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SeaChange Intl. (NASDAQ:SEAC)

F4Q08 Earnings Call

March 13, 2008 5:00 pm ET

Executives

William C. Styslinger III - Chairman of the Board, President, Chief Executive Officer

Kevin M. Bisson - Senior Vice President - Finance and Administration, CFO, Treasurer

Yvette M. Kanouff - Chief Strategy Officer

Martha Schaefer - SeaChange International - Director, Investor Relations

Analysts

Ali Mogharabi - B. Riley & Co.

Brian Coyne - F.B.R Capital Market

Alan Davis - D.A. Davidson

Murray Aronsen - Ferris Baker Watts

John Farrow – Borgen Capital

Greg Missinault – Neatman and Co.

Alan Davis - Analyst

Operator

Good afternoon. My name is Tramesis and I will be your conference operator today. At this time, I would like to welcome everyone to the SeaChange International fourth quarter fiscal year 2008 earnings conference call. (Operator instructions) Thank you. Ms. Schaefer, you may begin your conference.

Martha Schaefer

Thank you, Tramesis, and good afternoon, everyone and thanks for joining us today. We'll be discussing financial results for our fourth quarter in fiscal year 2008. The press release went out a short time ago, and is available on our website, both on the front page and on the Investor Relations page. Before we begin, 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 amended annual report on form 10-KA filed October 19th, 2007. Any forward-looking statements should be considered in light of these factors. Any redistribution, retransmission, or rebroadcast of this presentation in any form without the express written consent of SeaChange International is prohibited. Our format today will be as follows. Kevin Bisson, our CFO, will review our financial performance. Then Bill Styslinger, our CEO, will provide overview of the quarter. We’re fortunate to also have Yvette Kanouff, Senior VP and Senior Chief Strategy Officer with us, to discuss our software business following Bill’s remarks. We’ll be happy to entertain your questions at the end of our prepared statements. Over to you, Kevin.

Kevin M. Bisson

Thanks, Martha, and good afternoon everyone. Turning to our fourth quarter results for fiscal 2008, revenue for the fourth quarter amounted to $47.8 million dollars, which was $7.7 million or 19% higher than revenue of $40.1 million recorded in the fourth quarter of fiscal 2007. From an operating segment perspective, revenue from the Company’s Broadband segment, which includes video-on-demand or VOD and advertising and insertion products for the fourth quarter was $23.7 million dollars comprised of $18.9 million dollars of VOD revenue and $4.8 million dollars of advertising insertion revenue. VOD revenue for the fourth quarter of $18.9 million dollars was $2.6 million or 16% higher than VOD revenue of $16.3 million dollars generated in the fourth quarter of fiscal 2007. The increase in VOD revenue in the fourth quarter of fiscal 2008 compared to the same quarter in fiscal 2007 was driven by the $1.1 million dollar increase in VOD systems revenue along with a $900,000 dollar increase in middleware development revenue related mainly to our contract with Virgin Media. VOD systems revenue of $12.6 million dollars in the fourth quarter of fiscal 2008 derived primarily from continued strong quarter flow for VOD servers and Axiom software from US-based cable and telephone customers that we have experienced since the second quarter as well as increased VOD deployments with selected customers in Latin America.

The increase in middleware development revenues in the fourth quarter of fiscal 2008 compared to the fourth quarter of fiscal 2007 was due mainly to the inclusion in the fourth quarter of fiscal 2007 of one million dollars of sales discounts granted by the company relating to the 18-month extension of the company’s middleware development contract with Virgin Media.

Advertising insertion revenue for the fourth quarter amounted to $4.8 million dollars, which was one million dollars higher than comparable revenue of $3.8 million dollars generated in the fourth quarter of fiscal 2007. The year-over-year increase in revenue was due mainly to increased US-based cable, telephone, and satellite customer revenues driven by increased high definition advertising insertion system requirements. The company’s broadcast segment generated $4.5 million dollars of revenue in the fourth quarter of fiscal 2008, which was $2.9 million higher than the $1.6 million dollars of revenue recorded in the fourth quarter of fiscal 2007. The increase in broadcast revenues between quarters was primarily due to strengths from customers in Australia, Western Europe, and two public broadcasting stations in the US

Revenue for the services segment for the fourth quarter of $19.6 million dollars was $1.2 million or 7% higher than the $18.4 million dollars of revenue generated in the fourth quarter of fiscal 2007. The increase in services revenue in the fourth quarter of fiscal 2008 compared to the same quarter in fiscal 2007 was due to higher VOD maintenance revenue resulting from increased year-over-year VOD system deployments.

Geographically, product revenues for the fourth quarter of fiscal 2008 included 69% in North America, 17% in Europe, Middle East, and Africa, 8% in Asia Pacific, and 5% in Latin America. Consistent with previous quarters, Comcast and Virgin Media were 10% or greater customers in the fourth quarter of fiscal 2008. Revenue for all of fiscal 2008 amounted to a record $179.9 million dollars, which was $18.6 million or 10% higher than the $161.3 million dollars of revenue generated for all of fiscal 2007. Revenue growth at 2008 compared to fiscal 2007 derived mainly from higher advertising insertion and broadcast product revenues as well higher year-over-year revenues at ODG due to increased consent aggregation sales volume.

