Q3 2022 SeaChange International Inc Earnings Call
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Good afternoon, and welcome to see changes fiscal third quarter 2022 conference call for the period ended October 31st 2021. My name is Hillary and I will be your operator. This afternoon, joining us from the company is president and Chief Executive Officer, Peter Aquino, Chief Financial Officer, Michael trend and senior Vice.
<unk> and Chief revenue Officer, Chris Clemmer.
After the market closed today see change issued its financial results for the fiscal third quarter in our press release, a copy of which is available in the investors section of the company's website at Www Dot C change dotcom.
Before we begin today's call I would like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.
This paragraph emphasizes the major uncertainties and risks inherent in the forward looking statements that management will be making today.
As indicated forward looking statements are based on management's current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations.
These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K, and quarterly reports on Form 10-Q.
Any forward looking statements should be considered in light of these factors.
Additionally, this call contains certain non-GAAP financial measures as that term is defined by the SEC regulation G. non-GAAP non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.
Accordingly C change has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's early earnings release issued today.
I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of sea changes website.
Now I would like to turn the call over to see changes President and Chief Executive Officer, Peter Aquino, Sir. Please proceed.
Thank you Hillary this is Pete Aquino CEOC and before we begin with our prepared remarks today and focused on the third quarter I'd like to announce that we will not be addressing any rumors related to any big transaction that is circulating and induce I. Appreciate your consideration as it's noncore.
For us to provide any commentary today.
So with that let me turn it over to the operator to begin our prepared remarks.
Okay.
Good afternoon.
My name is Peter Aquino, and I'm, the new President and C E O C change international.
We had a solid third quarter and I consider a good marker for a jumping off point to reinvent seek put a long term.
I've been a quick study here on the opportunities ahead of sea change given my deep experience in technology media and telecom or TMT.
In fact, I was a customer of sea change when I ran RCN from 2000 afford a 2010 more than a decade ago.
For nearly 30 years, because they live with cable T V back office support and V. O D pay per view and AD insertion and has a long lasting core competency and delivering video and advertising software to the who's who.
Global client base, and cable telco and satellite and now the exciting migration towards cloud based streaming.
Okay.
As tailwind in trend shift from linear to O T T. Everything we do needs to be the best of both worlds.
Our new roadmap not only include software upgrades for our existing customer platforms and V O D and pay per view, but more importantly leads us to double our efforts to leverage our capabilities to develop SaaS products for content and advertising and a growing Tam for both.
The good news for <unk> is that our opportunity goes well beyond North America. There are numerous use cases for our capabilities in content distribution and programmatic advertising.
Through our experienced software engineering team seek operations and motivated sales teams distributed worldwide our pipeline of new deals is exponential.
Our job is to get there one way or another that is organically or by considering strategic initiatives.
We are great partners and believe that we can accelerate our ability to capture future growth opportunities with others through scale.
Looking ahead, we have a head start with three new focus areas that are natural extensions of our traditional linear and AD insertion business.
I consider it less of a pivot to more of a lean in to the areas that we have significant upside.
The three product areas are streamed bid advertising Rev shares on streaming and our new product that we call extreme.
First stream Vid was launched this year and is expected to be SaaS workhorse for us for years to come.
Extreme I L and popcorn flicks are the first two examples of new logos that we recently closed.
Extreme bid as a white label offering whereby we packaged content into a customized app to be distributed everywhere on any device.
Which stream bid we are seeking side.
This allows specific customer content to be discovered curated and consumed.
Our team is now gearing up to sell this new service more rapidly and considering business segment targeting including entertainment health care and education.
We currently offer a previous version of the software product to a major health care provider and they expect to migrate everyone to the new stream the SaaS platform.
Second we all know that advertising has a huge tam globally and the more targeted can be the more valuable can beat to our clients.
Add selection and customization in the streaming world can maximize channel real estate and provide real time data to our customers to monetize.
We're also shifting our business model to what I call development plus.
Meaning that we will work with operators to develop the SaaS platform and also sharing the upside through revenue share arrangements.
Historically C change would simply provide the hardware and software and be done.
Now, we're aiming to be and now we're aiming to be part of the upside.
Specifically, we closed our first revenue share deal with a large national satellite provider to test our ability to monetize advertising real estate within the lineup.
We are very excited about this development.
With our partner and consider this to be a significant avenue for growth for seek down the road.
And last but not least.
Is our newest product that we're branding extreme.
This is the current capability that is being repurposed and aimed at the smart TV industry.
The trend towards zero set top boxes is here and advertising funding content or apps placed on any device lends its way to free advertising supported TV or fast channels.
