Q2 2023 SeaChange International Inc Earnings Call

for the period ended July 31, 2022. My name is Kevin and I'll be your operator this afternoon.

Joining us from the company is Chairman and Chief Executive Officer Peter Di Aquino, President Chris Klimmer and Chief Financial Officer Kathleen Mosher.

After the market closed today, C-Change issued its financial results for the fiscal second quarter and its press release, a copy which is available in the investor section of the company's website at www.cchange.com. Before we begin today's call, I'd 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 FCC in Regulation G. non-GAAP financial measures should not be considered in isolation from or 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 earnings release issue today.

I'd 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 SeeChange's website. Now I'd like to turn the call over to SeeChange's Chairman and Chief Executive Officer Peter Di Aquino. Sir, please proceed.

Thank you, operator. This is Peter Aquino, Chairman and CEO of SeaChange International, and I welcome all of you to our second quarter call.

We had a few quarters off from having these earnings calls as we were working through a potential merger with Triller under exclusivity.

As many of you know, we mutually agreed to terminate that deal this past June .

But during that period, which is evidenced by the second quarter and year-to-date financial results, see change focused on our customers and new product development.

Through solid management execution, we have improved our operations and became even stronger.

We believe that job one is to improve seed change as a standalone company, which will in turn provide more optionality as we explore our strategic alternatives to create shareholder value.

While we continue to operate our core business diligently, we simultaneously committed to pivot towards software products for the future.

Our revenue mix from Core products only to Core plus SaaS products are just now beginning to take hold.

Our total revenue growth plus mix change.

are expected to continue to fuel organic growth for the foreseeable future.

In addition, we're also targeting certain opportunities through SMART M&A to accelerate this shift and gain scale.

Our efforts on both fronts, organic and inorganic growth, are in full swing.

Our vision is to capture the strong tailwinds in connected TVs, fast channel streaming, and programmatic ad insertion.

We can leverage our expertise in video software engineering and customer solutions to scale up way beyond linear TV.

This is the movement where video operators are embracing cord cutting and creating multiple options on their own through all things streaming and over the top.

We are also expert in advertising insertion to both the more traditional linear channels and now any streaming platform.

Advertising in the streaming world can be more targeted and potentially even more valuable to our customers.

So the good news here is that we're in the right industry with a growing tan for these types of products.

And our goal is to be on the leading edge of this movement and grow our company at the same time.

Chris will walk us through how we are now complementing our core video platform and add insertion business that supports the who's who of cable, telco, and the satellite industries.

We are well into new products and services that offer these same customers.

plus new logos, the best of our SAS products.

We continue to be very excited about our growing relationship with Vida and gearing up for even more expansion in fast channel software development.

Later on in the call, Kathy will cover our financial performance in more detail, and the highlights of the second quarter suggest that SEEK is now a platform positioned for a step up in market share.

We are debt-free, cash flow positive from operations, and we're planning to be EBITDA positive through the back half of fiscal 23, while we aggressively focus on corporate development.

Our revenue growth rate for the second quarter is up 12% year over year and 9% sequentially.

On a year-to-day basis, the financial results of seed change reflect a massive improvement in cost control and profitable growth.

And we're very excited about all of these things coming together as we again pursue strategic alternatives from a position of strength.

So at this point, let me turn the call over to our newly promoted President of SeaChange, Christoph Klimmer.

Chris?

Thank you, Pete, and good afternoon, everyone. Thank you for joining us today.

Our mission is to get sea change.

is to become a recognized leading provider of technology that enables our customers to distribute and monetize their content across all relevant video channels.

From linear pay TV to streaming services, connected TVs are fast channel offerings.

During the first half of fiscal year 2023, SeaChange made tremendous progress in its pursuit of this mission.

Today, I'd first like to briefly reiterate our key strategic goals in more detail and then highlight how our Q2 accomplishments have moved us closer to achieving them and our broader corporate mission.

