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Executives

Martha Schaefer - Director, Investor Relations

Bill Styslinger – President & CEO

Kevin Bisson – Senior VP & CFO

Yvette Kanouff - Chief Strategy Officer

Analysts

Brian Coyne – Friedman, Billings, Ramsey & Co.

Andrew Rosenberg – Footprints Asset Management

Ali Mogharabi – B. Riley & Company

Blair King – Avondale Partners

Murray Arenson – Ferris Baker Watts

Greg Mesniaeff – Needham & Company

Alan Davis – D.A. Davidson

SeaChange International, Inc. (SEAC) Q1 2009 Earnings Call May 29, 2008 5:00 PM ET

Operator

Welcome to the SeaChange first quarter fiscal 2009 earnings call. (Operator Instructions) I would now like to turn the conference over to Ms. Martha Schaefer, Director of Investor Relations; Ms. Schaefer you may begin your conference.

Martha Schaefer

Good afternoon everyone and thanks for joining us today. We'll be discussing the financial results for the first quarter of our fiscal year 2009. Our press release went out about an hour ago and is available on our website 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 Annual Report on Form 10-KA filed April 14, 2008. 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. Yvette Kanouff, Chief Strategy Officer is also with us today fresh off the plane from Europe. Yvette will be available along with Kevin and Bill to take questions after our prepared remarks. Over to you Kevin.

Kevin Bisson

Thanks Martha and good afternoon everyone. Before I discuss our financial results for the first quarter of fiscal 2009, I want to point out that as mentioned in today’s earnings release we have realigned the financial reporting of our operating segments. Our three new operating segments include software, which includes our VOD, advertising, hospitality, middleware and broadcast software products; servers and storage which includes our VOD and broadcast server product lines; and media services which encompasses the activities of our UK subsidiary, the on demand group or ODG.

These three segments replace our three previous segments which included our broadband, broadcast and services segments. Bill will be discussing in his remarks the company’s rationale for revamping its operating segments beginning in this year’s first quarter.

Now turning to our first quarter results for fiscal 2009, revenue for the first quarter amounted to $45.3 million, which was $6.5 million or 17% higher then revenue of $38.8 million recorded in the first quarter of fiscal 2008. From an operating segment perspective revenue from our software segment for the quarter was $30.1 million which was $4.2 million or 16% higher then revenue of $25.8 million for the first quarter of last year. The year-over-year increase in revenue was due principally to increased Axiom software deployments at Cox and Comcast along with a large VOD software deployment for a hospitality customer as well as a large deployment of set-top box software at a large North American based MSO.

This increase in VOD software license revenue was partially offset by lower Comcast software development revenue tied to the timing of projects initiated and completed and hence the timing of revenue recognized in last year’s first quarter compared to this year’s first quarter. Our servers and storage segment generated $11.3 million in revenue for the first quarter which was $2.7 million or 31% higher then revenue of $8.6 million included in the first quarter of last year. The increase in servers and storage revenue between years was due mainly to an increase in VOD server shipments to several North American based cable and telecommunications companies in this year’s first quarter along with a $1.6 million year-over-year favorable swing in deferred Comcast VOD server revenue.

The media services segment had revenue for the first quarter of $4 million which was $400,000 or 8% lower then revenue of $4.4 million generated in the first quarter of fiscal 2008. The decrease in media services revenue between years is due primarily to ODG professional services revenue related to two Latin American customers in last year’s first quarter that was not replicated in the first quarter of this year. Geographically revenue for the first quarter of fiscal 2009 included 70% in North America, 21% in Europe, Middle East and Africa, 7% in Asia Pacific, and 2% in Latin America.

Consistent with prior quarters Comcast and Virgin Media were 10% or greater customers in the first quarter of fiscal 2009. Total gross margin of 50.2% for the first quarter was 4.3 points higher then total gross margin of 45.9% for the first quarter of fiscal 2008. Looking at gross margin by operating segment, software segment gross margin of 54.9% for the first quarter was 0.4 points higher then gross margin of 54.5% for the first quarter of last year. The increase in software gross margin was due to higher product gross margin due to a greater mix of higher margin Axiom and set-top box software license revenue partially offset by lower service margins related to increased year-over-year customer support headcount.

