SeaChange International (SEAC) Presents at Drexel Hamilton Telecom, Media & Technology Conference (Transcript)

SeaChange International, Inc. (NASDAQ:SEAC)

Drexel Hamilton Telecom, Media & Technology Conference

September 07, 2016 09:40 AM ET

Executives

Ed Terino - CEO

Peter Faubert - CFO

Analysts

Greg Mesniaeff - Drexel Hamilton

Greg Mesniaeff

Okay. I guess we can get started. Good morning. We had a little of -- some technical difficulties here that have been worked out. Our next presenting company is SeaChange International. I am Greg Mesniaeff. I cover network infrastructure for Drexel Hamilton. And it’s my pleasure to introduce you Ed Terino, Chief Executive Officer of SeaChange and with him is Peter Faubert, the Chief Financial Officer.

SeaChange is a well-known provider of video infrastructure solutions to carriers in many different parts of the world. And I want to just mention that Drexel Hamilton, as you know is a service provider of owned and operated firm. And coming to our conference, they’re also helping us able to better understand as they start their new careers on wall street. It’s all yours.

Ed Terino

Thank you, Greg. Good morning, everyone. I am really excited to be here today. Before we get into our presentation, let me go through the obligatory Safe Harbor Provision. I want to give you a little bit of background about who we are.

SeaChange was founded in 1993 and went public in 1996. The Company’s headquartered in Acton, Massachusetts and has offices throughout the world. We have facilities in Asia, Europe as well as North America.

The Company started as a hardware company and over time has transitioned into a hardware and software company, and in 2012 it divested its hardware business and became a pure play software company, focused on video software delivery. We’re technology innovator. We won three Emmy Awards for the technology we’ve developed and recently, we won a service award from TSIA in 2015.

Let me tell you a little bit about my background. I joined the Company in June of 2015 as a Chief Operating Officer. I became the CEO in April of 2016. For those of you who have followed us, the Company has had three CEOs since 2012. I joined the Board of SeaChange in 2010, so I’ve been associated with the Company for about six years. The way I came to be part of SeaChange’s Board was through a settlement between the SeaChange organization and Starboard Opportunity Fund. I was a nominee from Starboard and joined the Board in 2010. And I’ve been part of the Company, part of the Board since then.

So, let me talk about our mission. As you all know, video is exploded and the amount of video being created today is just growing exponentially. And what SeaChange fundamentally does is helps organizations monetize their video assets. The way we do that is we develop innovative software solutions that provide delivery platforms as well as advertising platforms that our customers can buy. And our customers can be telcos, cable operators, over the top players, content owners and content aggregators. We do this through multiple business models and those models can include linear broadcast, video on demand and over the top types of transmission using IPTV. And we do it supporting any number of revenue models, which would include subscription, a transactional pricing and advertising.

Our focus for 2017 and 2018 is trying to drive the business to the completion of a sort of turnaround of transformation to help drive long-term shareholder value. As most of you have probably observed our stock has declined in price recently and we have really been focused on trying to return the company to its core business of supporting video service providers. The way we’re doing that is we’re taking our expertise in video delivery and our market leading product portfolio, and we’re trying to serve that up to not only our existing customer base but new customers, especially in the IPTV video marketplace. We’re empowering service providers and content owners with compelling multi-screen experiences. I think the key point to take away is that SeaChange enables customers to reach their subscribers anywhere, anyplace on any device. And I think that we offer the most open solution of anybody on the market relative to video delivery.

We are a leader in video monetization; I think we have a very, very strong track record of being able to demonstrate that. We have well over a 150 customers. We have some of the biggest video delivery operators or service providers in the industry, and I’ll talk to them in a minute. But the way we do it is through provide leading solutions in the area of back office and advertising. We also support the ability to handle millions of subscribers and hundreds or tens of thousands of assets for all the very, very reliable, scalable means. We’re entrusted to deliver the highest value video assets for our customers. So, our customers ask us to take on the most important parts of their business which is a revenue generating video on demand capabilities. We’re a pioneer in technology in multichannel TV advertising and video on demand as well as multi-screen. And then, we’ve recently made some development efforts to move a lot of our customers to cloud-based computing. And this is empowering our customers to be able to save money while expanding their deployments and their platforms across their customer base.

Our customer base is the envy of most of our competitors, if not all of our competitors. We have customers globally. In fact about half our business is actually transacted outside of the United States. We are a leading software provider around the world to a number of many large scale video service providers, companies like Verizon, Liberty Global, Altice are all customers we’re very proud of. And we operate some of their core video delivery systems and some of their most mission critical platforms.