Total gross margin of 49.6% for the fourth quarter of fiscal 2008 was 7 points higher than gross margin of 42.6% for the fourth quarter of fiscal 2007. Product gross margin of 57% in the fourth quarter was 15.3 points higher than product gross margin of 41.7% in the fourth quarter of fiscal 2007. The increase in product gross margins in the fourth quarter of fiscal 2008 compared to the fourth quarter of fiscal 2007 were due primarily to a greater mix of higher margin VOD software revenue along with significant year-over-year improvement in broadcast margins due to a more favorable customer mix of broadcast revenue.

Service gross margin for the fourth quarter amounted to 38.9%, which was 4.7 points lower than service gross margins in the fourth quarter of fiscal 2007. Sales volume related improvement in VOD maintenance margins due to increased year-over-year VOD system footprint was more than offset by lower margins at ODG.

Total gross margin for the full year of fiscal 2008 was 45%, which was 2 points lower than the 47% gross margin generated for all of fiscal 2007. Adjusting the reported gross margin for fiscal 2008 to exclude expenses related to the cost reduction actions undertaken in the second quarter of fiscal 2008, fiscal 2008 revised gross margin of 47.7% was .7 points higher than the gross margin of 47% for fiscal 2007.

In the same vane, adjusted product gross margin of 54.8% was 5.7 points higher than product gross margin of 49.1% for all of fiscal 2007 due primarily to the improvements cited earlier in broadcast product margins between years.

Adjusted service gross margin of 37.6% for fiscal 2008 was 6.3 points lower than the service gross margin of 43.9% recorded for the full year of fiscal 2007. The lower margin between quarters was due to increased year-over-year headcount in anticipation of increased revenues outside of North America, as well as lower margins at ODG.

Operating expenses in the fourth quarter of fiscal 2008 of $22.2 million dollars was $100,000 higher than operating expenses of $22.1 million dollars incurred in the fourth quarter of fiscal 2007. The increase in operating expenses between quarters is due primarily to a general and administrative expense increase between the fourth quarters of fiscal 2008 and 2007 of $700,000 dollars due mainly to accrued and set-up compensation expense that was essentially offset by lower amortization expense tied partially to the removal of Filmflex related intangible assets during the fourth quarter in connection with the sale of the company’s equity interest in Filmflex.

Reported operating expenses for all of fiscal 2008 of $89 million dollars was $800,000 higher than operating expenses of $88.2 million dollars for fiscal 2007. Excluding $1.2 million dollars of reported operating expenses in fiscal 2008 related to the fiscal 2008 second quarter cost reduction actions, the adjusted operating expense for fiscal 2008 were $400,000 dollars lower than operating expenses for the full year of fiscal 2007.

Higher headcount related R&D expenditures were more than offset by lower amortization of intangibles.

The company generated net earnings of $14.6 million dollars for the fourth quarter of fiscal 2008 as compared to a net loss of $3.7 million dollars for the fourth quarter of fiscal 2007. Net income for the fourth quarter of fiscal 2008 included a $12.6 million dollar gain on the sale of the company’s equity investment in Filmflex Movies Limited, a UK based joint venture among SeaChange, Walt Disney Company, and Columbia Pictures Corporation that provides a video-on-demand movie service for Virgin Media. The corresponding earnings per share on a fully diluted basis for the fourth quarter of fiscal 2008 was 48 cents per share as compared to the 13 cents per share net loss recorded in the fourth quarter of last year. The gain on the sale of the company’s equity interest in Filmflex contributed 41 cents per share in earnings for the fourth quarter of fiscal 2008.

For all of fiscal 2008, the company earned $5.4 million dollars compared with an $8.2 million dollar net loss for the full year of fiscal 2007. As noted previously, fiscal 2008 full year net income included the $12.6 million dollar gain related to the Filmflex transition as well as $6 million dollars of expenses incurred in connection with cost reduction actions taken by the company in the second quarter of fiscal 2008. The corresponding earnings per share for all of fiscal 2008 was 18 cents per share as compared to the 29 cents per share net loss recorded for fiscal 2007. The gain from the Filmflex transition and inclusion of the expenses related to the second quarter cost reduction actions positively impacted fourth quarter earnings per share by a net 22 cents per share.

Now turning to the balance sheet, the company ended fiscal 2008 with cash and investments of $87.9 million dollars, which was $24.8 million dollars higher than the $63.1 million dollars of cash and investments at October 31st, 2007, the end of the company’s third quarter of fiscal 2008. Cash flow of $24.8 million dollars for the fourth quarter was primarily due to $18 million dollars of proceeds related to the Filmflex divestiture, as well as cash generated from operations of $6 million dollars and a lower inventory balance of $2.7 million dollars, partially offset by capital expenditures of $1.7 million dollars.

Cash flow for fiscal 2008 of $32.6 million dollars was driven by the $18 million dollars of proceeds from the Filmflex transaction. In addition, full year cash flow from recurring operations of $14.5 million dollars combined with a $5 million dollar reduction at inventory was partially offset by $5 million dollars of capital expenditures.