Servers and storage gross margin of 49.5% for the first quarter of fiscal 2009 was 13.6 points higher then gross margin of 35.9% for the first quarter of fiscal 2008. The substantial increase in gross margin in the servers and storage segment between years was due primarily to higher VOD server and broadcast server product margins aided by improvements in manufacturing costs and favorable pricing along with slightly higher service margins related to lower service personnel costs.

Media services gross margin of 16.6% for the first quarter was 2.2 points higher then gross margin of 14.5% for the first quarter of last year due to a more favorable mix of VOD content aggregation service revenue which carries higher margins then professional services revenue. Operating expenses for the first quarter of $22.4 million was $600,000 higher then the $21.8 million of operating expenses incurred in the first quarter of last year. Increased selling and marketing expenses due to higher revenue based sales commissions and increased headcount along with higher headcount related G&A expenses at ODG was partially offset by lower amortization of intangibles resulting from the removal of intangible assets from the company’s balance sheet in the fourth quarter of last year related to the sale of the company’s equity investment in Filmflex.

Net income for the first quarter of fiscal 2009 was $343,000 compared to a net loss of $4.6 million for the first quarter of last year. The corresponding earnings per share for the first quarter of fiscal 2009 was $0.01 per share compared to a $0.16 loss per share for the same period last year. Turning to the balance sheet, the company ended the first quarter with cash and investments of $79 million which was $8.9 million lower then the $87.9 million of cash and investments at January 31, 2008. The reduction in cash and investments in this year’s first quarter was driven by a $12.9 million increase in receivables due mainly to an unusually large amount of product shipped and invoiced within the last month of the quarter that was not collected prior to the end of the quarter.

In addition the company generated $3.4 million of cash in the quarter from operations when factoring net income generated for the quarter and adding back $3.1 million of non-cash depreciation, amortization and stock-based compensation. This cash flow from operations was partially offset by the company’s repurchase of 283,000 shares of its stock at a cost of $2 million during the first quarter as part of its previously announced stock buyback program in February of this year.

I’ll now turn it over to Bill.

Bill Styslinger

Thank you Kevin and good evening everyone. We have begun fiscal 2009 on a high note. Revenues of $45 million plus for the quarter amounted to a 17% year-over-year increase. Quite remarkable when you consider the first quarter revenues for the past two years were $38.8 million and $33.2 million. Strong operating leverage from this quarter’s revenue level generated net income of $300,000; the third consecutive quarter of profitability for SeaChange.

Aiding this bottom line performance for the quarter was the achievement of 50% gross margins. From a balance sheet perspective SeaChange maintained nearly $80 million of cash at the end of the first quarter with no debt. It continues to preserve extensive financial flexibility relative to future investments and product [expansion] and development as well as the return of capital to shareholders. To that objective the company repurchased $2 million of its own shares in the first quarter as part of our previously announced stock buyback program in February and we’re continuing to buy.

I will spend the next few minutes discussing some of the key drivers of our financial performance for the quarter after which I will provide you my perspective on why we decided to revamp our business segment reporting.

On our last earnings conference call we guided that while fiscal 2009 revenue would exceed fiscal 2008, we also anticipated that the year would be more backend loaded. Nevertheless we also stated that we would be profitable in the first half of fiscal 2009 and for the full year as well. With today’s results we are half way to our initial goal of first half profitability. From a revenue perspective our software business benefited from a number of near-term factors.

First our advertising insertion business continues to see higher then normal spending from US cable and satellite companies because of their need for high definition insertion systems. Second our VOD software business continues to maintain its preeminent position with Comcast as they continue their VOD upgrade and expansion activities and purchase a greater breadth of the company’s software product offering. Third on the heels of deploying Axiom software at four of its sites over the previous two quarters, Cox accepted shipment of Axiom licenses for one additional site in the expansion of a previously converted site during the quarter.