The market conditions that we’re currently facing, as you probably know, are very -- changing very rapidly. You have -- it’s a tier 1 level of video and telco operators, a lot of consolidation taking place; and then below the tier one operators, you have the tier two, three and four operators who are really struggling to invest in their platforms to remain competitive. Most operators are having to spend more money on content acquisition and therefore have less capital available to spend on their platforms. So, it’s important that they are provided opportunities or alternatives for platforms that are more cost effective to implement. And then, you have the whole dynamic of over the top where you have content owners, content aggregators trying to compete with video service providers and going directly to consumers. So with all of this change going on and with the increase in cost of content, there is a huge market transition taking place. We see this is a really solid opportunity for SeaChange to accelerate, because we’ve already demonstrated we have the technology to serve these customers.

Here are some examples of customers that are currently looking at consolidation across the globe. Altice is a French based video service provider who recently acquired HOT, Suddenlink and Cablevision. All three of these operators are our customers. And we believe we can be instrumental in helping them to aggregate these customers and create a consolidated video delivery platform. Liberty Global who is SeaChange’s biggest customer has done numerous acquisitions over the last two to three years. Recently, Liberty acquired Cable & Wireless in the Caribbean. And we stand well-positioned to help Liberty consolidate Cable & Wireless into their cable operations. At Liberty Global, we not provide them our video platform, our back office platform but we also do significant amount of development in delivery of an in-home gateway, which I will talk about later. And then, recently, you may have heard that, ABRY Partners in Boston, who owned RCN, sold RCN to TPJ. And TPJ owns Grande Communications. So, this is another example of a consolidation that’s taking place that SeaChange can definitely benefit from.

I think the key for us in being able to serve this market and service our customers in general is that we have a very open and flexible architecture. So, when you look at our competitors, they are not as open and not as flexible, they require you to use a lot of their platforms, their technologies, companies like Ericsson or Cisco or Huawei usually are providing end to end solutions. Our sort of position is, we will work with anybody. And we have done that. And I think a lot of our customers like us because we’re so open and so flexible with respect to our architecture.

So, let’s talk about SeaChange’s business strategy. As I said earlier, I joined the Board in April, when I joined the Board -- I’m sorry, I joined the company as a CEO in April. And when I joined the company, my main focus was to get the company back to its core business. So, we’re really very focused right now on our core business, which is basically video delivery to the video service provider industry. The way we’re doing that is listed here on this slide.

First, we’re innovating new products to help our customer monetize their video assets. I’ll talk a little bit about some of those products regarding the innovating and some announcements we’re going to have in the next week, later on in my presentation. We’re clearly trying to broaden our customer base. So, we’ve been pursuing other cable operators. We predominately are focused on -- we’re focused on tier 1 operators. And more recently, we’ve made efforts to try to reach out the tier 2, 3 and 4 video service providers as well as telcos. In addition, we’re heavily engaged with video content owners and video content aggregators to try to broaden our customer base.

We’re trying to leverage our existing products by making them available in a virtual environment for cloud-based deployment. We’re expanding our business through new product offerings, one of which I’ll talk about later called Rave, which is our end-to-end OTT solution. And then, we’re increasing penetration into our existing customers by looking for them to either migrate from older platforms to a newer platform but upgrade from their current platform to a newer version of their current platform. And I would say over the next 12 months, a main driver of our revenue is going to be in this area. We will convert our legacy back office customers to our current generation of back office and will migrate -- not migrate but upgrade some of our existing back office customers to the newer version of our back office.

And then, another key component of our strategy is to expand the use of partners. And the use of partners is designed to really allow us to penetrate geographies that we currently don’t have a presence, but also allow us to penetrate industry verticals that we don’t have competencies. So, examples of that is I said earlier, if video is exploding, there is a lot of videos that hasn’t been monetized in industry such as education, healthcare and other industries that we believe there is a market opportunity to realize. But we don’t have the competency to pursue those opportunities. So, we’re looking for partnerships to help us pursue those vertical industries.

And then, the last part of our strategy but certainly the most important is we’re trying to optimize our operating expenses to drive to profitability. This year, in fiscal 2017, we’ve been successful thus far at being able to reduce our annualized operating expenses by about $15 million. We did that through divesting or closing down a business that we bought in 2015, which saved us about $7 million; and then, we did an acquisition which I’ll talk about later that we announced, will save about $8 million a year in operating expenses. So, we’ve already achieved reductions or improvements in our cost structure to save us about $15 million on annualized basis.

Lastly week on our earnings call, we announced that we’ll be talking further cost optimization actions here in the third quarter that we believe will drive us to an overall savings annually of about $30 million.