Our first goal is to strengthen and expand our long-term existing customer engagements.

Servicing our long-standing customers is our core competency.

and one of the keys to our future success.

We do this primarily in two ways.

First, we provide and deliver best-in-class, linear pay-to-be VOD and time shift TV products and services.

for Tier 1 cable companies and telco operators across the globe.

Second, through rolling out continued product improvements and delivering value-aware to existing customers.

to ensure the expansion of long-term engagements.

We are especially proud that our customer Teve Cable in Ecuador has entrusted us to help them monetize their FIFA World Cup 2022 rights through their SeaChange powered streaming service to ensure the best possible life experience for their subscribers and viewers of the biggest sports event in the world.

I am also very happy to report that we have had recent success towards our goal to expand engagements with existing customers and extended a contract with a major tier 1 customer in Latin America.

resulting in substantial license revenue and a recurring support and services revenue component.

Our second strategic goal is to build new and recurring license-driven SaaS revenue streams with cloud-based enablement products like StreamVid, our platform to power direct to consumer streaming services.

We aim to accomplish this by first

removing the streaming market entry barrier.

and enabling content owners to address their audiences and monetize their content catalog with the premium direct-to-consumer streaming service.

Second, by building out SaaS and consumption-based business models with a scalable, cloud-based and productized solution that generates high-margin revenues and long-term engagements.

And lastly, by maximizing the value of our partners catalogs and by monetizing the content with premium subscriptions for sophisticated service side ad insertion solutions.

To that end, we were able to deliver on this strategic goal by onboarding several new StreamIt customers, with three of them set to launch by Q4 of this fiscal year.

We are excited about these forthcoming launches that can drive higher margin revenue for seed change and consumption based upside based on the business models that we have sold them under.

The company's third strategic goal is to tap into the growing video advertising tab.

with a broad product portfolio that helps to maximize the value of our customers' ad inventory.

both for inventory within the traditional broadcast value chain and for inventory out of the streaming world.

Our products, the unified advanced advertising platform for insertions into broadcast and IP, and Xtreme, our fast channel service platform for connected TVs, help us to accomplish this through several different ways.

First, by protecting existing and generating incremental ad revenues for linear TV by enabling automated ad sales on broadcast streams.

which increases the value of underutilized inventory with real-time bidding.

inventory with real-time bidding. I'll see you in the next.

by ensuring optimized targeting with targeted and contextual advertising that will advertise based on the content being watched or the viewer's profile, which can drive better monetization.

And lastly, by enabling the distribution and monetization on connected TVs via fast channel services.

including playout and ad insertion.

Our progress on this goal is best demonstrated by our work with Zeta.

where we help them to build out their own dedicated streaming service on the VITA OS.

Vida and us have made significant progress on this project, which is expected to be completed later this year.

Another major milestone towards capitalizing on the increasing video advertising time has been the recent commercial launch of an automated ad sales flow for Dish in the US.

Through this new sales flow, Ditch will now have the ability to sell additional broadcast ad inventory to generate a new revenue stream.

Finally, our last strategic goal is to drive innovation within our industry.

and to help our customers to increase their reach and the viewing time per user.

both of which will drive inventory value.

We do this through partnerships such as the recently announced strategic engagement with Source Digital, a provider of immersive metaverse experiences, and through in-house innovation and patent pending technology.

With a global team of industry strategists, technology sales experts, and video software engineers, we are focused on executing against these growth objectives and seeking opportunities to accelerate them through strategic partnerships.

That concludes my prepared remarks. I'll now turn the call over to a new CFO , Kathy Mosher, to cover the financials.

prepared remarks, I'll now turn the call over to a new CFO , Kathy Mosher, to cover the financials. Kathy? Thanks for standing by.

