Q4 2023 SeaChange International Inc Earnings Call
Good afternoon, and welcome to Sea Change's fiscal fourth quarter and full year 2023 conference call for the period ended January 31, 2023.
My name is Diego, and I will be your operator this afternoon.
Joining us from the company is Chairman and Chief Executive Officer, Peter Aquino, President, Chris Clemmer, and Chief Financial Officer, Mark Shouldinsky.
After the market closes today.
C-Change issued its financial results for the fiscal fourth quarter and full year in a press release, a copy of which is available in the investors section of the company's website at www.c-change.com.
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 and Regulation G. 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 earnings release issued today.
I would like to remind everyone that this call is being recorded and that will be made available for replay via a link available in the Investor Relations section of sea changes website now.
Now I would like to turn the call over to Sea Changes Chairman and Chief Executive Officer, Peter D. Queena. Sir, please proceed.
Thank you operator.
Good afternoon, everyone. This is Peter Aquino, Chairman and CEO of SeaChange International. Welcome to our fourth quarter and fiscal 2023 end-of-year call.
So going back to January 2022 at the beginning of our fiscal year. The leadership team at sea change set out to achieve three specific goals by fiscal year end.
The key categories, where.
First improved financial performance.
Second, service excellence, and third, executing on a large development plus project that we're planning on with Vita.
I'm happy to report that we exceeded expectations in all three categories.
And now I'll just briefly highlight the fiscal 'twenty three accomplishments.
First, we set meaningful financial performance goals; we strive to grow top-line revenue and exit the year free cash flow positive by the fourth quarter.
The numbers truly tell the story of our fiscal twenty-three accomplishments.
The revenue for the year was 32 and a half million, and that's up from 27.3 in fiscal 'twenty-two.
That's 19% up year over year.
EBITDA was set beyond breakeven on accumulative basis for the year.
And that's versus negative $4 5 billion of fiscal 'twenty two.
With a record $17 million and adjusted EBITDA in the fourth quarter.
That's over a 12-quarter period; we're now EBITDA-positive not only for the fourth quarter but for the entire year.
EBITDA swung a positive $5 million year over year.
And this is due in part to strong sales in fiscal 'twenty-three and continued cost control.
And our management team right now is firing on all cylinders. So, we're very proud of the accomplishments on the financial side.
Second, we aim for operations improvement and encourage client software upgrades, which ultimately leads to a better end-user experience.
Our customer support team goes beyond the call of duty; it looks for ways to collaborate with the leading MSOs.
Mobile and wireline broadband operators, and satellite providers.
To target trouble areas and minimize disruptions.
Sometimes this requires software upgrades and implementation investments on both sides that none of us can put off any longer.
We view these investments as joint contributions, and we also invest in talent and expertise to make these upgrades as seamless as possible.
Throughout fiscal '23, we managed to upgrade nearly a dozen software platforms, quite a who's who, of leading video and advertising providers around the world.
Cosmos customer service improvements also lead to lower costs and minimize as chair.
Our customer churn rate is close to zero, and that says something very positive about our core software products and our support team.
And finally, we set out to execute a potentially transforming development, plus deal with Vida and high says in fiscal 'twenty-three.
It was a significant test of our software engineering skills in our 100+ developer team in Warsaw, and they passed with flying colors.
B, they're required to change the higher management and execute on our roadmap directed by Vida. This required an entire software development joint effort carved out of our existing Paul and team, and we did this in about nine months.
By the spring of 2022 we began to hire new experienced software engineers, along with our talent pool in Poland.
The developer vetoes a future streaming platform for their connected TV operating system, now hitting the market in a phased approach globally, with millions of devices to follow.
If you visit nearly any Walmart, Best Buy, or Costco in the United States, you will see a VidaFree TV.
Marketing on hyphen-smart TV inventory on display.
Your takeaway should be that sea changes inside.
With our development plus contract that features a long-term engagement between our company, she changed leaps into a new chapter.