So, let me shift focus into our products. So, our products are really broken into three distinct areas and we sell them separately by each of these areas. The first area is our video platform products. These involved our back office technologies that basically deliver video to our customers subscribers. The second area is advertising, which in fact provides the ability to do ad insertion, flow [ph] the video that’s being served up to the subscribers. And then, the third area is our user experience, which basically provides the ability to interface directly with the subscriber through a user interface and through a set top box software capability. Let me talk about each of these areas separately.

So, in the area of video platform, the product, the back office platform is called Adrenalin. What Adrenalin does is it drives a number of features that cable operators and video service providers want to provide to their subscribers. They include things like video on demand, network DVR, replay TV, time-shifted TV. In addition and within our Adrenalin platform, we have a module called Business Management System. This module provides a lot of promotional offer capabilities to video service providers. So, when you are accessing your video on demand and you get an offer to buy a movie and watch a movie free or to binge-watch a certain program for a price or to buy a weekend worth of viewing, all of those promotional offers are driven through our Business Management System that really is designed to help our operators, our customers generate more revenues through our platform, through their platform.

The overall market opportunity is to enable a single centralized back office implementation from the cloud. So, today, most of the operators we deal with are deploying their back office in an on premises data center. And what we see evolving over the next couple of years is a transition away from on premises to a cloud based deployment. The reason our customers want to move to a cloud based deployment is because it’s obviously much more cost effective to run cloud, in a cloud environment than it is to run on premises, but more importantly the update cycles for enhancing the software platform with new features and new functions takes an awful long time in an on premises environment. So by going to a cloud environment, you can actually get updates in a much more frequent cycle. One of our major customers is undertaking a major initiative to move from a on-premises back office platform to a cloud deployed back office platform.

Just quickly jumping through some of the other capabilities we have. Within the back office platform we also have a product called AssetFlow. AssetFlow is a content management solution that enables our customers to manage their content. Managing content is an important requirement for most operators because today the operators are having to serve that content to multiple platforms and multiple devices, and every one of them require different formatted video. So, by having an ability to centralize the management, all the metadata and all the other formatting can be done centrally and then it can be distributed through one process. And this is really important to maximize the number of assets that can be deployed on these various platforms and again maximize the monetization of the assets.

The advertising platform is fundamentally a ad insertion capability that can be used by our customers to insert ads in linear TV, in video on demand TV and most recently, we announced the ability to insert ads on over the top programming. Fundamentally, most over the top revenue models today are subscription VoD, subscription video on demand, but there is a growing trend to move the revenue model to advertising based revenues. And we believe that our advertising insertion capability will help enable that transition, that development to occur.

The next area that I want to address is our user experience. This is really the term we use for set top box software. So, in the video service provider industry, most operators have to provide the set top box to their customers. The features and functions that are available in that set top box are really important to what the user experience will be like. The programming guide is developed, the look and feel of the programming guide, and then the features and functions around that set top box are really critical.

The challenge that’s been faced by the industry is that only the largest of tier one cable operators, can develop, can afford to develop these sophisticated set top box platforms. Comcast has Xfinity, X1, Liberty Global has developed their own version of a product. And there is really a need to have a robust set top box capability but most of the video service providers can’t afford to develop it. So, we’re looking at ways to help facilitate that. One of the ways we’re trying to facilitate in we recently did an acquisition of a company called DCC Labs. We announced this acquisition in May. DCC Labs is based in Poland and has about 70 software engineers. They have extensive experience in developing video software products for the set top box that leverage a number of different platforms including, RDK, Android TV and Linux. And they were one of the first vendors, among the first companies to actually launch an RDK 2.0 platform for a SeaChange customer. They are very, very experienced in these areas, and they have a lot of experience in user interface. And what we’re looking to do is have them leverage that experience in building some products that will allow some of the smaller video service providers to have a more robust user experience for their subscribers.

Next week, we’ll be at the IBC Show in Amsterdam, and we will be demonstrating some of the user experience capabilities that DCC Labs has developed. Here you can see a slide that shows, a user interface at the top of the slide; it’s common across four different delivery platforms. So, we’re going to be introducing four products that will allow an operator to have a common user experience across their entire subscriber base and that subscriber base can be deployed on a set top box that is empowered with RDK, on a set top box that runs into a TV, on a legacy set top box and also on mobile devices that would include an iPhone or a tablet.

The last product I want to cover is our OTT offering called Rave. This is a full end to end solution that we sell off the shelve to content owners, content aggregators and even video service providers. What it enables them to do is in a very short cost-effective way, get a video delivery platform up and running through the Internet, through IPTV. We’ve had good success with this. We recently announced -- in fact, this week we announced that Filmbank in Europe has selected us to be their platform of choice; we are really excited about this opportunity. Filmbank has a significant number of video assets. And they’re developing market programs for the education sector, the hospitality sector and the healthcare sector. And we believe over time, this could actually be a significant revenue contributor to SeaChange.