Seek is uniquely qualify through our highly skilled software team to partner with content Aggregators, who are already in discussion with smart TV players.
We are being very proactive in this area and look forward to reporting back to you on our progress on extreme.
So at this point, let me turn it over to Chris to give you. Some more examples of our product use cases and accomplishments in Q3.
Chris.
Yeah.
Thank you Pete and good afternoon, everyone.
I would like to spend the next several minutes, providing an update on our progress in each of our business segments and on the significant market opportunities on the horizon.
At a high level I remain very encouraged with the advancement of our key sales and marketing initiatives that position sea change for long term growth as a valuable player to the cable screening and ethics basis.
Starting first with our cable and operator, TV business, which has always been one of our core competencies and remains a key driver of our future success.
As many of you know we have a long track record of delivering value to clients in this space, which include tier one operators, such as Verizon AT&T and Liberty Global where we are deeply embedded in their operations.
You may have seen our announcement in late November of our multimillion dollar contract renewal with one of the largest msos in the U S, which provides high margin recurring revenue over the next two years for the company.
We have been working with us msos for over a decade now demonstrating the long tails of these business engagements.
Within cable we're also working diligently to secure license upgrades professional services projects and support extension.
These types of opportunities not only provides continued revenue, but also can help us streamline our efforts on cost to support various customer deployments, while we upgrade and footprint to the latest software versions.
Within advertising, we're highly focused on securing meaningful market share in this massive multibillion dollar tam by being more than just the back office supplier, which we have been in the past and by allowing us to achieve more upside through revenue sharing arrangements.
We are seeing early signs of success in this market and new business model as we recently picked up a new logo and advertising with be it.
The cable and broadband provider serving eastern Alabama.
We were selected to replace its aging linear broadcast AD insertion platform with our advanced platform, providing robust and insertion capabilities for the cable TV business.
As well as providing a pathway foods nextgen TV streaming operations.
A very important development in our advertising business that I am incredibly excited about is our recent agreement with a nationwide U S satellite operator for a long term recurring revenue share deal.
While it is too early in the rollout to discuss specifics of monetization expectation. This is the exact type of deal we aspire to accomplish more of going forward that leverages, our capabilities and relationships to enter a large tam with a tier one customer.
We are encouraged with our progress converting customers to our new revenue model and look forward to executing similar deals that provide sea change with significant upside as we perform for our customers.
Now moving onto streaming where there are two main points that I would like you to take away from this call.
The first is through we're seeing a lot of traction in the streaming market and content owners continue to go direct to consumer.
We believe we have some of the best technology with a rapid cycle time that can allow the consumer to quickly come to market and I'm proud to say and we have an outstanding pipeline of streaming enablement opportunities globally.
We recently entered into an agreement with the new streaming customer whose special interests excellent service, we expect to launch in late Q1 or early Q2 of our next fiscal year.
With the exact launch date, depending on the customer's finalization on our content strategy.
Second I would also like to point out the extension of our stream of product to now support access to gaming content.
This product extension came at the request of a customer and transit streamed it into a true multi aggregation service platform.
That provides a unified immersive user experience for the discovery of all types of content, including third party content such as games.
The customer a large middle Eastern Telecom company entered into a paid proof of concept agreements with us and we anticipate the customer the rule the offering out to subscribers, resulting in a more mature the agreement with C. G.
The creation of this product enhancement provides he changed with another valuable offering that we are starting to market and expect healthy demand as we demonstrate our capabilities.
The last thing I want to cover is a new opportunity we're developing in the free advertising supported TV segment or fast.
Fast as a consumer trend of replicating the traditional linear TV experience on connected smart Tvs with personalized targeted advertising.
Which we believe creates a host of opportunities for technology providers, such as sea change, where we can leverage our core competencies in streaming and advertising.
Under the brand name extreme we're currently building an offering to target a complete opportunity within the SaaS market, while simultaneously having discussions with large players in this market as we progress towards future monetization opportunities.
We will keep you apprised to future updates as we expect finalizing our go to market offering in Q1 of our next fiscal year.
That concludes my prepared remarks, I'll now turn the call over to Mike Mike.
Thanks, Chris and good afternoon, everyone.
Turning to our financial results for the third quarter of fiscal 2022.
Total revenue for fiscal Q3, 2022 was $7 2 million, an increase of 9% compared to the prior quarter and an increase of 44% compared to the same quarter last year.
The sequential and year over year increase in total revenue was primarily driven by a material increase in product revenue, which was slightly offset by a decline in service revenue.