We expect this trend to continue for the remainder of this fiscal year as Cox standardizes its VOD software platform with SeaChange to include both the initial conversion and software license expansion in many of these sites to accommodate VOD stream expansion. As mentioned in last quarter’s conference call we expect Cox to also deploy our VOD advertising product, AdPulse, at several sites this year based on successful on My Prime Time launch in Cox’s Orange County location late last year.

In addition the software business generated significant revenue in the first quarter from the initial deployment of VOD software for the hospitality industry. We expect further deployments of this product to several Las Vegas hotels through the remainder of the year as many of these hotels convert rooms to high definition television.

Our servers and storage revenue in the first quarter was approximately 25% of total revenue and was driven by continued spending on VOD expansion by Comcast as well as deployments as several other North American cable and telephone companies. We continue to ship our Flash memory based VOD server and are receiving very positive feedback from customers as we migrate our VOD server product away from disk-based storage. We’ll share some of that feedback with you next quarter. I believe you’ll be pleased with the breadth of its acceptance.

ODG revenue while down year-over-year in the first quarter due to non-recurring professional services revenue in Latin America last year showed year-over-year revenue growth with its European customers and its subsidiary On Demand Deutschland, a joint venture with the television group. Virgin Media continues to publicize the growth of its VOD offering with monthly VOD views rising from 14 million in the first quarter of calendar 2007 to 36 million in Q108.

The portion of ODGs revenue related to the amount of VOD content processed on behalf of Virgin Media the more VOD orders by Virgin customers, the greater the revenue potential for ODG. In the case of On Demand Deutschland, the joint venture marked its first anniversary in the first quarter by coming to agreement and providing VOD content services for Telecom Austria’s IPTV service. Telecom Austria’s IPTV service which was launched in September of 2007 is expected now to attract 80,000 to 100,000 subscribers by year-end which is double the number of subscribers initially forecasted when the service was launched.

Telecom Austria is the third service provider signed up by On Demand Deutschland since the joint venture’s formation about a year ago. On the back half of this revenue performance for the quarter, the company showed strong operating leverage and generating profitability for the quarter. With nearly two-thirds of the quarter’s revenue software driven the company was able to generate gross margin above the 50% level for the first time in nearly eight quarters.

We have been telling investors that our operating model projects gross margin at the 50% level and we achieved that mark this quarter. Our goal is to consistently meet or exceed this objective in order to help generate increasing earnings.

Turning to our guidance for the remainder of fiscal 2009, we expect revenue for the full year to be higher then last year and we have further refined this guidance to project year-over-year top line growth to approximately 10%. Our full year revenue guidance stems from continued strong spending on VOD server and software products by North American and international cable and telecommunication companies as well as increased media services revenue from service providers outside the UK.

Following three consecutive quarters of profitability we expect the company to be profitable for the second quarter this year as well and as for all of fiscal 2009 driven by continued software margin strength and operating expense containment.

I’d like to focus the remainder of my remarks on the company’s reasoning for realigning its business segments beginning in this year’s first quarter. This decision essentially has its roots from approximately two-and-a-half years ago. At that time the company made a rather bold decision to separate the pricing of the VOD software from VOD servers. By disaggregating the VOD server and VOD software pricing from the total VOD system price, the company was able to build a paid software licensee mechanism with customers upon the initial VOD system deployment and a paid additional revenue for software upgrades as well as customer support fees.

The software upgrade program has since evolved into what we refer to as our software subscription program that allows customers access to our latest software upgrades and enhancements for our price per active stream. By separately tracking the revenue contribution from our software products we have been able to track the gross margin and bottom line contributions for our various VOD as well as other software products to see the relative contribution of these products to the top and bottom line financial performance of the company.

While we have been internally compiling our software product data we have been communicating to investors as the significance of our suite of software products as a contributor of increased revenue, recurring revenue and highly profitable revenue. While investors generally appear to comprehend our rationale for emphasizing the strength and scale of our software product line, we came to the conclusion that formally organizing and reporting our business by the three product segments noted earlier would quantitatively show how powerful our software business truly is.

Our first quarter numbers prove this point, of the $45 million plus of company revenue generated in the first quarter two-thirds of that revenue came from our software business. In addition the software business on an absolute dollar basis is our most profitable business reporting $4.2 million of segment income in this year’s first quarter. Besides being our largest business segment, the software segment offers some of the greatest potential for revenue and earnings growth.