Our management team is new. The people you see on the slide, only one preceded me, and I’ve only been in the job for about a year. I’ve been the CEO only for about four or five months. So, we have a fairly new management team. So, what I want you to take away from the changes we’ve made organizationally is that when I joined the Company in 2015, we had about 20 sales people covering the globe. Of that 20, we only have about six or eight left, and we are now up 30 overall. So, we’ve actually replaced probably 75% of our sales organization. And we’re trying to increase the size of our sales organization. So, whenever you go through this type of transition, you clearly experience a time in order for the sales people to get traction in the marketplace and to covert pipeline into revenue opportunities. So, we’re really a new management team. We’re certainly trying to move our sales organization forward. Peter Faubert, CFO was our newest hire. He joined us in July, so he’s only been with us about two months.

I am going to turn it over to Peter and ask him to take you through a financial review.

Peter Faubert

Hello, everyone.

Just a quick background on the -- I’ve been the CFO now for tech companies, VC funded companies for about 12 years. Most recently, I was the CFO at a company called This Technology, which dynamic ad insertion software sales. We sold that company to Comcast in 2015. So, got some familiarity with this space and happy to be here.

So, in terms of financial highlights, first and foremost, we have a pretty strong base of business through our maintenance support and SaaS services across multiple and a broad range of customers.

In the first half of 2017, as Ed alluded to, we’ve added a bunch of sales people. Sales people focused on not only new products but new geographies, and we’ll go through some of where our focus is in terms of increasing our sales and revenue pipeline in a few slides.

As Ed mentioned, we have already undertaken a bunch of cost cutting initiatives, one of those initiatives was the divesting of acquisition that we did called Timeline Labs. Secondly, we transitioned our in-home business engineering efforts to the DCC Labs operation in Poland. Both of those together are saving us annual run rate $15 million a year. We’ll announce initial cost savings in Q3. Those cost savings will be largely internal. And really those cost savings are meant to get us back to up net income -- operating income positive and cash flow positive operations. And finally, we have a strong balance sheet. We’ve got $51 million on the balance sheet and no debt.

So, we’ve had some quarter over quarter decline in revenue, and that started happening in the latter half of 2016. Since then, we’ve been bolstering our sales resources. And we’ve now seen that our pipeline has grown to over three times our bookings targets for Q3. So, we’ve put ourselves in a good position to convert that pipeline into revenue growth in Q4 and into 2018.

You can see that a majority of our sales right now is focused in North America and EMEA. Some of the resources that we’ve added on the sales side have been specifically dedicated to increasing our business opportunities in Latin America and APAC. And we see a significant opportunity to increase our sales and our revenue out of those regions as we move into 2017.

So, product revenue was $2.5 million for the latest quarter, that’s down from last year. We had two deals, two product deals that we forecasted in Q2 that were delayed due to customer decision making and we expect to close those deals in the latter half of 2017.

Services revenue was $16 million for Q2, also down from last year. In Q2, we did have one customer that has active SOWs that were accounted for the percentage of completion basis. We estimated the time to complete those active SOWs and extended that time out which resulted in less revenue being recognized for the quarter. So, we took about a $4 million hit on revenue in Q2 related to the revised estimated time to complete on those SOWs. That’s a $27 million project that’s been going on since 2012. So, it’s a long-term, very complex multiple element delivery project that with now -- with the transition of DCC labs has reevaluated the time it’s going to take to complete that project. And you can see the impact of that if you look at the year-over-year performance and the user experience space on both the services side and on the product side. We have seen that reversal of revenue related to that extended -- estimated time to complete.

So from a growth perspective, we’re focused on getting back to increasing cash flow quarter over quarter and increasing revenue quarter over quarter. So we picture the additional focus on the sales of new products with some of the upgrades that Ed talked about in terms of Axiom to Adrenalin and the expansion of our sales efforts geographically that we’ll be able to get back to quarter over quarter increases in revenue in the latter half of this year and into 2018.

In addition to that, we expect to improve the mix of products that we’re selling. So, higher levels of software licenses and SaaS sales through new products should increase our overall product margins. And then in addition to that, we’re focused on more efficiently delivering our services to increase the services margin. So, our target margins in the immediate term is in the mid 60% range.

We’re going to continue to invest in sales and marketing in the areas that I talked about in terms of new products and new geographies. And then a lot of the cost cutting initiatives that we’ll be in Q3 will be around reducing our G&A expenses and to some extent making our R&D processes more efficient, including up some of the R&D resources.

