Q3 2023 SeaChange International Inc Earnings Call

Good afternoon, and welcome to see change its fiscal third quarter 2023 conference call for the period ended October 31 2022.

My name is Molly and I will be your operator this afternoon.

Joining us from the company is chairman and Chief Executive Officer, Peter Aquino.

Chris Clemmer, and Chief Financial Officer, Kathleen Moshe.

After the market closed today, she changed issued its financial results for the fiscal third quarter press.

Press release, a copy of which is available in the investors' success section of the company's web site at <unk>.

Ww Dot C change dot com.

Before we begin today's call I will.

Like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.

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.

That term is defined by SEC regulation G.

non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with.

With gas accord.

C change has provided a reconciliation of these non-GAAP financial measures.

Most directly comparable GAAP measures in the company's 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 press release relations section of <unk> website.

Now I would like to turn the call over to see changes Chairman and Chief Executive Officer, Peter do you Queena. Sir. Please proceed.

Thank you operator, good afternoon, everyone. This is Peter Aquino, Chairman and C. E O C change international and welcome to our third quarter call.

Our momentum to strengthen our software platform continues and were now hitting on all cylinders.

Revenue growth was very strong up 16% year over year and 13% sequentially.

Profitability and cash generation continues as we recorded another quarter of positive EBITDA and increased our cash balance to nearly 15 million with no debt on the balance sheet.

And our new SaaS and Paas channel software products are now taking hold and producing incremental gross revenues now reflected in this quarter.

Our transition towards providing our customers with streaming services and software to support their smart TV operating systems, such as the project, we announced last quarter would feed and high says it's clearly the momentum that we can build on.

All of this is now translating into improved financial performance for sea change, resulting in double digit revenue growth.

We continue to leverage our embedded expertise in video and AD tech to power over the top services for all of our customers.

Our rich history of supporting Msos, telcos and content owners.

Allows us to up sell many of our customers who are IP based services that ride increasingly advanced broadband networks not only in the U S, but around the globe.

Streaming content over wireless or wireline is being powered by sea change in North and South America, Europe and EMEA.

We are truly an international software company with the bulk of our 100 plus software engineers working out of our office in Warsaw, Poland and we're so very proud of our team there as well as all of our employees around the world.

Many of our customers and the who's who of the video industry are depending on us to seamlessly enable their move to the streaming world. While we diligently support their large deployments of traditional Vod and AD insertion.

Our embedded core business produces great baseline cash flow as we reinvest that St expert team into everything streaming for connected devices.

This is our future.

This quarter is a great example of the impact of our revenue composition shift towards growth products. For example, in new stream vid sales to content owners and software development for Vida, specifically contributed towards our high value mix accounting for over 70% of new sales this quarter.

We are managing our go to market efforts to continue to sell growth products.

<unk> been streaming software products are not only high value in terms of expected multiples for these revenues, but tend to be more recurring in nature as well, which is a great business model.

In addition, C changes progress and consistent revenue growth, while right sizing our cost structure has been fueling fueling better cash flow.

And this is exactly the profile that we've been striving for and we could do even better on.

Our effort to promote profitable organic growth continues to be job number was.

Simultaneously, we continue to look for ways to be opportunistic to gain scale.

We continue to explore strategic and transforming ideas as well as commercial opportunities with players in our space.

Market timing for M&A is very difficult for most at this time in this current environment, but.

But we will aim to be prepared when the opportunity to transact arises.

The good news is that sea change is strong liquidity profile and irrelevant video platform to sell and support.

This allows us to execute our organic program without much disruption.

And as most would agree the best time to discuss strategic alternatives and maximize values when the companies in a position of strength along with improved capital markets.

In the meantime, we have a large tam and tailwind in our favor for what C change delivers and we aim to capture as many opportunities as possible to keep sea change moving in the right direction.

So with that let me pass the call over to our President Chris Clemmer to take a deeper dive into our operations Chris.

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

Q3 was yet another strong quarter for sea change as we continue to grow our topline and transition our business to a more sustainable level of profitability, while delivering increased value to our new and existing customers.

During Q3, we continued to execute on our strategic growth plan centered around three main pillars.

First.

Renewing and strengthening long term relationships with our existing base of long standing TV operator customers.

Which has resulted in multiple long term support renewals and several system operating bookings.