We have the number one VOD software product in the world with our Axiom product line and we believe that this product is positioned to capture its fair share of the overall growth in VOD subscribers in the future. The software segment also includes ad insertion, middleware, hospitality and VOD advertising product lines which have significant growth potential. With our current standing as the VOD software of choice and new products in the pipeline such as the recently introduced Affinity, a search and recommendation product, the software segment has the potential for additional margin expansion to drive increased earnings.

While I’ve spent considerable time focusing on our software segment as a driving force for realigning our business segment, I’m certainly not diminishing the importance of servers and storage or our media services segment. We continue to see traction with customers for our Flash memory VOD server as I discussed earlier, our process for growth with our media service segment through ODG are very encouraging throughout Europe. Following up on the discussion of our new business segments, we look forward to sharing with you in a future earnings conference call how we view this market [size] of our new business segments in order for investors to more quantitatively evaluate the top line growth potential for SeaChange.

Now let me speak briefly about a new account, Turk Telekom to be their prime IPTV system integrator. Turk Telekom has 19 million subscribers and by one measure is the 13th largest in the world as a telephone company. We expect revenues from this contract in the next 18 months to be approximately $15 million. The IPTV system will provide multi channel broadcast services and video on demand. I just need to point out that that $50 million is the first phase of the project.

This is a very big step forward for us for a number of reasons. First it shows the value we have as a company to manage and supply a complete television system for a major telephone company. Second we have carefully expanded our professional services organization in order to prime IPTV projects. While this is our first large scale telecom project, we were the prime system integrator for Virgin Media’s very successful VOD deployment and have done a number of smaller projects since then. Some we were a sub to larger Telco suppliers.

It is important for us to be recognized as a large scale system integrator in order to have strong direct relationships with large Telcos. Thirdly we will use almost all of our products; in particular this is a big boost for the TV navigator middleware product we purchased from Liberator a few years ago. And fourthly, we expect to jointly develop, test and deploy new products with Turk Telekom.

So the relationship strengthens our product and services position with the telecom market worldwide, and let me point that our large Telco customers today are Verizon, [KDDI], NDT and now Turk Telekom. Not bad huh?

We’ll now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Coyne – Friedman, Billings, Ramsey & Co.

Brian Coyne – Friedman, Billings, Ramsey & Co.

In terms of the Turk Telekom agreement, Bill I just want to make sure its $15 million in revenues over the next 18 months or so, is that what you said?

Bill Styslinger

Yes.

Brian Coyne – Friedman, Billings, Ramsey & Co.

I was wondering if you could just perhaps talk to us first about how you—maybe just a little bit more specificity about your role as the integrator. Again, how much do you sort of see it as SeaChange proper products and services, your relationships with other equipment vendors or service vendors as perhaps as you pull that system together and maybe a little bit more background on why you believe you are successful in getting that?

Bill Styslinger

It’s because we believe we have a pretty broad offering. We have a very strong track record for delivering and in fact if you were to deploy a broadcast and on demand television service in the world service as a telephone company, I think we’re the best in the world to do that. In the past we’ve done that with other systems integrators and so now we’ve stepped to the forefront and show off our skills directly and I think for the presentation by the various elements of our company I think we’re very persuasive. There are very strong people we have in the company and it’s a very strong proposal. So there are obviously elements that we don’t manufacture for instance DRM, digital rights management stuff and set-top boxes and encoders and such so our role is to help negotiate these deals with the suppliers and to make sure that they perform as per the agreement with Turk Telekom. Integrate all of those with the ready products that we have.

Brian Coyne – Friedman, Billings, Ramsey & Co.

Just in terms of—with the progress there, how do you see any other opportunities? We know of a few things that are out there, is this going to be something that you’ll focus on stepping forward and being the integrator and then does that play any kind of a role—if that is in fact sort of a growing part of your strategy, does that play a role in how you’re thinking about perhaps how to use some of your cash just perhaps to maybe bolster that part of your business?