I’ll now turn it over to Bill for his remarks.

William C. Styslinger

Thank you, Kevin, and good afternoon everyone. We’re very pleased to be targeting another quarter of excellent financial performance following up on our strong third quarter. Our fourth quarter revenue of $47.8 million, but our second half totaled to $97 million aided by the gain on the sale of our equity investment in Filmflex. We also achieved quarterly net income of $14.6 million. Yet even excluding this gain, the company generated net income for the fourth quarter of $2 million or $5.3 million for the second half. Substantially over achieving our second half goal of returning to profitability.

Our fourth quarter profitability combined with improved working capital performance resulted in $25 million dollars of positive cash flow for the quarter or $7 million dollars excluding proceeds from the Filmflex transaction.

I will spend the next few minutes commenting on some of the key drivers of our financial performance for the fourth quarter.

You may recall in our third quarter, we projected the company to be profitable in the fourth quarter, but most likely not as strong as our performance in the third quarter. This quarter, our advertising insertion business from increased spending for US cable and satellite customers for high definition insertion systems while ODG generated record revenues for the fourth quarter benefiting from increased processing of VOD content on behalf of Virgin Media.

The fourth quarter’s revenue performance shows the advantages of our diversified product operating and that total fourth quarter revenue was very strong despite our VOD business coming off a little from its record third quarter revenue.

Our bottom line results for the quarter were boosted by the sale of one third interest in Filmflex. The gain on this transaction was $12.6 million dollars and the proceeds of $18 million dollars contributed significantly to our $88 million dollar cash balance at the end of fiscal 2008. The Filmflex investment was a financial success and more importantly it validates ODG’s strategy of providing VOD content every agent services throughout Europe. ODG’s joint venture in Germany with the Telemunchen group, a much larger opportunity is an example of how ODG is implementing this strategy and we expect more of this type of arrangement to be finalized in fiscal 2009 and beyond.

Excluding the gain on the Filmflex transaction, we are pleased to report net income of $2 million dollars. Our achievement of nearly 50% gross margins with similar gross margins in the third quarter show the evolving size and strength of our software business. I think we again demonstrated the leverage we have as our revenues rise.

Our fourth quarter had significant achievements from a customer’s perspective. We mentioned the last earnings call that we began to see meaningful revenue in the third quarter from Axiom software with third party video-on-demand service. We specifically cited a multi-million dollar sale of Axiom software licenses working with the concurrent 4,500 VOD server. I’m happy to report that the system is lodged, running well, and the customer is very happy. We shipped Axiom software licenses to three additional Cox sites in the fourth quarter for similar integrations and we expect that Phoenix will be the model for Cox going forward. In addition, we recognized revenue in the fourth quarter of Axiom deployments at two additional customer sites that operated with another competitor’s VOD server.

Our strategy of gaining software sales with multiple VOD server vendors is clearly working. The fourth quarter showed continued strength in our VOD products with our largest customer. We won several VOD server orders during the quarter to upgrade some of our largest base as well as expansion of our base with software orders. This customer also selected our Flash server in the quarter for its next generation on-demand architecture. Combine these wins with our recurring software subscription and maintenance revenue gives us confidence that this customer continues to be rock solid.

During the quarter, we marked a milestone in our VOD server product strategy with the first commercial shipment of our new Flash memory server to Cablevision Mexico, the largest digital cable television company in Mexico, and we have a number of additional opportunities from the [Goodmarch], our Flash server is getting customer amps. With fall resilience and scalability provided by our costal architecture, combined with the space and power consumption of Flash memory, we believe our Flash memory server will provide us to leave in the next generation server technology as customers migrate away from traditional disc-based servers.

Turning to our guidance for fiscal 2009, we expect year-over-year top line growth with second half revenues greater than the first half revenue consistent with our experience in fiscal 2007 and 2008.

Our full year revenue for fiscal 2009 is being driven by continued broad study by North American cable telephone companies, as well as US-based MSO’s on advertising insertion systems driven by increased high definition requirements.

Following two consecutive quarters of profitability, we expect to be profitable both the first half of all fiscal 2009, based on our margin strength of our products, first half and all of 2009. With particular emphasis on recurring high margin VOD revenue in related services, as well as continued cost containment of operating expenses.

Now giving guidance for fiscal 2009, I want to spend the remainder of my remarks on customer development in the VOD space. Now how these developments support the drivers for our business that we have communicated to you over the last several months. It is these customer tie-ins to our business drivers that give us the utmost confidence and the tremendous growth potential in the VOD space as we look ahead. Many of you may be familiar with the Comcast recent announcement at the Consumer Electronic Show in January of its project Infinity. This reflects a general trend to make more content available on-demand as an important driver for SeaChange. This could reemphasize content available on-demand is what is going to drive SeaChange. This year, Comcast plans to expand greatly its library of VOD content. In fact, Comcast has stated that it expects to offer more than 6,000 movies a month by 2009, which is up more than four times the 1,300 movies currently offered. With 6,000 movies, more than half are planned to be in high definition. High definition is also a key driver for SeaChange. These objectives clearly demonstrate Comcast’s commitment to VOD and the explosion of content that we made available on-demand by Comcast over the next 12 to 18 months. Our relationship with Comcast is strong. We expect that to continue as project Infinity is rolled out.