Product revenue for fiscal Q3, 2022 increased 30% to $3 5 million or 49% of total revenue.
Page $2 7 million or 41% of total revenue in the prior quarter.
Service revenue for fiscal Q3, 2022 decreased 5% to $3 6 million or 51% of total revenue.
Compared to $3 8 million or 15, 9% of total revenue in the prior quarter.
Revenue from our international markets in fiscal Q3, 2022 was 3.0 million or 42% of total revenue.
Which compares to $2 8 million or 43% of total revenue in the prior quarter.
Revenue in our U S market for fiscal Q3, 2022 was $4 1 million or 58% of total revenue.
Which compares to $3 7 million or 57% of total revenue in the prior quarter.
Looking at our margins gross profit for fiscal Q3, 2022 was $3 7 million or 52% of total revenue compared to $4 1 million or 63% of total revenue in the prior quarter.
Product gross margin for the fiscal third quarter of 2022 was 54% compared to 74% from the prior quarter.
Product gross margin was impacted by substantial network extension project, which included a hardware component and professional services.
Service gross margin was 60% compared to 55% from the prior quarter.
Looking at our expenses non-GAAP operating expenses for the fiscal third quarter of 2022 decreased 6% to $5 1 million from $5 4 million in the prior quarter.
They also decreased 23% compared to the third quarter of last year.
We are pleased with the significant cost reductions, we've achieved which lowers the revenue needed to obtain a breakeven point and is that a direct result of the efforts put forth and improving operating efficiencies.
GAAP loss from operations for fiscal Q3, 2022 totaled 2.0 million an improvement of zero point $5 million for the loss of $2 5 million in the prior quarter.
As a percentage of total revenue GAAP loss from operations for the third quarter of fiscal 2022 was negative 28%, which compares to negative 38% in the prior quarter.
Non-GAAP loss from operations for fiscal Q3, 2022 totaled $1 4 million or a loss of three cents per basic share, which is relatively consistent with the loss of $1 3 million or a loss of three cents per basic share in the prior quarter.
As a percentage of total revenue non-GAAP loss from operations was negative 19% compared to a negative 20% in the prior quarter.
GAAP net loss for fiscal Q3, 2022 totaled $2 1 million, which compares to 0.2 million net income of breakeven on a fully diluted share basis in the prior quarter fewer.
If you recall last quarter, we recorded a onetime noncash $2 $4 million gain on the forgiveness of a P. P. P alone.
Non-GAAP net loss for fiscal Q3, 2022 totaled $1 5 million or a loss of three cents per basic share.
Compared to a non-GAAP net income of $1 5 million or gained three cents per fully diluted share in the prior quarter.
Turning to the balance sheet at quarter end, we had $17 6 million in cash and cash equivalents and no debt, which we believe puts us in a strong financial position to execute our growth strategy the remainder of the fiscal year and beyond.
This completes my financial summary for a more detailed analysis of our financial results. Please refer to today's earnings release as well as our 10-Q, which we plan to file that ended the day tomorrow.
I will turn it back to Pete now to wrap up before we move to Q&A Pete.
Thanks, Mike.
So as I mentioned, we are exploring a variety of strategic alternatives and these will open doors for seek to gain scale.
And we hope to accelerate value creation for our shareholders well with the with these methods.
There are two ways to grow as you know organically or Inorganically and we're focused on both paths to accelerate growth.
Have something to share and report to our shareholders, we will do so.
So I wanted to set up that.
Before we take Q&A and Hillary well take some questions.
Thank you at this time, we will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
It depends using speaker equipment, it may be necessary to pick up your handset before pressing the stacking.
One moment, please all the poll for questions.
Our first question is from Steven Frankel of Colliers. Please proceed with your question.
Good afternoon, I, just wanted to try to triangulate between this quarter's performance and the large contract renewals that you announced.
We announced a while ago how much revenue from that agreement was recognized in the quarter and what is most of that.
Responsible for the uptick in and maintenance that we saw.
Hey, Steve It's Mike So it was probably.
Less than 500000, so that contract was multimillion multiyear but that one is.
So the entire contract is spread out over I believe it's two year period.
Okay. So what what accounted for the large uptick in maintenance <unk>.
<unk>.
That was one piece, but the other uptick was in kind of a hardware component in product revenue.
So that when it was up significantly.
Significantly again that when we touch on the call with Us and network infrastructure upgrade with a strategic customer one so that was kind of a one time you know.
Third party hardware pass through.
That happens to me My next question. So that was a third party hardware.
Correct and that in part yet would lead to the gross margin.
Russia.
