Q3 2020 Earnings Call

Greetings and welcome to the sea change third quarter.

2020 earnings conference call.

At this time, all participants are in listen only mode.

A question and answer session will follow the presentation.

If anyone should require operator assistance during the conference Press Star Zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Mary Conway. Thank you you may begin.

Thank you operator, good afternoon, everyone and thank you for joining US Seachange released results for the third quarter fiscal 2020 ended October 31st 2019 today after market closed if he would like a copy of the release you can access it on the IR section of our website and investors dots. He changed outcome. In addition to.

Company today's call will be using a presentation, but it's also posted on our website at the same location and we already there afterwards, we encourage you to Buick along with our remarks.

With me on today's call are you feel Onep, Chief Executive Officer Catholic Chief Commercial Officer, Merrick told you ski Chief Technology Officer, and Michael print Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Where you'll see it begins I'd like to remind you that the information we're about to discuss today may include forward looking statements, which are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results could differ materially from expectations.

These risks are outlined in our FCC filings, including our annual report on Form 10-K , which was filed on April 12, 2019, and our most recent Form 10-Q , which was filed on August Thirtyth 2019, any forward looking statements should be considered in light of these doctors. Additionally, this presentation contains certain non-GAAP or just.

Financial measures as defined by the FCC, we have provided a reconciliation of these measures to the most directly comparable GAAP measures the tables attached to the press release and with that I'd like to turn the call over to you'll see you'll see.

Thanks, Mary and welcome everyone.

Starting with if an internet doing.

We had a solid quarter, we do they couldn't you play with <unk>.

20.5 million in revenue.

Because of 22.2 median.

An increase of 6 million from the end of <unk> I was thinking what do.

Well its margin was 76%.

Income from operations was 5.2 medium.

We closed eight significant framework deals.

What do.

He sees on topic to seven deals we shipped in the second quarter.

I want new wins represent a wider range of content and service provider.

Since the end up to what do you secure <unk> business, we've got the mills in the Americas, India.

We have a large and growing pipeline opportunities that we expected converting to cycle and talk to you for went beyond its we continue executing well with what did you.

It is important to note that we have accomplished these seem to very short period of time.

I joined the company in Germany, and together, we did leadership team immediately began to beat that won't be station and go to market strategy.

Clearly well team has done an excellent job launching difficult border, beating it might benefit that you need <unk> based on up when you go to market started you and converting them into signed contracts.

In addition to focus 11, new generation. We also did you seemed a little operating expenses.

We continue to see mine operation in a way to better align the company. We don't you booked lockett's package.

We have it didn't do find additional expense savings.

And we are actively engaged in realizing those savings.

As opposed to operating civil engineering team in multiple geographies, we know what to think of engineering give me one single location.

Fights, many tens had been efficiencies and cost savings opportunities.

Another example is I want to quarterly meeting you know.

We have announced that we have entered into the system into if I were knocked it.

We expect to save about 1 million per deal you know predicting cost is an example to sale in diffuse knit did it expenses that we will incur you know what did you space.

Mike our new CFO .

To both your life the cost savings, we if they didn't you fight and when display didn't you find additional opportunities that may exist.

The only financial metric that was disappointing.

Cash balance 15.8 comedian adequate do it.

Good news you did we believe our cost position to stop in <unk> and the actions. We are thinking now whiteside the cost structure with the company combines we dealt with folks its momentum.

At the Sop to be cash flow positive going forward.

It's still me today is that the transformational seachange is well underway and thinking book.

I think filled that evidence that tell us what did you go to initiative a winning in the marketplace.

Positioning seachange forklift market leadership and long term profitable.

If I won't go offering and our unique value based engagement, it's been with received.

I wouldn't you wind up what they will provide additional confirmation that we have a superior product, which enable our customers intent to offend an exceptional fuel extends to their customers.

I will be to get dramatically different you did if they will bring start customers in terms of both opex savings and your revenue generation potential, including simple Kim enable us to achieve quick closing cycles.

We're also making focused we the positioning seachange is a social provider.

We believe that we will maintain to 70% Glasgow smoking and.

<unk>, 10% to 15% non-GAAP operating margin will be attending Balan, if white 21.

We have long term agreements and predictable equaling revenue.

We partner with Dr. Miller to provide though it could take on the infrastructure under monkeys go talk to that extent full dignify views.

Which will fight looked in predictable revenue stream for.

And make us an important strategic partner for customers.

I want to reiterate that with the exception of <unk> and cash balance Doggett, who continue to remain confident you know ability to me do you feel financial targets.

We did let me turn it over to Chuck.

Which are detailed on some of our to go to wins.

I didn't I look to get them before joining sea change and I seem to charge due simply to Caulfield the leadership <unk> global steel.