Just last month, Walt Disney, through its ABC television network, announced a ground-breaking arrangement whereby ABC will provide its network programs on an advertising supported video-on-demand service to cable and satellite, who agreed to disable fast-forwarding capabilities. This announcement was a result of ABC’s successful trial of this service with Cox Communications in Orange County, California that was announced last May at the Cable Show in Las Vegas, at which we have referenced in our prior quarterly earnings calls. This My Primetime service offered by Cox sets several advantages for SeaChange. First, like project Infinity for Comcast, this new VOD service offered by ABC provides more content. In this case, primetime content in an on-demand environment. Availability of Hot content is a key driver for SeaChange.

Secondly, it is a service that we offer to a multitude of service providers, hence spreading this content to other potential customers of SeaChange. Finally, ABC’s announcement provides a shot in the arm for industry-wide efforts to monetize service providers’ investment in VOD advertising. While VOD advertising will surely provide cable television companies in Telco’s additional source for revenue growth, it also provides SeaChange the opportunity to sell more of our ad pulse on-demand advertising platform across a multitude of customers who sign up for the ABC VOD service. Cox has told us that they will be expanding My Primetime service in Orange County and they will begin incorporating dynamic advertising in on-demand using SeaChange’s ad pulse product. We expect My Primetime and ad pulse be rolled out further Cox sites in fiscal 2009.

As we enter 2009, SeaChange like many publicly traded companies, is facing headwinds relative to structural changes in the US economy, whether it’s high cost of energy, tightening of credit, or overall slowing of economy. While these forces do have some impact on our customer base, we feel very strongly that our customers will continue to devote significant levels of their capital budgets to increasing deployments of VOD hardware and software in fiscal 2009 and beyond. Combining these actions from our customers with our continued efforts on cost discipline gives us confidence that SeaChange will be a consistent generator of profit and cash. We’ve demonstrated this conviction the second half of fiscal 2008 and intend to do the same for fiscal 2009.

Finally, like many of you, we are not happy with our current stock price and believe it does no sufficiently reflect SeaChange’s long-term growth prospects. We think the stock is a good buy. As a result, last month we announced that our four directors authorized to repurchase of up to $20 million dollars of the company’s stock as part of a stock buyback program. We believe this action represents an excellent investment opportunity for both the company and its shareholders. The strength of our balance sheet and our confidence in our ability to produce cash over the next several years allows us to execute this stock buyback program of maintaining the financial flexibility to achieve longer term growth prospects and build significant shareholder value. We’re going to start buying as soon as possible.

Next up is Yvette, the general manager of our software business for the last 18 months, has done a remarkable job of getting it going. Yvette?

Yvette M. Kanouff

Thanks, Bill. I know you are all aware of the focus that we’ve had on software for the past three years as I’ve periodically given you a summary of our progress on the software-related products and as our revenues now around a $100 million a year in this area, we thought it would make sense to give you a bit more insight as we go into our new fiscal year here.

When SeaChange was founded, our customers were hardware customers. At that time, SeaChange could be tracked in terms of server sales for advertising and then later for VOD and that’s really changed. In time, our customers realized that software is what’s managing all of this hardware and that’s critical to their service quality, to their service scalability, and to their ability to launch new applications. Hopefully these past years have proven that this separation of hardware was indeed a successful move on our part.

Let me give you a few notes on this quarter. High definition was a big factor for our advertising growth this quarter. We had six new open back office software wins with our Axiom software this quarter. We had three new open client wins with our Axiom client software products. We had three new end-to-end wins this quarter of hardware and software together, and of course we also continued with the expansion business in customs software products that we provide.

So before I go into a bit of depth on what we’re doing on the software front, I’d like to address the hardware business, which we separated from the software. As much as that separation has enabled us to get into markets that we didn’t have access to before, having our own hardware offering remains critical in offering the end-to-end solution. Many customers, especially our international ones, see a solution-based offering as mandatory. That makes the combination of offering hardware and software a real advantage to us.

Looking at the VOD hardware versus software, it’s really a today focus. If we want to focus on tomorrow, we can see that we’ve really established a baseline of controlling video CDN and for those of you who don’t know the CDN space, a CDN is a content delivery network. Most people use the word CDN to define the delivery infrastructure, both hardware and software for the Internet.

So with the introduction of video over the Internet, CDN has to handle video intelligence, video propagation, and meditated management, all the things that we’ve perfected in managing over network, such as cable. The point is that as data and video merge, our network architecture work is getting larger and larger in scope, but with a larger focus than traditional CDNs. Our network allow operators to manage reactive content, such as Internet content, as well as proactive content such as the license, the managed video content we have in VOD. So the point is that both our hardware and software have a significant play today and tomorrow.

So getting back to our software outlook in fiscal ’09, as Bill mentioned, we certainly plan on growth and profit. We’re looking at three main areas in the software space. The first is core management software like our Axiom product, an area in which we’ve been leading. The second is advertising, which is evolving to a much larger scale than the head-in base local ad solutions we’ve been selling for years. The third area is client application. We’ve built DVD on-demand software, gaming applications, Internet on TV applications, and we plan to continue creating these opportunities to help our customers grow revenue and to reduce return.