Second increasing our recurring revenue baseline with high margin SaaS based deals.

And third.

Creating a new and extended product portfolio and services that can help our customers maximize their returns across all television and streaming channels.

While also increasing end user stickiness and engagement.

Since our last call in September and in line with our strategic growth plan, we have executed on numerous accomplishments.

Okay, I want to spend a couple of minutes highlighting.

As we announced last week, a sea change was selected by Fox Sports Mexico.

To power their next generation streaming service with our comprehensive screening enablement platform streamed it.

We believe we won this deal as we have the best technology to support Fox Sports Mexico's three key business objectives, which.

Which include.

Maximizing content monetization with flexible subscription packages and targeted advertising.

Retaining existing and acquiring new customers with the highest quality of service on all major device platforms.

As well as increasing user engagement by improving user experience and simplifying content discovery.

For those of you newer to our company Xtreme bid as a cloud based over the top or OTT streaming enablement platform.

That provides content owners the ability to deliver unique highly scalable and personalized streaming services and to handle rapid user growth.

Our new partnership with Fox Sports, Mexico serves as further validation of not only the growing need for our platform expanded.

But also of sea changes unique capabilities in the market.

This agreement with Fox Sports, Mexico, if a software as a service engagement.

We're sea change with benefit from Fox of success in growing the viewership base and increasing their subscription and AD revenues.

And therefore supports our strategy of growing higher margin and recurring revenues.

Sticking with the topic of sports.

We recently expanded our services agreement with Grupo David Carpenter.

The leading cable provider in Ecuador.

To help support the streaming of the FIFA World Cup event in Qatar.

Our cloud architecture technology has proven to enable throughput JV cabinet to support large increases in concurrent subscriber node and combined with our ability to enable and engaging sports experience with a flexible user interface.

Lastly, we have completed a major development faithful veto.

A leading provider of operating systems for connected Tvs.

In an ongoing project to help them build out their own dedicated streaming and free AD supported streaming TV all fast services.

As a result of completing this major phase.

I can now launch the sea change based streaming service on the millions of Vita powered connected Tvs across the world pre.

Providing a premium experience for connected TV viewers and outstanding monetization options with sea changes AD insertion service for targeted AD insertions across fast channels.

We expect VITAS use of the sea change based streaming service to be launched no native in Q1 with a potential impact to revenue as soon as Q4.

Now looking ahead at the outlook and future growth opportunities for sea change I'd like to point out two major organic growth catalysts, we are focused on.

The first catalyst is growth in the connected TV market.

As we've seen in recent trends consumer eyeballs continue to shift towards streaming of connected devices.

And especially to the large screen.

And this paradigm shift there's growing demand for technology vendors like sea change that can help content owners realize that connected strategies.

And optimize that monetization opportunities.

We believe our long standing relationship with many tier one operators as well as our growing international footprint with content owners, including positive reference cases make us an ideal partner for many of these players.

The second catalyst and false advertising.

In addition to the consumer shift towards streaming of connected Tvs.

We've also seen a trend in consumer shifting away from subscription based business model to free AD supported content.

We believe that with our unique technology to help operators and content owners alike to protect existing and build incremental AD revenue streams.

We are extremely well positioned to grow our market share in this growth sector of our industry.

By extending our product and service portfolio for existing customer base.

And by winning new logos that adopt AD based business models, we can begin to increase our market share and capitalize on this new growth sector driven by changes in consumer preferences.

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

Kathy.

Thanks, Chris and good afternoon, everyone turning to our financial results for the third quarter of fiscal 2023 compared to the second quarter of fiscal 2023.

Total revenue for fiscal Q3, 2023 increased 13% to 8.3 million from 7.3 million in the prior quarter driven by increases in service revenue.

Product revenue for fiscal Q3, 2023 decreased 27% to 2.2 million or 26% of total revenue compared to 3 million a 41% of total revenue prior corner.

Decrease in product revenue was primarily due to decrease in license revenue.

Service revenues for fiscal Q3, 'twenty 'twenty, three increased 41% to $6 1 million or 74% of total revenue compared to $4.3 million or 59% of total revenue in the prior quarter.

Increase in service revenue was primarily due to an increase in professional services revenue driven by the acceptance of completed work and multiple customers.