Yeah, that's why you saw that.
I'm from compared to 72.
Yeah.
Okay, and Where's backlog that was the number you guys were comfortable giving out in past quarters, where is backlog at the end of Q3.
Yeah, I think there's not much change, but I think we're gonna stop kind of reporting that on a consistent basis. The backlog that we used to report was driven by you know kind of the framework business model that we had and as we kind of look forward and you think about some contracts that.
It might be significant for us with a revenue share.
Our contract there really isn't anything to kind of put in backlog. So you know we had around 25 million last quarter.
Around the same but I don't think we want to kind of continue to give a detailed breakdown of that quarter by quarter.
Okay.
And and strained bid you said you've got at least one more customer that's going to launch in the next couple of quarters, and then maybe a little more detail on on the pipeline there.
Yeah.
Keith This is Chris how are you. So we're building the pipeline towards streamed at an extreme those Hudson, our two focus points to to build a pipeline right now.
I'm very confident that book and burn a lot of these.
Opportunities into deals over the next couple of quarters and the two that we have converted.
Good deals are true SaaS deals while the one that's still basically has an opt out for the customer or a matter of proof of concept phase.
The other one is a committed SaaS deal arms. So we're really looking forward to not only generate additional recurring revenue from these deals but also as I said in the.
In the remarks to extend the product portfolio.
Portfolio, So that's really exciting for us.
Okay, and then as Peter just this short.
Oh go ahead that was going to answer your question go ahead.
I'd say from a philosophical.
Philosophical stands.
Standpoint.
Yeah, you guys have been great at cranking, the expense structure down to preserve cash.
But at some point I would think if you have large opportunities in front of you.
And you believe you can grow this business don't you think you need to.
Starting to aggressively grow marketing and sales expense.
Yeah, I basically was reading your mind, because that was going to jump in with.
The transition if you will Steve from you know the legacy work that sea change.
Normally do and updating software for linear cable.
And spot advertising to more of a recurring model and the guys are frankly had made a lot of progress even before I came and starting that move towards you.
You know, what I would call sustainable recurring business and in the two areas that we're really focused on not only that.
Only streaming but things that are.
Our streaming plus advertising like.
And the fast channels are a really an interesting spot for us.
If you think about the future of no set top boxes.
We have a really nice role to play with some of the players.
So yeah, if we can continue to grow it would be more variable in nature because software development.
Towards very specific customer needs and projects is gonna be valuable so I think it will float together.
Probably the way you're thinking about it and and we should be talking less about.
Hardware sales.
Sales, if you will and more about cloud based deals that are really more strategic for our company and provides a nice future.
So again that you know I got here a quarter ago.
And I walked into a you know.
Shop that was already pivoting, if you will are or at least lean into the things that they can do I think with leadership and and a little bit more.
A vision of you know our commitment towards those future our products are as all we really needed to do and the rest are you know like I said, it's gonna be incremental games until we can figure out if there's something strategic to do.
To get to accelerate you know our scale.
Yeah.
Okay, great. Thank you.
Yeah.
Our next question is from Ron now D. N S. C O of Aegis capital. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question, so just taking them to a customer comments and the commentary in the Q&A as well I was just wondering are you assuming sort of labor cost pressure or difficulty in hiring it sounds like you guys are making that pivot from.
Shrimp cost streamline the infrastructure.
We had sort of restructuring to growth mode and that is your does your sort of making that transition. Yeah. I was just wondering if youre seeing no difficulty in hiring of labor cost pressure or any of that.
And then somewhat tight labor market. Thank you.
This is a nice nice to meet you I just came back from Warsaw and.
The competition for highly skilled talent is there are the good news is we have a great team in place has been in place.
For quite a while and we have a new CTO that we're really proud of that has worked with us before.
No.
C change has a lot to offer in terms of maintaining a great sales force and also giving them great projects to work on.
The competition for talent and pricing is is natural for all software development, especially out of Europe, but from our standpoint.
The endpoint, we have a good team and so it's highly motivated and we have a good comp plan that we continue to monitor and make sure its market base and.
And you know when we look forward to to really.
Being very productive, especially out of our Poland team.
Okay, great. Congratulations on the quarter you guys have done a great job. Thanks.
Thank you.
Thank you at this time. This concludes our question and answer session I would now like to turn the call back over to Mr. A cleanup for closing remarks.
Thank you Hillary we really appreciate your attention today, and we look forward to providing updates as we go along thank you again and have a great evening.
Thank you for joining us today for Sea changes conference call. You may disconnect. Your lines at this time, thank you and have a great day.
Okay.
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