In looking at our Broadband software leadership combined with our positive outlook for fiscal ’09, I assumed you’re wondering why we’re so confident when many other companies are struggling. So I asked a few non-traditional customers to give me some thoughts on SeaChange in this upcoming year. I figured that’s a little more appealing than hearing it from me. So the first person I asked was Nomie Bergman, who’s the EDP of strategy for Advanced Newhouse, most notably she’s been playing an industry leadership role in the direction of advertising for all of US cable and she quoted, “SeaChange has shown a great understanding of where cable advertising is going and we see them to be a key part of enabling advanced advertising in our industry.” So then I asked Virgin Media, due to their leadership position in VOD in Europe, and Howard Watson, the CTO of Virgin Media states, “SeaChange remains a key partner in our VOD strategy.” Last I went to China, one of my favorite countries in which I see growth opportunities and as you probably know, Shenzhen Cable has been leading video-on-demand in China and their president, Mr. Liu, mentioned SeaChange’s unique expertise and scalability as a factor in selecting us and continue to have us help their advanced television services offering.

So Bill mentioned our ongoing support with large customers like Comcast and Cox, but I wanted to give you a feel for how our outlook is beyond the traditional customers that we talk about all the time. Remember the three software areas – core management, advertising, and applications. That’s our software platform. So I picked these customers specifically so you can see how all three of these are really appreciated and to show you what our software focus is worldwide. Since I’m not sure if some of these industries quotes are going to help explain to you our confidence in fiscal ’09, I also went to our largest customers and asked each of them what makes us unique as a software provider, so that I could share that with you and the consistent answers were our strength in experience, scalability, quality, and features.

So we know that our reliability numbers are very high and we’re constantly investing in R&D to make those numbers even better to provide tools to our customers to easily scale and configure the increasing complexity of video services. We’re also building new compelling features and applications, as Bill mentioned, with My Primetime and time shift to television applications. I’m actually writing an article on all of the time shift to television activity worldwide for a publication next quarter and there’s so much of this with My Primetime, start over, catch up, look back, and so many different implementation set ups that customers have around the world. Also with advanced advertising space booming, we are very active in helping develop products that meet the needs of local, regional, operator based, multi-operator, advertiser and content owner stakeholders. Advertising will be able to be shared across many different devices, such as mobile and PC with all different business parameters. All of these require complex software, which is exactly what we have.

A critical advantage we have in building software applications is also our client software with DVD software, our VOD link navigation software, our TV navigator middleware. WE have the keystones to enabling video across devices and enabling applications such as time shifted television and advertising.

With more content, such as the big announcement from ABC this quarter, and customer growth, such as Virgin’s announcement of record subscriber numbers, there are a lot of worldwide opportunities for us in software. We have a great base with our Axiom and advertising spot product in the US and beyond, but we’ll be sharing more throughout the year and add-ons to that for CDN, advanced advertising, time shifted TV and also other services.

So I’ll be happy to answer any questions during the Q&A, but hopefully this gives you a good general understanding of the importance of our software and our customer base and therefore this critical shift for us to software as it now represents around $100 million in annual revenue.

So I’ll reiterate Bill’s comments that this year looks good for us here, both top and bottom line, and with that I’ll turn it back to you, Bill.

William C. Styslinger

Thank you, Yvette. So now we can open up to questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Ali Mogharabi with B. Riley & Co.

Ali Mogharabi - B. Riley & Co.

Hi guys. Great quarter. I’ve got a few questions. The first thing is can you put out more detail on the middleware side and how that business is going?

William C. Styslinger

As you know, we have the large accounts at Virgin Media that continue to be quite devoted to us. We keep expanding the features for them. We have some new accounts. We mentioned the Corvet account and a bunch of accounts in development. So we’re quite optimistic about the potential for middleware for next year.

Ali Mogharabi - B. Riley & Co.

Okay, so that’s basically growing as of course we’ve seen growth in almost every segment.

William C. Styslinger

I like to point out to people that we don’t need to win a lot of customers to make a lot of money with that software.

Ali Mogharabi - B. Riley & Co.

Bill, can you just give me some more detail regarding your top line guidance? At least for me, it’s not really that clear.

William C. Styslinger

Okay, I’m just going to reiterate first what I said, right? We expect growth for the year. We expect a profit in the first half and profit for the year. We expect cash generation similar to what we had this year and in the profile it looked like last year and the year before. So the second half is a lot stronger than the first half. If you were to ask me will the first half be as strong as the second half of last year, I would tell you clearly no.

Ali Mogharabi - B. Riley & Co.

I’m trying to figure out when you’re talking about year-over-year growth on the top line for this year, is it reasonable to assume that it’s going to be double digit growth?

William C. Styslinger

I think we’re going to stay away from, like have consistently for years now, any specific numbers.

Ali Mogharabi - B. Riley & Co.