Revenue from our international markets in fiscal Q3, 2023 was $3 6 million or 44% of total revenue, which compares to 4.6 million or 63% of total revenue in the prior quarter.

Revenue in our U S market for fiscal Q3, 'twenty twenty-three was 4.6 million or 56% of total revenue, which compares to 2.7 million or 37% of total revenue in the prior quarter.

Looking at our margins gross profit for fiscal Q3, 'twenty 'twenty, three with $5 2 million or 62% of total revenue compared to $4 8 million or 65% of total revenue in the prior quarter.

Product gross margin for the fiscal third quarter of 2023, with 26% compared to 72% from the prior quarter due to a significant increase in the amount of third party goods for several customers. They typically carry a lower margin and brought down the average product margin. However, this was offset by.

Strong service gross margins of 75% compared to 60% from the prior quarter.

Looking at our expenses non-GAAP .

<unk> expenses for the fiscal third corner of 2023 were 5 million and an increase from $4 8 million the prior quarter.

GAAP loss from operations for fiscal Q3, 'twenty 'twenty three totaled $3 7 million compared to a $6 5 million loss in the prior quarter No. We recorded a noncash impairment loss on goodwill during the second and third quarters as 5.8.

And to me point 3 million respectively.

Debt at quarter end, we no longer had any goodwill recorded on our balance sheet.

As a percentage of total revenue GAAP loss from operations for the third quarter of fiscal 2023 was negative 44%, which compares to negative 89% from the prior corner.

non-GAAP income from operations for fiscal Q3, 'twenty twenty-three totaled 153000 or breakeven per fully diluted share an improvement compared to 11000 or breakeven per fully diluted share in the prior quarter.

And our second consecutive quarter of positive non-GAAP income.

As a percentage of total revenue non-GAAP income from operations was 2% compared to less than 1% from the prior quarter.

GAAP net loss for fiscal Q3, 'twenty 'twenty 'twenty totaled $3 7 million or a loss of seven cents per basic share. This was an improvement compared to a net of $6 5 million or a loss of 13 cents per basic share in the prior quarter.

non-GAAP net income for fiscal Q3, 'twenty twenty-three totaled 134000 or breakeven per fully diluted share compared to a non-GAAP net income of 52000 or breakeven per fully diluted share in the prior quarter.

Turning to our balance sheet at quarter end, we had $14 5 million in cash and cash equivalents, which is an improvement compared to 14.3 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 financial results. Please refer to today's earnings release as long as our 10-Q, which we plan to file by the end of the week.

I'll now turn the call over to Jeff Grant from Gateway Investor Relations to moderate the question and answer session for pre submitted questions.

Thank you Kathy This is Jeff Grant of Gateway Group C changes Investor Relations Advisors I will now read off the top questions that we received at our firm from investors ahead of this call. The first question is with the stock price at this level for an extended period of time much like many micro caps what actions has the company taken with respect to NASDAQ.

Thanks, Jeff.

First of all I I believe that the share price at a company doesn't really reflect the assets or the strong financial and operating results.

That we discuss here today and I'm, a real believer and I've been a buyer of the stock personally.

In the open market this year.

As I believes he changed as an attractive investment.

But specific to the NASDAQ listing we filed an application on December six to be listed on NASDAQ capital markets tier that better matches, our peer group.

And this will have no practical effect on the trading of our stock.

However, this will provide the company with a six month extension.

To get our stock price up through execution, despite broader market conditions to meet nasdaq's listing requirements and this is exactly what a lot of micro caps are doing today as we speak.

So as time progresses, we will provide regular updates as necessary to keep everybody informed.

Yeah.

Thank you Pete. The next question is for Chris, which products and services do you expect to be the most meaningful revenue contributors for sea change looking ahead understanding that the sales process can be somewhat lumpy.

Thank you for this question.

So first I think that the performance over the past five or six quarters, where we have posted steady quarter over quarter top line growth.

Shows that we have been successful across all our key revenue streams product and services alike and that we have diversified our revenue structure.

This is true for our core operate a business in our services business all the way to our new product lines that generate SaaS revenues for us.

In terms of these products that we are very excited about here at sea change I would start with the stream bid our comprehensive streaming enablement platform.

That offers a multitude of options to attract viewers and monetize content.