Thanks, Chris, and good afternoon, everyone. Before I begin today, I want to introduce myself. As some of you may be aware, I was the company's tax director from 2008 to 2021. I'm very excited to be back at C-Change as its CFO . Now turn into our financial results for the second quarter of fiscal 2023 compared to the first quarter of fiscal 2023. Total revenue for fiscal Q2 2023 was $7.3 million compared to $6.7 million in the prior quarter.

Revenue was driven by increases in both product and services revenue. Product revenue for fiscal Q2 2023 increased 6% to $3 million or 41% of total revenue, compared to $2.8 million or 42% of total revenue in the prior quarter. The increase in product revenue was primarily due to increases in license revenue, partly offset by a decline in third-party hardware revenue.

Service revenue for fiscal Q2 2023 increased 11% to $4.3 million or 59% of total revenue, compared to 3.9 or 58% of total revenue in the prior quarter. The increase in service revenue was primarily due to an increase in professional services revenue and maintenance on new perpetual licenses.

Revenue from our international markets in fiscal Q2 2023 was $4.6 million or 63% of total revenue, which compares to $2.8 million or 42% of total revenue in the prior quarter. Revenue in our US market for fiscal Q2 2023 was $4.6 million or 63% of total revenue in the prior quarter.

2023 was $2.7 million or 37% of total revenue, which compares to $3.9 million or 58% of total revenue in the prior quarter. Looking at our margins, gross profit for fiscal Q2 2023 was $4.8 million or 65% of total revenue compared to $3.2 million or 48% of total revenue in the prior quarter.

Product gross margin for the fiscal second quarter of 2023 was 72% compared to 42% from the prior quarter. Service gross margin was 60% compared to 52% from the prior quarter.

Looking at our expenses, non-GAAP operating expenses for the fiscal second quarter of 2023 were $4.7 million unchanged from the prior quarter.

GAAP loss from operations for fiscal Q2 2023 totaled $6.5 million compared to $2.7 million in the prior quarter. Note, we recorded a $5.8 million non-cash impairment loss on Goodwill during the quarter. As a percentage of total revenue, GAAP loss from operations for the second quarter of fiscal 2023 was negative 89%, which compares to negative 41% in the prior quarter.

non-GAAP income from operations for fiscal Q2 2023 totaled $11,000 or break-even per basic share, an improvement compared to a loss of $1.5 million or a loss of $0.03 per basic share in the prior quarter. As a percentage of total revenue, non-GAAP loss from operations was 0% compared to negative 22% in the prior quarter.

Gap net loss for fiscal Q2 2023 totaled $6.5 million, or a loss of $0.13 per basic share. This was an increase compared to a net loss of $3 million, or a loss of $0.06 per basic share in the prior quarter.

non-GAAP net income for fiscal Q2 2023 totaled $47,000 or break even per fully diluted share, compared to a non-GAAP net loss of $1.7 million or a loss of 4 cents per basic share in the prior quarter.

Turn into the balance sheet. At the quarter end, we had $14.3 million in cash, cash equivalents, and marketable securities, which compares to $16.5 million at the end of the prior quarter. We continue to have no debt on our balance sheet. This completes my financial summary. For a more detailed analysis of our fiscal results, please refer to today's earnings release as well as our 10Q, which we plan to file by the end of the week.

I will now turn the call over to Jeff Grant from Gateway Investor Relations to moderate the question and answer session for the presubmitted questions. Jeff?

Thank you, Kathy. I'm Jeff Gramp of Gateway Investor Relations. We've been representing C-Change for the last several years and work with the company to respond to inbound questions from investors. I will now read off the top questions that we received at our firm from investors ahead of this call. The first question is related to the company's strategy. Pete, can you describe the company's strategic vision for fiscal 2023 and beyond and how it may have changed in light of the recent Triller merger termination in June ?

Thanks for the question, Jeff. You know, since I arrived at Sea Change almost a year ago, we set out to focus on improving our ability to grow organically and to improve profitability in the near term.

and that's what we did. And we want to accomplish this while strengthening our core competencies and supporting our customers.

who as you know are some of the largest companies in the video industry.