Next question, can you give us an update about the emerging markets and how well you guys are doing? I think Yvette sounded pretty optimistic about China, but also the rest of Asia and also Eastern Europe. Can you give us more info on that?

William C. Styslinger

A tremendous amount of activity going on in Central Europe, Middle East, China, South America, Latin America, and I can’t rattle off the accounts, but we’ve been particularly strong in Latin America and we have a number of accounts and association with ODG in Central Europe and good progress in China, which we think market share-wise is quite well with the cable companies over there. There may be some significant accounts in China that we have not announced. I’m reluctant to say who they are, because I’m not sure what’s announced and what’s not.

Ali Mogharabi - B. Riley & Co.

Okay, and I’m assuming of course, I guess logically speaking, you guys have not recognized much revenues from those wins yet?

William C. Styslinger

Some, but I shouldn’t leave out India. A lot of activity and wins in India. They start out small, because these countries by and large have low populations…it’s potentially, a lot of accounts, small numbers.

Ali Mogharabi - B. Riley & Co.

Yeah, well I guess that’s why we’re viewing as emerging. Last question, regarding the United States and especially the advertising side, we’re all hearing about project Canoe and the amount of money that some of the big cable operators are putting into that. Are you guys active in this currently and if not are you confident that you could be?

Yvette M. Kanouff

I’ll answer that and I won’t get into talking a lot about Canoe, since that’s really more for the cable operators to talk about what they’re doing with that consortium. We’re obviously very close with those cable operators that are part of that project and that’s why I pick Nomey Bergman for the quote for this particular earnings call. It’s just to give a confidence as to where we are at with advertising without giving away anything as to what’s happening with Canoe or what the operators would like to do with it. I just think it’s not our place to say since we’re really a key partner in that as opposed to the cable operators talking about what they’re doing with it. Does that make sense?

Ali Mogharabi - B. Riley & Co.

It does. I guess my takeaway would be then overall whether you’re currently directly involved or not, project Canoe will benefit you guys in the long run.

Yvette M. Kanouff

Well yes, and I think that I’m very comfortable talking about that advertising is going beyond the head end or local ad insertion that we’ve been doing. We’re definitely looking at a bigger scope than that. We’re obviously working with all of cable operators and we’re in a really good position there and that’s as much as I’m comfortable saying without stepping over bounds that I don’t think the operators would be comfortable in.

Ali Mogharabi - B. Riley & Co.

What about regarding one of your partners in that side of the business – Visible World. I’m assuming you’re actively working with that private company?

William C. Styslinger

Yes we are.

Operator

Your next question comes from the line of Brian Coyne of F.B.R Capital Market

Brian Coyne – F.B.R Capital Market

Good afternoon. Three or four questions, a couple for Yvette. I was wondering if you could just talk to us a little bit about going after the advertising software part. Can you maybe give us a sense of competitive profile of that business. Is it more like sort of the same that you saw or we’ve all seen on sort of the ad insertion side, the traditional insertion side, and then second I was wondering if you could also give us perhaps an update on your North American telephone customer and customers and just kind of how you see that trending perhaps any detail on what you saw in the quarter for them.

Yvette M. Kanouff

Sure. So I’ll start with the advertising question and it’s a little bit kind of being immersed into all of the software. I think it’s a little bit exciting, not just to see the software play, but what’s happening in the industry and if you’re following the advertising space and you might be aware of some of the trends that have happened where advertising is really shifting to the pay-per-click model on the Internet and to multiple devices and everyone is really looking at that space to say how is it emerging, because it’s changing so quickly, and if you look at some of the statistics that are going on with 64% growth in Internet video advertising and some of these incredible numbers of opportunity for ads, the question is how do we play and also how does our customers’ advertising change? So I wouldn’t say it’s really appropriate to look at it in the traditional sense of we sell a spot system that inserts spot ads into local programming. There’s a whole infrastructure that’s changing and that’s the way that we’ve been looking at it for about the last year is how do help enable that infrastructure to change to getting different ads and different devices across different platforms and different means of measurement. Certainly the obvious one is ads on VOD. A very different model than traditional spot advertising. Do the players change competitively? Well VOD players are different than the traditional ad players. Yes, so I would say that it is a whole new world all around. Competitors as well as the offering and if you think about why, right, you’re changing from linear to on-demand to individual and then there’s what goes to that individual and what logic do you use to pick this ad for that individual. So there’s so much opportunity that’s different from what we’ve been doing before.

William C. Styslinger

In answer to your telephone company question, Brian, let me just point out a few things. First of all, we remain the sole supplier of hardware and software for on-demand at Verizon, which is as you know quite successful, and also their library for VOD, actually increases to more than 10,000 titles through the year with 1,000 POD titles this year. I also want to point out that not only do we sell them the core management software and service, we also sell them the product that goes in their client for providing DVD like experience for movie viewers and other VOD content and fact for games. So we’re doing quite well there.

Brian Coyne – F.B.R Capital Market

Bill, following up on your response on the Verizon side, does that really sort of grow as subscription grows or is it going to be one those situations where you’re going to see a lot of development of titles, sort in advance of that, and then installation of the infrastructure before you start to see the subscribers taken off before they grow incrementally.