So to summarize, I think we have a great opportunities here to leverage our existing customer base. I think we have an opportunity to cross sell our products into their customer base. We’ve identified opportunities to leverage those customers, to cross-sell products in both the U.S., EMEA and in the new regions that we talked about in Latin America and APAC. By virtualzing our core products that allows us to more efficiently deliver products and services, and we should see the results of that being the increase in margins that we talked about. We’ve identified the new opportunities that we have for OTT for the Rave product and for nature, [ph] and then obviously, the new market opportunity, certainly is in Latin America and APAC. And again, the cost cutting initiative that’s on the way right now should save us an additional $15 million a year in annual run rate. The goal of that is to get to operating income and to cash flow positive operations.

So, in closing, I’m very excited to join SeaChange. I’m happy to be here and look forward to working with all of you going forward. Any questions?

Question-and-Answer Session

Q - Greg Mesniaeff

In the G&A saving that you referenced several times in your presentation, is it -- could we assume that some of the in-house functions you have, are going to be outsourced; is that what that’s all about or…?

Peter Faubert

So, I think about $4 million of the cost savings is really efficiencies, so going through and really cleaning some old legacy software licenses, cleaning up old servers back from our hardware days; there will be some headcount reductions in the G&A area. I think another big opportunity for us is, we’ve got 300 engineers that support our products right now.

Greg Mesniaeff

Into the U.S. or over the world?

Peter Faubert

Worldwide. So, I think we’ve got an opportunity to really make the R&D, build and deliver process more efficient in terms of supporting our products. And then, finally, in the professional services area, I think with some more efficiency and how we’re delivering our services, we’ll be able to clean up some of that headcount as well and really leverage higher margins on those services of interest.

Greg Mesniaeff

So, it’s really going to be an operating margin improvement rather than a margin [ph] story [multiple speakers]

Peter Faubert

Some growth -- in the professional services, it should be gross margin. Yes.

Ed Terino

A lot of the cost of DCC [indiscernible] operation, is going through cost of goods sold. So by picking up $8 million a year on savings pipeline, by acquiring them, we will see some of that go through margin. That’s why we expect to see margins going from the low mid 40s to 50s?

Peter Faubert

On the margins in Q2, we’re depressed as well because of the change in estimate.

Greg Mesniaeff

I have another one, if you could just -- I mean, clearly, the transition from Axiom to Adrenaline has been kind of a center stage, question or part of the story is can you give us kind of a recap of what’s going on?

Ed Terino

Yes. What we said on our call was it is still about 20 plus Axiom customers who we believe are candidates for migration to Adrenalin. I think we’ve put quotes out to 11 or 12 of those customers. And as Peter mentioned, we did have a couple of slips from Q2 into the second half of the year. One or two of them were Axiom migrations. In addition, we’ve had some recent success with convincing some Latin American and South American customers to go through a migration. So, [indiscernible] in the second half of the year. So, our goal would be to achieve on average of two to three. Just so you understand, we announced that Axiom will be end of the life in 2017, at the end of 2017, so we were up six quarters to go. So, if you take the 20 or somewhere up, 20, that’s all three a quarter. The average revenue for the opportunity range from 750,000 to about 1.2 million. So, if you dollarize on an average of 800 times probably 20, about $16 million of revenue opportunity for us over the six quarters, if we’re successful in bringing all of those acting customers. So, we think it’s a major revenue driving process in the next six quarters.

Greg Mesniaeff

Can you talk about how your customers view your set-to-box software platform vis-à-vis the offerings that they get or they could get from Arris or Technicolor both of which ironically or incidentally are being at this conference here today and tomorrow? I was wondering if…

Ed Terino

So Arris and Technicolor have set top boxes which don’t really have software; they have some software on it, meaning embedded coding or embedded code, but they don’t deliver the features and functions that we deliver. So, if someone work at the on Arris or a Technicolor. So, if they were to buy the set-top-box, they would need a software provider, either they do it themselves or they need a software provider to develop software. We’re more competing with TiVo where TiVo has a set-top-box and Comcast for that matter. They both have set-top-boxes and they have software that they develop that operates in their set-top-box. What we’re doing is actually just creating a software and being set-top-box exhaustive. So, we’re saying if you want to use an Arris box, a Technicolor box, android TV box, an Apple TV box, you can use those and we’re going to provide software which will allow you to have a customer experience on that box.

Greg Mesniaeff

Any other questions in the room?

Ed Terino

Okay. Well, thank you for your time.

Peter Faubert

Thank you.

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