Bill Styslinger

We don’t see it really as making demands on our cash the way we are managing this one in any case and this would be a good model for others going forward. First of all, yes we expect this to be a tipping point for us to get more like deals and I don’t see it yet as this being a cash demand.

Brian Coyne – Friedman, Billings, Ramsey & Co.

I was really thinking about a cash demand as maybe if you’re thinking about M&A to perhaps expand –

Bill Styslinger

We always think about that. If we could find the right attractive partner yes.

Brian Coyne – Friedman, Billings, Ramsey & Co.

If you could give us maybe a little bit better sense, you’ve had three nice quarters of profitability here and starting to get some consistency and starting to get some leverage, do you see sort of a breakout point over the next, call it a year or 18 months, where perhaps in conjunction with this deployment at Turk Telekom and maybe some other things going on where you start to see a little bit of that—the earnings start to expand up from on a GAAP basis, $0.01, $0.02, $0.03 something where you all of a sudden start to talk about $0.07, $0.08, $0.09 and if so, how do you think about the cost side of the business as you get there?

Bill Styslinger

The simple answer is we expect to contain the expenses and not allow the breakeven point to move up so that you can see a lot of leverage.

Kevin Bisson

I think also that certainly deals like Turk Telekom enhance the top line performance of the company and with the—combining that with the margins that we exhibited this quarter and the cost containment on the operating expense line you really start to see the enhancement of the operating leverage of the business so I think its obviously a combination of both. Its not just cost containment but its also top line revenue opportunities and I think that’s—the breakout is going to come I think when you start seeing that top line accentuate beyond the levels we’ve seen over the last couple of quarters.

Operator

Your next question comes from the line of Andrew Rosenberg – Footprints Asset Management

Andrew Rosenberg – Footprints Asset Management

On the server and storage segment, what do you feel the impact from high definition rollout could be for you in that server and storage segment?

Bill Styslinger

It’s an [inaudible] question because a single stream of high definition takes three to four times the bandwidth and storage of a standard definition television and that’s still just picking up so we will decline to make projections but its obviously very favorable trend for the sales of service and storage.

Operator

Your next question comes from the line of Ali Mogharabi – B. Riley & Company

Ali Mogharabi – B. Riley & Company

Just to follow-up on the Turk Telekom announcement or the detail that you gave $15 million is the first phase, can you give us some more color on how big of a deal this can be, what we can assume in total revenues that you may generate from this deal?

Bill Styslinger

I really would—I’m a little reluctant to talk about how big that might be as yet because its just around timing but the first phase begins with a soft rollout in the fourth quarter in anchor to about 100,000 subscribers. But they have a lot of subscribers.

Ali Mogharabi – B. Riley & Company

Regarding the current customers you have mainly in North America, I’m just curious have you—Arroyo or [Broadbust] of course now part of larger companies, have they gained any traction in the markets that you’re serving right now? Do you see those guys come up against you?

Bill Styslinger

They come up all the time but I think as I pointed out in my remarks that next quarter we’re going to give you a sweep of how we’re doing there. I think you’ll be quite pleased with the breadth of our success.

Ali Mogharabi – B. Riley & Company

On the hospitality deal, I’m assuming that that’s with Cox hospitality?

Bill Styslinger

Correct.

Ali Mogharabi – B. Riley & Company

Just your thoughts on the Sony NCTA announcement yesterday, it looks like they’re now putting the burden on the TV manufacturers. It increases the exposure of VOD services but am I right--?

Bill Styslinger

You’re right, we like it.

Ali Mogharabi – B. Riley & Company

In the short-term it makes sense but I’m assuming this will make the upgrades and enhancements difficult as it’s less likely that the consumers will go out and buy new TVs just for those enhancements. Just trying to figure out—am I right in thinking that this may actually—this may result in lower exposure to interactive applications therefore taking longer for consumers or subscribers to actually adapt to those things?

Yvette Kanouff

I think that the reason that Bill is expressing some enthusiasm about that is because it just makes the onus of enhanced applications come from the back office and come from our software and servers so instead of counting on the customer to have to buy enhancements in the home, the enhancements will be done in the back end using our software. So I think that there’s a great upside for us, the more that the devices become implemented into the televisions. It also is just a good thing to take one more step towards all digital in an easy way without the set-top box.