In addition, we understand that the tailwinds of our industry definitely are in streaming and connected TVs and that insertion over streaming.

And that's what we can excel in.

I'm happy to say we're well into that pivot and gaining momentum every day as you're heard on the call.

However, even with this recent execution or current planning period, we are still aggressively pursuing strategic alternatives mainly to gain scale.

And the trailer deal was one way we could have accomplished this.

You know, although we expected to operate as a separate business unit, we could count on some revenue synergy with combined companies. That was the plan.

So I can't go into too much detail as to why the deal terminated, but I can say that we mutually agree that it was the best thing for both parties to do.

and we wish each other success in the future.

You know, but looking ahead, a combination with a strategic partner to gain skill is still on the table as one path.

It simply makes sense if we want to accelerate our growth and leverage the software team that we have in Poland to do much more in streaming fast channels.

and the whole connected TV world, which we can play in.

We can be a leading player given our experience and capabilities.

that are very well established and the company has been around a long time and we certainly have a lot of skills in that area.

Our expectation is to capture that opportunity as soon as possible to help create shareholder value again while executing on our day to day operations.

supporting our customers with their ability to operate their state-of-the-art video and advertising platforms.

So, the main thing is we as sea chains have to have a strong operation on a standalone basis because this will put us in position to enter those potential strategic discussions.

on an opportunistic basis and as I said before, you know, from a position of strength.

That's our strategy and that's what we're going to execute on for the rest of this year.

Thank you, Pete. The next question is, Chris, what is the company's plan and strategy regarding future products and services that will drive revenue growth going forward?

Thank you for this question.

The goal of all of our product and innovation initiatives is to create

measurable value for our customers.

and in the process of course generate long-term and recurring revenue streams for sea change.

If you look at the industry trends and consumer viewing habits at large, you will see that video consumption continues to shift.

from subscription-based and many other pay TV services.

to advertising funded streaming on connected TVs and other connected devices.

This is where new and exciting opportunities and business models for a tech vendor like T-Change emerge.

And our job is to provide our customers with the best possible tools to monetize their content and services in this new consumer paradigm.

Essentially, monetization in this new world will be driven by the value of the ad inventory.

which again is defined by a service's reach.

and its ability to engage with its audience in a meaningful way to basically keep the customers hooked.

I think our new product portfolio that we are working on right now helps to achieve exactly that.

Think about our ability to increase the quality of ad targeting with personalization or context data.

or our new initiative with Source Digital to provide immersive engagement.

with Source Digital to provide immersive engagement on connected TVs.

or our ability to aggregate multimedia content like cloud games on top of video to keep users on a unified platform and simplify content discovery.

These product initiatives are all designed as cloud-native services that provide scale and high-margin revenue for C-Change.

Thank you.

Thank you, Chris. The last question we received is for Kathy. What is the financial outlook for sea change?

Thanks Jeff. I'm new to the role, but I'm not new to sea change and I see a lot of energy and passion that supports our current momentum. We've worked through the necessary right size in over the past couple of years to get a solid platform that we reported on today. This current version of Sea Change 2.0 is focused on profitable growth and new recurrent products and services to supplement our core business.

The newer SAS products that Chris spoke about are forecasted to contribute at an exponential rate.

We anticipate improving EBITDA through the back half of the year with incremental business generated from existing customers and new logos purchased in our Xtreme SaaS products and Xtreme VID. As Pete said earlier, we'll continue to focus on the day-to-day operations while taking advantage of the new opportunities and catalysts that will help us scale in the near term.

Thank you, Kathy. This completes the question and answer session. I will now turn the call back to Pete for closing remarks.

Thank you Jeff.

Well, we all appreciate your interest in Sea Changer International as we progress through fiscal 23 and we look forward to future communications.

Have a great evening. Thank you.

Thank you for joining us today for See Changes Conference Call. You may disconnect your lines. Thank you.

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be with you momentarily.