortunately the position for a new CEO didn't have to remain open for very long and SEAC was able to immediately transfer the power to a highly competent individual from within. I believe this to be a silver lining considering that Mr. Terino had served on the SEAC board since 2010 and was elected as Chief Operating Officer in June of 2015, reporting directly to Jay Samit.
While Terino may not have the same "sizzle" as his former boss, he is definitely no slouch when it comes to experience and competence. In the past six years, Terino has served on the board of directors for software and technology companies including Extreme Networks, Inc., S1 Corporation, Phoenix Technologies Ltd., and EBT International, Inc. Presently, in addition to serving as a director at SeaChange, he serves as a director for Baltic Trading Ltd. His professional experience spans 30 years in senior management and operational roles for public companies including SVP and CFO of Art Technology Group, Inc., CEO and CFO of Arlington Tankers Ltd., and VP of Finance and Operations at Houghton Mifflin Harcourt.
Investors Betting on a Turnaround Story
Of course, only time will tell if the CEO shift made any sense. However, turnaround stories in the stock market are not that rare and many have happened under circumstances within companies that were in positions of much poorer organizations, weaker proprietary products, and massive debts. In SEAC's particular case, Terino outlined and determined that the greatest opportunity moving forward would be two-fold. First, continue to focus on the core business while driving new product innovations. And second organize and increase the sales force to capture as much business as possible.
Somewhat ironically, during the conference call, while the new CEO was offering greater transparency to SeaChange's endeavors, he would not comment on future products except to promise that there will be an announcement made this coming June. More than likely, it won't be a major game changer but it will offer another product for their current and potential customer base to monetize their video assets. With a dedicated OTT sales team, along with an arsenal of products to satisfy the global market opportunities, SEAC might just be in a position to make good on Terino's optimism. Even Hamed Khorsand, the analyst mentioned at the beginning of this article, apparently had some time to digest the story and reiterated his buy rating on the company a few days later- although, it understandably came with a reduction of the price target from $10 to $6.
So, What is the OTT Potential for SEAC?
According to Forbes, total service revenues earned by OTT internet television service providers worldwide will rise to $49.7 billion by 2020 from $22 billion in 2015. And growth beyond that, according to this report, will advance for at least the next two decades. So while traditional distributors will continue to execute a crucial role in the growth of OTT because they also specialize in areas that TV networks don't have an expertise in, including sales, marketing and customer management, companies like SeaChange will be there to fill in the gaps. And, while technology giants like Huawei announced that they will "cloudify" all of their products and services to continue competing with OTT providers, SEAC is already positioning itself to offering their customers the option to use a public cloud or a private cloud based on their needs and budget, thus potentially helping the company generate more license revenue.
I have initiated a small, first entry position in SEAC this Monday. With SeaChange's approximate $71 million in cash and cash equivalents and no debt, I believe that this company, which has weathered many storms since its inception back in 1993, will manage to prevail under its new CEO. It appears that their appetite and level for taking risks was addressed by the ousting of CEO Samit, and, as noted in their most recent conference call, "Without timeline our cash burn from operations for the full-year would have been less than $1 million." It appears that the worse may have already been priced in the stock and as long as Terino and company deliver on their promises and projections this level may prove to be a great entry point.
Disclosure: I am/we are long SEAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to conduct their own due diligence and consult an investment advisor prior to making any investment decisions. I look forward to reading you thoughts on the subject. If you found this article interesting, please click on the follow button below. It would be greatly appreciated.