Ali Mogharabi – B. Riley & Company

I guess I’m trying to figure out, is it safe to assume that then maybe the life of the TV set in a household will actually be longer as a result of that?

Yvette Kanouff

I wouldn’t know about that. I guess the life of set-top boxes is awfully long. I don’t know in comparison to television lifecycles because a lot of those get moved from room to room as well but the way that we look at it is even if they get moved from room to room, that’s just the expansion of digital for us so its just all good.

Ali Mogharabi – B. Riley & Company

I looked at the new offerings that you had at the NCTA, can you talk a little bit more about those, restart TV, Affinity, seen any interest or did you see any interest in those from your current or new clients and should we assume that some of your current clients are now looking at restart TV rather then what Time Warner has deployed?

Yvette Kanouff

Well I think that the interest level was very high and I think that the positive feedback that we received pretty consistently was its nice to see us focusing on innovation that allows them to grow revenue and so I think that it was very positively received and there is a lot of interest. As far as the implementation of restart, we’re a technology company so what we’ve done is we’ve just taken the approach of allowing the flexibility and especially worldwide, some operators want to do start over, some are doing full network PBR with rights, some are doing look back only without start over capability so we’ve just offered a platform that does all of those and I think that that’s—because of the fact that the business model is still being established and nobody really knows where exactly its going to end up in the long-term, I think that that flexibility is appreciated.

Ali Mogharabi – B. Riley & Company

Can you give us an idea of what percentage of the software revenues were from advertising?

Kevin Bisson

I think those were—that number was roughly comparable to what we showed of the last several quarters under the old segment reporting basis.

Operator

Your next question comes from the line of Blair King – Avondale Partners

Blair King – Avondale Partners

On the international front if there’s any way any of you could talk more about what might be in the pipeline and particularly along the lines of any opportunities you see in Asia would be particularly important. Obviously this Turk Telekom thing is a great opportunity but it would certainly seem to me that a lot of the opportunities going forward, material opportunities going forward really would be international and it would great to get some further clarification on how things are going there and what the pipeline really looks like.

Bill Styslinger

There’s quite a bit of activity in both—in the big countries, China and India as you may know. I not sure we have publicized yet that Beijing Cable is doing the Olympic Village with [C] Chinese Video on Demand. There’s a number of cities which are largely government operations that have chosen [C] Chinese for video on demand throughout China. And we have some very successful operation service providers in India and another bunch on the way. So there is a lot of activity. The volumes of streams accounts in those deals are initially quite small so they look like small deals but there’s a lot of people there.

Operator

Your next question comes from the line of Murray Arenson – Ferris Baker Watts

Murray Arenson – Ferris Baker Watts

Now that you’ve broken down kind of the software and server storage standpoint what I hope to get to is looking at margins on a software product and then server storage product basis. Can you offer anything up on that front or am I left to kind of back into some things?

Kevin Bisson

I think on the software side clearly on the product side those margins are in excess of our overall margins and I’d say comfortably, whereas on the servers and storage side, I would say that they are lower, not markedly lower, but lower then the 50% that we achieved in total for the company and that’s just on the product side. In terms of the services for each of those businesses, the service margins are lower on the software side then the average for the company primarily because most of our service costs or our support costs are software oriented and conversely on the hardware side, our margins are accretive to our overall 50% margins for the quarter for the opposite reason, meaning that proportionately speaking our support costs are fairly low relative on the hardware side or on the server and storage side relative to the software business.

Bill Styslinger

And just to make another point on the software business, margins there are somewhat lower; we’ve built up the software technical support organization worldwide substantially over the last 18 months in order to provide a really high quality and comfortable pleasant service to the customer. And those margins should improve over the coming quarters.

Murray Arenson – Ferris Baker Watts

You mentioned the timing of several orders coming in in the last month of the quarter so the AR balance, DSOs go up, can you talk about, characterize those at all. I mean are we looking at server deals, software deals, were those the kind of things that you didn’t know if they were coming or not or you just knew they just happened to fall at the end of the quarter and maybe one month into this quarter, how are things looking as far as linearity goes?