We're not just work-for-hire; we are partners with our clients, and their success is our success over the coming years.
It's a real step forward, as a sea change is a value-added partner.
In summary, if you look at the sea change's evolution in just 12 quarters.
We created a growing, profitable platform that is poised for the next step up to gain scale.
We expect to be a net contributor and accretive in any combination that focuses on the tailwind of video streaming ad tech and fast channel development on connected TVs for the foreseeable future.
Our mantra is to continue to improve our recurring and SaaS revenues with our existing and new logo operators and content publishers alike.
And we want to remain in the best position to be opportunistic.
As we explore strategic alternatives.
So at this point, let me turn the call over to our President, Chris Clemmer. Chris.
Thanks, Pete, and good afternoon, everyone. Thank you for joining us today.
As Peter has already laid forth, we did that in fiscal 'twenty-three on a high note.
And I'm happy to report that we generated substantial growth across all of our main KPIs.
Our financial performance reflects our company's transition to a more sustainable level of growth and profitability. It also shows that our core value proposition, which is focused on helping customers distribute and monetize their content portfolios, continues to gain traction and remains an exciting, dynamic, and rapidly growing element.
Streaming and video advertising markets.
Instrumental to our successful operational performance in fiscal 'twenty, three and our positive outlook into fiscal 'twenty four.
Our our three drivers for success.
First our team.
More than 100 in house video software developers and our R&D hub in Warsaw, and 50 field engineers globally continue to develop innovative TV streaming and advertising solutions to add significant value to new and existing customers, both by increasing operational efficiency and fairly complex TV and streaming ecosystem.
And by introducing services that generate new and incremental video revenues, such as our ad insertion solutions.
Second, our portfolio of state-of-the-art video software products.
These products are built to deliver premium multi-screen and streaming experiences across all device platforms, content types, and business models.
Leveraging the best monetization capabilities, especially through smart and targeted ad insertion.
They continuously iterate it using the latest backend and frontend technology stacks and are designed to capture the opportunities that arise along with shifting consumer trends.
Third, our customer base.
We are privileged to call the who's who of global MSOs, cable companies, and mobile operators our customers.
For most of them, we have been providing a solution for many years now.
Our engagement models with them are based on continuity, stability, and continued optimizations and upgrades of the deployed SeaChange software.
With frequent upgrades and extensions, we ensure that our customers remain up-to-date with technology and continue to receive value-added services in today's ecosystem.
They can roll out for their subscribers.
I would now like to take a closer look at the fourth quarter of fiscal 'twenty-three S.
As Pete mentioned earlier, we executed our strategic growth plan centered around three core pillars.
First, and in line with my previous remarks, we should concentrate on renewing and fortifying our relationships with our long-standing operator customers.
Which has successfully led to multiple engagement renewals and upgrades.
Second bolstering our recurring revenue stream by securing higher margin source deals.
And third.
By innovating with new and expanded products and services, we can help our customers optimize returns across all television and streaming channels, as well as enhance end-user retention and engagement.
To begin, I'd like to highlight two key announcements we made in the past quarter.
Including the launch of an extreme all-cloud-based content monetization platform designed to maximize ad revenue on connected TVs.
As well as the launch of Vita free VITAS streaming hub or free advertising supported video leveraging the same extreme technology.
The launch of Extreme signifies a sea change in commitment to capitalize on the consumer evolution of content consumption on connected TVs.
And provides new products and services that help our customers maximize returns across all television and streaming channels.
As consumer preferences shift away from linear pay TV to streaming and from subscription services to advertising-funded television and content offerings.
We've seen an explosion of consumer demand for comprehensive content aggregation, eDiscovery, and <unk>.
Connected TVs.
With the launch of Extreme, we're able to address this trend in consumer demand.
Enabling access to wide selection of content independent of our cable subscription or setup box while providing.
The premium streaming experience for the end user and.
And benefits to content owners and advertisers.