Chuck.

Thank you you see I'm pleased to join you today in my new role as the Chief Commercial officer at U.S., You mentioned earlier, we added eight new significant framework wins during the third quarter.

These wins validate the support in the market for Seachanges value based solution with both current and new customers.

Our existing customer base is signing up to do more in their current platforms with access to framework solution, providing sea change with increased revenue and cash predictability through multiyear engagements.

New customer wins demonstrate that we are replacing multi vendor solutions, creating a better user experience and higher quality of service as well is gaining the increased revenue and cash predictability from the multiyear engagements.

As trashing continues to pick up for framework in the market, we see further alignment and overall contributions from all three supporting geographic regions and sales.

Framework wins are currently more evenly distributed compared to our past quarter and the increasing sales pipeline indicates that this will be the norm moving forward.

Our customer base as well as the market continues to see that framework is not only a unique value based solution, but also provides so much more.

One of our more significant wins in the third quarter.

It was further influenced by the addition of their predictive analytics module to the framework platform with recent release of our industry, leading predictive analytics capability customers know can understand and better monetize the information in their video platforms.

I'll turn it over to our CTO Merrick to further discuss these innovative achievements and advancements in our technology.

Thanks, Chad and good afternoon, everyone I'm excited to share with you in innovation update on the framework.

Last quarter, we announced the availability of version seven of our cloud native back office with enhanced analytics capabilities and the modern and versatile orchestration layer.

Analytics helps our customers increased revenue by making better data driven decisions.

In Q3, we extended the feature set of the analytics component to now include automated solutions for generating incremental revenue and reducing subscriber churn.

In particular, the framework now offers better targeting a promotional campaigns through the use of artificial intelligence and advanced behavioral segmentation.

Thanks to this innovative approach we can now identifying provide tailored content offers to subscribers, who are likely to churn with even better accuracy than before.

We are also leveraging this innovation to provide better ad targeting.

INAP using the framework kleintop as well as using server side ad insertion.

Analytics also provides advanced revenue production, which allows our customers even better insights into individual future customer value that's about as extensive content sales trend analysis.

This past quarter, we successfully completed the integration of the extreme product in software engineering team with the rest of the Poland based R&D team.

The entire R&D organization, it's not focused on building out new framework roadmap increments.

Adopted a lean agile process that spans all framework components, which gives us the advantage of being able to add new functionality simultaneously across the entire platform.

This means that new innovative features are brought to market faster than before and are not constrained by internal or external integrations happens.

We expect to continue increasing the efficiency of our R&D organization by consolidating teams focusing on our core functionality and eliminating redundant legacy product features.

With that let me turn the call over to Mike Our CFO .

Thanks Mack good afternoon, everyone. Let me say at the outset I'm delighted to be here today, working with a high caliber team and mapping out an exciting growth trajectory is what attracted me to see change.

I look forward to collaborating with my colleagues to achieve sea change its full potential.

Now I'll review, our third quarter results.

We entered the third quarter of fiscal 2020 16.3 million in total backlog excluding legacy maintenance.

We booked new business of 20.6 million during the quarter and ended the quarter with backlog of 22.2 million.

So far this fiscal year, we've closed 15 significant framework deals with total value more than 39 million.

Includes seven deals valued at more than 20 million in total revenue that we told you about in late August .

Even that framework engagements contribute revenue over multiple years, we expect that our backlog will continue to grow as we close additional framework deals and the remainder of this fiscal year and our recurring revenue from this backlog will increase and become more predictable.

Total revenue in the third quarter was 20.5 million, a 10% increase compared to 18.6 million in the third quarter of the prior fiscal year.

The increase in revenue was driven by framework engagements that were delivered during the quarter.

Total product revenue was higher in the third quarter. This year at 13.5 million or 66% of total revenue compared to 8.3 million in a year ago quarter or 44% of total revenue.

The increase in product revenue was driven primarily by software licenses delivered to customers related to framework arrangements.

Total services revenue in the third quarter was 7 million or 34% of total revenue compared to 10.3 million or 56% of total revenue in the third quarter of last fiscal year.

As expected we continue to see declines at both professional services and support revenue from customers related to legacy products.

This quarter, we have seen successful transitions at some legacy customers to new frame up arrangements.

In addition, we've continued to transition or professional services organization to our customer engineering organization as we complete legacy professional services projects.

His transition is expected to be completed in our fourth quarter. This year.

Oh, the total services revenue in the quarter maintenance and support was 6.2 million and professional services was point 8 million compared to 7.5 million and 2.7 million in the prior year quarter, respectively.

Revenue from international customers was 10.1 million in the third quarter. This year and represented 49% of total revenue compared to 10.5 million or 56% of total revenue in the prior year quarter.