Kevin Bisson

I think it was unusual from the standpoint that it was more timing then anything else. I don’t think it was—if you’d asked me this question 60 days ago I would have expected those orders to come in sooner then they did and hopefully we would have had an ability to collect on some of them but it was more of a timing from the customers’ perspective then anything else. I will say that the customers involved are our typical customers so clearly there isn’t a collectability issue what so ever and I suspect that given what we’re seeing in the current quarter our expectation is that we would get back to a more normal linearity in terms of shipments and hopefully collections so that the receivable balance would certainly not spike up to that level.

Bill Styslinger

I think its worth noting, it’s probably already clear but we didn’t take business from Q2 into Q1. We’re saying we’re going to be profitable in Q2.

Murray Arenson – Ferris Baker Watts

When you were going over comparisons you referenced the timing of some of the Comcast software development and I wondered if that was just a backward looking comment or if there was something to be read there in terms of Comcast software development through the rest of this year?

Kevin Bisson

No without getting into the nitty gritty accounting here, essentially last year we had several software development projects that were initiated in the first quarter that based on the accounting allows us to book some of that revenue at that time. Due to the timing of the projects that we’re working on now, we didn’t initiate a lot of them in this first quarter and again that’s both a timing issue, there is nothing to read into it other then the fact that we just happen to initiate some of these projects more in the first quarter then we did last year then this year. I think Yvette and Bill will both tell you that our relationship with Comcast has never been stronger and our expectation is that our software development revenues this fiscal year will be substantial as they have been in the past couple of years.

Murray Arenson – Ferris Baker Watts

Maybe following on some of the previous questions on the IPTV and telecom side of things, you are pulling together a nice stable of customers there and you gave us some numbers at least to start with on the Turk Telekom side, NTT has been with you awhile and for a long time these have been deals where it seems like its tough to figure out when you might see some acceleration of growth, when things might spike, when they might get more active and I just wanted to take your pulse as to where you see IPTV rollouts across your customer base right now, is it still really tough to figure out when they’re gaining momentum or are you actually seeing some of that happen?

Bill Styslinger

Well there’s certainly more activity. But still in IPTV in general the stream counts are low compared to the established cable companies. That’s not going to change dramatically in the next 18 months and more then that I probably wouldn’t project anyway. But I am pleased with that building—portfolio of accounts; they’re pretty nice accounts.

Operator

Your next question comes from the line of Greg Mesniaeff – Needham & Company

Greg Mesniaeff – Needham & Company

With the increasing focus on software and particularly Axiom, as you look at your VOD pipeline, would it be fair to say that some of your key customers are cherry picking their hardware, their VOD hardware and software vendors and perhaps giving you the software piece of the business and some of the other hardware vendors the hardware business or is the strength of Axiom been primarily driven by upgrades of existing VOD installations where perhaps the hardware is still, has some life to it and you’re just, they’re just upgrading the software platform?

Bill Styslinger

As I said, I think next quarter when we provide you more color around how the [flat] server in particular is doing, I think you’ll be pleased with the breadth of its acceptance so I don’t think that our customers are—there are certainly some accounts like Cox that has chosen one software vendor and one hardware vendor but in general I think our software is becoming such a strong player in the industry that it is going to become just by its nature I think as people want to refine their spending and simplify their operations more and more are going to tend to embrace one software vendor completely across their systems.

Greg Mesniaeff – Needham & Company

Looking at your balance sheet you posted a nice increase in deferred revenues; I was wondering if that’s mostly Axiom or just other software of if you can just give us some color on that, composition of that?

Kevin Bisson

A good chunk of that are annual maintenance contracts both on hardware and software where customers, many customers will essentially pay in advance and we amortize that over the entire 12 months so that’s a good chunk of it.

Greg Mesniaeff – Needham & Company

Okay so mostly ongoing. You mentioned obviously Comcast continues to be a greater then 10% customer, with all of the news flow out of Comcast in the last quarter about them scaling back certain aspects of their network spending priorities, I’m wondering how, if you can give us any color on what their strategic direction is vise a vie switch digital video, and obviously video on demand and how your strength in software plays into that?