Another exciting market for us is free AD supported streaming TV, a fast where we can support operators content owners and TV platform providers to provide streaming services and monetization capabilities through ad insertion.

Lastly, we should not forget about our ability to expand and deliver for our long standing relationships with tier one telcos.

This market's still deliver strong revenues and margins for us.

Essential for us to build value and drive innovation across all of our product lines is our center of engineering excellence in Poland.

You may remember that we have more than 100 fulltime in house video software engineers that help us to realize innovation, along our tech road map and to accelerate the expansion of our product portfolio.

For example, we have just recently filed two provisional patent applications for products that will enable our customers to further personalize the viewing experience on their platforms and to measure and stimulate engagement.

Thank you.

Thank you Chris the last question, we received is for Kathy.

How should investors think about the company's ability to grow revenue and achieve positive EBITDA.

Thanks, Jeff.

We have been encouraged with our operational performance that has generated strong topline revenue growth, while our costs have remained relatively stable and more efficient during this timeframe.

Allowing us to generate positive EBITDA for two consecutive quarters.

Further we have been encouraged with our results year to date.

With revenue of $22 3 million up 19% over the prior year period, while non-GAAP operating costs of $14 million has decreased 10% over the prior year period.

We remain optimistic about our future revenue growth capabilities and do not expect our cost profile could change materially over the near and medium term and therefore I feel good about our ability for an EBIT breakeven or better outlook.

Okay.

Thank you Kathy this completes the pre submitted Q&A session I will now turn the call to the operator to continue the Q&A session for todays listeners.

Thank you and at this time, we'll be conducting a question and answer session. If.

If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue you.

You May press Star two if you would like to remove your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

And one moment, please while we poll for questions.

And our first question comes from the line of needle Coke She wood Northland capital. Please proceed with your question.

Yes congrats.

Congratulations on the solid results sequential increase and.

Free cash flow generation Derrick.

And the Fox Sports is Mexico is a strong testament to the tantalizing opportunity that you talked about.

Subscription.

Content moving towards advertising.

Can you discuss the evolution of that deal and the potential for.

That gil to replicate across other properties at Fox as well.

Thank you me I'll, let me take this question.

So.

The evolution of the deal is based on the guys from Joseph alluded. The BJ you may know that we have sales team local yields in Latin America.

And the focus here, especially with selling the <unk> platform and the services that the platform too.

It's to help content owners that has the premium content proposition to reach their subscribers directly to go direct to consumers.

With the full flexibility across all of the monetization models that are possible with streaming.

So our physical example, called sports Mexico is a good example.

It.

Shows how our platform model I think monetization model.

They can go to market.

Model, but also.

User adaptation capability.

And I think it's a testament not only of our ability to be a.

Great technology vendor to premium tier one.

Content company.

But also to our ability to help that content can be volatile.

Of course this is models across platforms and eventually hopefully also across all territories.

So would you say that your Latin American team is the star of your overall sales team.

I think we have a very very good global sourcing.

Latin America has shown.

Very good results over the past couple of quarters, we believe that the market in Latin America.

Isn't the perfect state, where more direct to consumer content called positions pushed to the market.

And with a good reference cases that we have done now footprint with a strong sales team and of course as I call.

I think we're in a very good position should we need to be successful at this moment.

So.

What's the ability you believe to replicate the success in the Latin American market to other markets.

So we do see some place in other markets as well I just want to highlight eradication of open items.

Hey, Ben.

Total global company portal operations.

To be precise so we have a very strong liquidity profile.

The market saw Latin American local marathon tomorrow.

To replicate this particular engagement.

Oh to maybe other sports bodies or sports rights holders.

It's something that we're actively working on right now and we hope to show for it so first of all in the sports sector.

Over the next quarter or two.

Excellent. Thank you for taking my questions.

Thank you.

Thank you and at this time. This concludes our question and answer session. If your question was not taken please contact <unk> IR team at <unk>.

The AC gateway I arent dot com.

I would now like to turn the call back over to Mr. Guido for his closing remarks.

Thank you operator.

We appreciate your interest in C change and look forward to our future communications have a great evening everyone. Thank you.

And thank you for joining us today for Sea change. This conference call you may disconnect your lines.

Yeah.

Okay.

Okay.

Mhm.

Okay.

Okay.