Two customers comprised more than 10% each of our total revenue in the third quarter of this fiscal year, whereas in the same quarter last year three customers each comprised more than 10% of our total revenue.

Third quarter fiscal 2020, gross margin was 76% compared to 62% and the prior year quarter.

The significant increase was driven by the increase in product revenue this quarter compared to the same quarter in the last fiscal year.

Product gross margin in the third quarter was 97% compared to 79% in the prior year.

Service gross margin in the third quarter. This year was 38% compared to 48% in the prior year quarter.

Primarily resulting from the decline in overall service revenue with fixed costs that as I've mentioned earlier, we on the process of reducing.

At this point legacy professional service engagements are substantially complete as a result, we've reduced fixed costs in both professional services and support functions and expect these actions to be completed by the end of this fiscal year.

non-GAAP operating expenses and a third quarter of fiscal 2020 were approximately 10.5 million compared to 11.8 million in the same quarter over the prior year.

The decline reflects the continued cost savings initiatives related to the reduction of third party costs and elimination of non essential internal cost throughout the organization.

In fact, our excellent progress on this front enabled us to be more efficient into achieved non-GAAP operating profitability.

You'll recall that we've been carrying resources this fiscal year to complete legacy professional service and support arrangements.

We will continue to reduce costs related to these legacy projects once they're completed by the end of this fiscal year.

All of our cost reductions that we've done this year translate into over 12 million of savings. So we're pleased with our efforts to date.

For the quarter, we generated 5.2 million in non-GAAP operating income, which translates to non-GAAP operating income of 14 cents per fully diluted share.

This compares to non-GAAP net loss of point Threemillion or one cents per basic share in a third quarter fiscal 2019.

We also generated net income for the quarter of 2.1 million or six cents per basic and diluted share compared to a net loss of 3.8 million in the third quarter fiscal 2019.

Turning to our balance sheet, we ended the third quarter fiscal 2020 with cash and cash equivalents of approximately 13.8 million no debt.

Cash decreased in the third quarter reflects funds used for operations of 4.9 million.

Mary the result of changes and accounts receivable in Unbilled revenue as a result, the timing of billings related to our framework deals executed during the period.

As you'll see noted we believe that we're now beginning to rebuild our cash when their expectations for ending fiscal year higher than where we were at the end of the third quarter and while we're not providing fiscal 2021 guidance today, we fully expect that will accelerate the growth of our cash balance during that period.

Deferred revenue was 7.8 million decreased from 10.7 million as of January 30, Onest 2019.

Driven primarily by the timing of revenue recognized in renewal of post warranty maintenance and support agreements during the quarter.

Yes, so excluding Unbilled receivables was 59 days at the end of the third quarter this fiscal year.

Continued improvement compared to 71 days in the third quarter of last fiscal year.

Our unbilled receivables were 16.6 million in the third quarter this fiscal year compared to 7.9 million in the third quarter of last fiscal year.

The increase is the result of timing of billings from a framework deals due to the payment terms on those deals.

We're very pleased with our customer wins, leading to increased backlog and product revenue in the third quarter.

As you'll see mentioned, we expect this trend to continue leading to an increase in framework transactions in the remainder of this fiscal year.

Positive momentum with our framework go to market strategy with new and existing customers provides us added confidence in our revenue projections. We are today reiterating our total annual revenue guidance of 70 to 80 million.

And now we expect to sustain operating profitability on a non-GAAP basis and reach positive cash flow in the second half of this fiscal year.

With that let me turn it back to you will see for closing comments. Thank you.

Thanks, Mike we want to have picked up by summarizing that was the future.

Do we think deep.

We have built a team of business leader designed to increase our market share and to accelerate our product innovation and execution.

I mean didn't know what product in go to market leadership.

So do you need to friends on customer relationship by providing outstanding service, we don't site engineering support.

Kobe deficiency.

That's in marketing and R&D I wouldn't talk to achieved a target deficiency by the end of it if you could tell you.

My kids will come to streamline allogeneic limitation.

[noise] become cash flow positive.

He said allows us to we'd be though what cost position, which will enable us to if you know with them.

To do it may I still see change.

We are confident did these strategic priorities, we deliver looked in revenue growth doctors margins profitability and then on several showed dose finding.

We want to close by thanking our customer of the future interesting.

At this stage by older side, well revisit significant diamond energy for our company.

We believe that we got one did I stopped and why do we have accomplished to look into very short period of time. They seemed much to do we debt, let's open the call up for questions.

Thank you.

Ladies and gentlemen at this time, we will begin our question and answer session.

If you'd like to asking question press star one on your telephone keypad.

A confirmation tone <unk> indicate that your line is in the question Q.