William C. Styslinger

We get essentially revenue per subscriber for some software and we get revenue per strength, basically for core management software and service and as you may know, they expect to greatly expand a number of subscribers this year. There will be additional sites, add-on streams. A portion will be built out, a portion will be recurring.

Brian Coyne – F.B.R Capital Market

Do you have any update on the master purchase agreement about potentially two more on the horizon and sort of a bigger picture question, as obviously your customers are moving toward Flash memory, as that sort of evolved, how do you really think about your business model changing in terms of what kind of leverage do you see in your operating line? Does it really come off in the gross margin part, off the operating side? Where is the power in the model driving the earnings forward?

William C. Styslinger

It’s pretty simple for us, because I think we’ve demonstrated over the last few quarters, that little rise in revenue, and you’ve also seen us carefully manage cost and also that the leverage remains going into the future and we have a lot of programs here to continue to do that while we still maintain a fairly aggressive R&D, but longer proportion or scaling with revenue. So we feel very confident in our ability to gain leverage with an increase in revenue. There will be over time, as there has been for the last year, a shift in mix, which also is favorable to that, towards software and recurring service revenues. So that’s the answer to that question. I think that’s pretty solid. What was the first question? Oh yeah. We don’t want to waffle on that, because I’ve indicated now I think pretty consistently the last few quarters, that isn’t really a key metric in how we’re going forward. I know people keep asking about it, but we move at a pace that customers want to move at. In terms of completing agreements, right, and the actual completion of agreement, there’s no urgency to it on either party, because we are getting all the business from those two accounts that we suggested would be coming and they are still coming. The accounts are moving ahead without those agreements being in place. So I don’t think there’s any real point to measuring us or looking to those as milestones for us and I think the better milestones would be how this content that we talked about is moving out. It’s pretty optimistic statements about that I think. HD is, I think you can see advertising as a forerunner as the various service providers move to HD very broadly. People want HD. Then the ABC thing with high content, that’s a big one, and then the [long tail] is a big contributor. So the bigger that library gets, the more there is for people to select and watch and the more they’ll watch. Those are the big drivers. I would also point out, which probably is not obvious, but our relationship with our customers has never been better.

Operator

Your next question comes from the line of Murray Aronsen with Ferris Baker Watts.

Murray Aronsen - Ferris Baker Watts

Good afternoon, everybody. Congratulations on the quarter. I want to just ask you a little bit, I know this is a dicey topic, but to get as much as I can from you in terms of timing. As you look out over next year, you’ve indicated it should be kind of similar to the way trended in this past year, which is obviously much stronger in the second half. Can you give us some color as to what are the levers that are moving that? Are you looking at timing on software development stuff? Are you looking at budget cycles? Are you looking at individual projects that you’re working on for key customers or new deals coming in the door? What’s responsible for that cyclicality or seasonality?

William C. Styslinger

There’s a great deal of project work which produces things more strongly in the second half and it’s been similar to the last two years in that regard. The rest of those things you’re talking about are all players. It’s been a surprise to me how our revenue has performed in the first quarter the last couple of years, so we don’t want anybody to be surprised about that again this year. One thing I can say about the first half over last year is that we expect growth year-over-year in the first half.

Murray Aronsen - Ferris Baker Watts

Can I ask you a little bit about the broadcast and the advertising business, because we’ve seen over the course of the year, both those businesses have been going up sequentially, especially the broadcast business and I just kind of want to get your sense of the outlook going forward, you know, if it’s too much to expect sequential growth going forward and if that’s going to be a lumpy sort of proposition or how you view that?

William C. Styslinger

The broadcast business, I think pretty much for everybody who’s in it, in the first quarter slows down before the NAB program, before the NAB conference, and that’s been a long tradition. You shouldn’t expect sequential growth in broadcast in this quarter because of that, but you should expect in broadcast. The broadcast products are being very well received by our customers. It’s around workflow, management, and readying the program to play reliable, but also to put it out in other forms. As you see the story unfold that Yvette started to hint at with CDN. Today you could look at us as a specialized content delivery system for high quality television and a lot of it starts right there, as evidenced from the ABC My Primetime. They’re doing more things with that content and try to monetize in different ways and our workflow strategy and archiving strategy and play their strategy all work together there and I think that story that we have is a pretty good story, getting a lot of good vibes from broadcasters. I think broadcast is going to do well this year.

Murray Aronsen - Ferris Baker Watts

Given some of your thoughts on the advertising side and what Yvette was talking about, you know, characterizing you guys kind of high quality CDN, I’d love to get your thoughts on, you know, we saw the Who-loo launch within the last day or two from NBC-U and from FOX, to get your thoughts on how that changes the environment, if it does, if you see that as broader opportunity?

Yvette M. Kanouff

I really think that all of that is opportunity. I don’t see any of that to be negative. I think the more that we have content available on video that needs distribution, the better. Right? And there is some differences between the types of delivery mechanisms we probably shouldn’t get into on the call today, because it’s really about getting ready for our fiscal ’09 and how we’ve done last quarter, but Murray, I’d be happy to follow up with you on that particular conversation.

Operator

Your next question comes from the line of John Farrow of Borgen Capital.