Yvette Kanouff

There are two things that they’ve been very public about, one of which is the move of the implementation of project Infinity and the other is their focus on advertising. So both of those happen to be products that we build so the positioning that we’re in right now is a good one. And I can’t get into a lot more detail then that but I think that we’re in a fortunate position to be in several very high priority projects with Comcast.

Operator

Your next question comes from the line of Alan Davis – D.A. Davidson

Alan Davis – D.A. Davidson

I wanted to get a little more color on the server and storage gross margin improvement year-over-year and you mentioned pricing and lowered costs as the two drivers there, I’m wondering what’s driving that, are you getting more premium on the Flash servers, is that a meaningful part of this or what’s going on there?

Kevin Bisson

A couple of things are going on here, number one as I mentioned in my remarks, we did have overall reduction in manufacturing costs, labor and overhead costs have come down significantly. A lot of that has to do with some of the cost reduction actions that were taken in the second quarter of last year where we consolidated manufacturing and that’s improved margins with the servers and storage business.

Our broadcast server product line has shown significant improvement in margins, some of it cost related some of it pricing related. And that has shown overall dramatic improvements for the overall segment. So I think that’s a lot of it and then thirdly to Bill’s point earlier, we have built up the support organization within SeaChange to drive more of the support on the software side and that has allowed for improvements on the servers and storage service margins as well as some of that build up in support costs on the software side has been from I’ll say borrowing folks that were normally on the service and storage side of the business. So a combination of those three have really positively impacted margins year-over-year.

Alan Davis – D.A. Davidson

You singled out in terms of high definition both your ad insertion business and some hospitality business, I wonder if you could give us a little better insight into how meaningful those two revenue streams currently are for you.

Bill Styslinger

Actually it’s across the board. A lot of the expansion at Comcast for service and storage is also high definition so high definition this year is a very strong driver of software and hardware revenues for us. Everybody now wants high definition, its something like 25% I think are current users of high definition television. A year ago it was surprising that there was, that the stores had switched over entirely to high definition. It’s hard to find a standard definition television any more. It’s a growing phenomenon that plays right to value for us.

Alan Davis – D.A. Davidson

And the Turk Telekom, your expected revenues you mentioned there over the next 18 months, I would imagine those would be somewhat back end weighted on to those 18 months, and I’m curious your expectations on gross margins for that business comparable to your current gross margins? Additive, dilutive? What’s your outlook there?

Bill Styslinger

The products that we’re talking about in the $15 million are SeaChange products and there isn’t—really I’m not in a position to comment on those gross margins.

Operator

Your final question is a follow-up from the line of Ali Mogharabi – B. Riley & Company

Ali Mogharabi – B. Riley & Company

Kevin can you breakout that I think it was $3.1 million that included D&A and stock-based compensation? How much of that was D&A, how much of that was stock-based comp?

Kevin Bisson

I believe around $2.3 million was depreciation and amortization and obviously the $350,000 or so for net income, the remaining is the stock compensation.

Operator

At this time there are no audio questions.

Yvette Kanouff

I’d like to just add one more comment on software, I’d like to just clarify that the comment about software and hardware being combined and us taking those apart and how that works with other server vendors and I think its important to note that the software is expanding far beyond just driving video servers and as we add mobile devices and we reach out to so much of a larger customer base then where we’re at today, and we reach backwards in the network more and we’re really providing a content distribution network that’s pretty sophisticated, the software being separated is a really strategic function for us and it has enabled us to get into some sites with third party video servers that we would not have had the opportunity to get into before. But separate of that, it is a very strategic decision for us and I think that’s something worth noting. Maybe we’ll talk about that on a future call.

Bill Styslinger

Thank you all for calling this evening. Our company is on the upswing and perhaps I’ll get to see some of you in the next 90 days to talk more about just how well we’re doing. I look forward to another good report for you in a few months and thanks again for listening and have a good evening.

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Source: SeaChange International, Inc. F1Q09 (Qtr End 04/30/08) Earnings Call Transcript
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