The press Star too if you would like to remove your question from the Q.

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Our first question comes from Steven Frankel with Dougherty. Please state your question.

Good afternoon, Yossi and congratulations to you and your team I want to focus in for a minute on.

The cash issue or was there something materially different in the terms of these deals versus Q2, a they got you significantly less cash upfront and kind of describe what a framework deal looks like.

[noise] okay. Thanks, So no it wasn't Defunded then you'll be.

We have you used to be if it its mainly timing. Many of these agreements were signed in developed well through the quarter.

And therefore using standard payment due.

The cost shifting into Q4, so does nothing major do.

In regards to the cash we travel deals.

In most cases customers will pay.

Moelis an equally some drilling did you relation of the engagement meaning.

Let's assume full dicicco discussion to duties and agreements will fight media well vetted relational five view.

We pay a median.

Right after the engagement.

And to deliver the software.

And do pay additional million video why did you shouldn't be engagement.

Like is there anything else you did.

See so really it's timing. This is Mike Brent you know from a cash perspective, it would be spread out evenly over a deal but when we look at it from you know revenue recognition, we've got a software license and so from a revenue perspective gets more front end loaded.

Okay and.

And then in terms of the gross margin improvement on the product side, a is that a sustainable level, where there was something unusual this quarter and you didnt have any pass through hardware and in future quarters, you might have some of that.

If it keeps us D.C.D. gross margin defeated yes, sure. Yes, you sustainable we are targeting much better technology.

And keep in mind wants really moved a component.

Well for fishing on services, which will somewhat less profitable it will enable us to do.

Much Mo and don't seem to me the gross margin.

And if you're thinking about future Sea change you need to think about software company in most software companies.

Good day intimidating when it comes to gross margin.

Okay and.

Could you go back over those customer concentration numbers again, you dropped out how many customers did you have above 10%.

Three.

And how would you characterize the framework deal signed in the quarter of new customers versus a legacy installed base, how does that split out.

So we don't show this information I can tell you did.

First of all well, we do you see it and it's likely to be situation going forward most of them on new customer.

I can also show, we do that didn't denzel Joe graphic on balance.

We are getting to a point, where the geography, where we operate North America Lucky in America annual.

I'm in terms of revenue contribution in gross margin down more or less equal.

And did well they gave each will continue.

And be the case going forward.

Okay and.

Lastly, it looks like you've been stretching out payables.

Well those have to come in over the next couple of quarters and what's the path to.

Positive cash flow.

Sure. So I think at this point, we're kind of projecting the ended the year, we'll be at better cash position than we are now as you know what our next earnings call. We'll obviously see share a little more detail on fiscal 2021, and you know from a payables perspective, I think that will eventually you know come down a little bit.

The next couple of quarters, you know as you talked about we made a lot of changes in terms of efficiencies and cost reductions and I think as you know we realize though you'll see the p. balance come down a little bit.

But it but my specific question was what's the take for this company to generate cash from operations.

Is it a scale issue is it.

Now when when can you generate cash.

We expect to generate cash do you feel Steve.

Okay do you expect positive cash flow from operations in Q4, the fourth quarter correct, Yes, that's correct. Okay, great. Thank you.

Yes, Thank you Steve.

Thank you. Our next question comes from Jason Smith with Lake Street. Please your question.

Hey, guys. Thanks for taking my questions just looking at the framework deals now that you've had another quarter under your belt are the size of these framework deals in line with previous expectations or are they tracking bigger or smaller than wouldn't you had newish initially thought.

Hey, Jason I'm, so down in line with our plan.

So the number that we have announced ease significant wins. In addition to date, we have additional wins, we chose not significant at this stage they will be significant.

In the near future.

Okay and from a competitive landscape I know, you're displacing some multi vendor solutions, but have you seen any significant change from a competitive standpoint and it related Lee how has the competition responded from a pricing standpoint.

With the or success.

Offering these framework deals.

So I will apply thing is based on value, we do look to spicy.

We are focused on sea change in teaching institution deal. So we all know discussing the competition.

Okay and last one from me I just to.

Confirm the backlog has now been completely scrubbed of any legacy deals correct.

Yes, so the backlog numbers that were reporting our framework backlog and you know that's intentional because we're obviously going to demonstrate that's it that's going to continue to grow so it's framework on me.

Okay perfect. Thanks, a lot guys.

Thank you.

Thank you.

Thank you. This includes the acuity session I'll now turn it back to you will see aloni for closing remarks. Thank you.

Thanks again, everyone for joining us today.

Wouldn't be attending the Needham growth conference in New York in January 2020, and we welcome the opportunity to meet you do thanks again and they have a good evening.

Thank you. This concludes today's conference all parties may disconnect have a great evening.