John Farrow – Borgen Capital

Congratulations on great quarter, stock buyback, everything. That’s terrific. Kevin, I’d like to thank you in particular. Great job on the operation side of it, or on the balance sheet. I have one quick question. The two master agreements that don’t get signed and you made the comment that well they just keep buying things and keep ordering. Is there any reason, I mean what’s to stop them from never signing? I’m not saying that as a negative, I’m just saying why do they have to sign the master agreement?

Yvette M. Kanouff

I guess I can help answer that. I don’t think that the issue is so much the actual agreement. The actual agreement just sets up all of the legal framework for how and what and setting pricing and things that are typical that you’d expect in a master purchase agreement. For us, the announcement of having a master purchase agreement or two or three or four is an announcement that we have a commitment from a customer to SeaChange and to something that is large enough that warrants a master purchase agreement. So when I talk about it, that’s the real goal that I have is to say there’s a customer that we’re working on a master purchase agreement for, because they’re large enough to warrant a master purchase agreement. The actual finishing the legal work of that or signing it or never signing it is somewhat irrelevant. I think it’s very important to the customer to sign it, because they would like to have all the legal framework for their guaranteed services and pricing much more so than it is for us.

John Farrow – Borgen Capital

Do you get better pricing before they sign it or after they sign it or doesn’t it really matter?

Yvette M. Kanouff

It’s irrelevant.

William C. Styslinger

It doesn’t matter.

John Farrow – Borgen Capital

That’s it. Thank you very much. Good job.

Operator

Your next question comes from the line of Greg Missinault with Neatman and Co.

Greg Missinault – Neatman and Co.

Just a couple of quick follow-ons here. You had mentioned Comcast as one of the greater than 10% customers in the quarter. I was wondering if you can give us some decomposition of that revenue by Axiom versus hardware and also tell us is this consistent with any of their recent RFP activity or off of some older ongoing purchase arrangements?

William C. Styslinger

That customer has a very interesting RFP that a lot of people responded to for next generation on-demand servers and we were winners. So that allows them to buy our current products and those new products with a lot of confidence going into the future.

Greg Missinault – Neatman and Co.

So it’s safe to assume that it includes both Axiom as well as the Flash-based hardware?

William C. Styslinger

Yes. We have not yet shipped Flash servers to Comcast out in the field. I’m not announcing that here.

Greg Missinault – Neatman and Co.

But there’s the presumption that that may occur at some point, right?

William C. Styslinger

Yes. I’m sure they’re going to buy it.

Operator

Your next question comes from the line of Alan Davis.

Alan Davis

First, on the guidance again, give us kind of the factors to think about why cash flow from operations wouldn’t grow in line with revenues and your forecasting flat cash flow from operation on revenue growth next year.

William C. Styslinger

I didn’t do that, not intentionally anyway. There’s a lot of factors. I mean Kevin is better at answering this question than I.

Kevin M. Bisson

Alan, I think, as I noted in my remarks, we had a fairly sizeable reduction in inventories this year with revenue growing next year, it may be difficult, although we’re not obviously giving up on it, but it may be difficult to replicate the inventory reductions that we saw in fiscal ’08. We do that in fiscal ’09, but I think to Bill’s point, the point on the cash flow remarks was more along the lines of saying that we have a very powerful business in terms of being able to generate cash if we are able to successfully generate the operating leverage that we’ve demonstrated in Q3 and Q4 and we intend to do that in fiscal ’09.

Alan Davis

Okay, and somewhat related to that, if you are able to generate profits as you expect, what’s the best way to think about the tax rate.

Kevin M. Bisson

As Bill pointed out, as part of the gain on the sale of Filmflex, we exhausted essentially all of the US tax carry forwards from prior years. So going forward, I think that as we generate profits, we’ll be able to use some other credits that we have, but I don’t think one can assume that we will be shielding all of our income from taxes going forward.

Alan Davis

I guess also fair to assume that maybe the Filmflex sale might be modestly dilutive to fiscal ’09?

Kevin M. Bisson

Yeah, from the standpoint that the equity earnings that we were generating from Filmflex and each quarter in prior years, obviously we won’t have that benefit in fiscal ’09 and going forward. I think last year we’ll see the numbers in the 10-K, but fiscal ’08 was roughly in the neighborhood of $1.7-$1.8 million dollars.

Alan Davis

It might help maybe if you take your various product categories and service for that matter and is it possible for you guys to rank them in terms of growth prospects for fiscal ’09?

William C. Styslinger

I think they all have good growth prospects. I mean I certainly see the mix continuing to go in the direction of the software and services, if that’s helpful.

Alan Davis

What was the total depreciation and amortization for the quarter and then stock base comp?

Kevin M. Bisson

It’s in the press release, but the depreciation and amortization for the quarter was $2.5 million dollars. Stock base compensation was $1.5 million.

Operator

There are no further questions at this time. Do you have any closing remarks?

William C. Styslinger

Well thank you, everyone, for participating in our conference call and we look forward to speaking to you again soon and have a good evening.

Operator

This concludes today SeaChange fourth quarter fiscal year 2008 Investor Relations earnings call. You may now disconnect.

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