Extreme provides significant added value to content owners by offering them a new distribution channel and revenue stream to maximize their return on content costs.
On the other hand, the platform provides advertisers with intelligent tracking and targeting through big data to help improve conversion rates with fast advertising.
The extreme platform, in addition to being another innovative offering we have released, will also help change and expand our SaaS offerings to customers, generating recurring higher-margin revenue.
Leveraging the same extreme technology.
We also were able to jointly develop the beta-free solution, which was rolled out to millions of Vita-powered smart TVs from High and other TV brands. This past January.
With C change extreme technology, Vito will now be able to provide a superior streaming and advertising insertion solution to accelerate the expansion of free ad-supported content globally on smart TVs powered by Vita. In addition to enabling full control of video content, it also has the ability to seamlessly manage, curate, and publish.
Monetize this content.
As more content becomes available under advertising business models Smart T. The operating systems like Vida.
All becoming the primary gateway to publish our partnerships."
The launch with Vida validates the consumer shift we've seen away from cable and subscription models for advertising content.
While allowing us to further expand our strategic partnership with Vida, as well as participate in their continued success.
This increased partnership with Feed Up has been the result of continued innovation from Sea Change and will play a meaningful role in our growth going forward.
Yeah.
Speaking more to our developments with existing customers, the company closed multiple renewals during the quarter with tier one and tier two operators in all three of our main geographic markets.
Including North America, EMEA, and Latin America.
These renewals further demonstrate our ability to deliver on our strategy of fortifying our relationships with our long-standing operator customers.
Continued execution of this strategy remains a top priority for C Change as we improve our existing products, deliver increased value in professional services, and secure system upgrades for existing customers.
Yeah.
Continuing with other recent developments in the quarter, we launched Source Digital—Entre stream, a platform that is a true innovation driver in the connected television and advertising space, in collaboration with our partner Sensor.
Enabler unique med adverse experience that can be streamed on LG devices.
In September last year, we partnered with Source Digital to jointly develop the Source platform with a sensor.
The platform now combines sourced digitally activated moments with three alternatives that create immersive and personalized user engagement across any PTO or digital net adverse experience.
With Sensus Merdivorous platform to showcase lives, so called meta events, such as concerts or sports events.
And she changed the stream of platform through which these events get streamed and monetize.
From a source platform, users can immerse into a digital experience, interact with other users, experience concerts, and purchase merchandise with the optionality of switching back and forth between our live events streamed on an LGTV.
And the three D members.
In addition to adding more high-margin recurring revenue through a SaaS-based platform, the launch of Source provides us with a pre-packaged solution for the metaverse's sea change. Together with Source Digital, we can cross-sell to a variety of content owners globally.
Okay.
In addition to co-launching the source product, we are also finalizing a stream at launch with a major media company in EMEA.
We expect to go live in the coming weeks.
This is yet another company that sees tremendous value in our SaaS-based platform.
Which provides our customers with.
Flexible billing and payment handling, including in that purchases vouchers and refund.
Advanced analytics to attract key service metrics and make data driven decisions to optimize the business performance.
Support for all content types, including VOD, live linear, and time-shift, with the option to add fast channels to the platform and a seamless onboarding flow for new subscribers and users.
Taking a step back, we're seeing two major growth catalysts playing out that are driving demand for sea change solutions.
First.
We're seeing growth in the connected TV market, which has largely been a result of consumer behavior trends shifting towards streaming connected devices, particularly on larger screens.
In this changing landscape, the company is well-positioned as a technology vendor to help content owners realize connected strategies and optimized monetization opportunities.
Our long-standing relationships with many tier-one operators, as well as our growing international presence, coupled with positive reference cases from content owners and publishers.
Make us an ideal partner for players in the connected TVs space; we are confident that our existing technology solutions and services.
Along with continued delivery of innovative solutions, it will allow us to capitalize on this growing demand.
The second growth catalyst involves the consumer shift towards free, ad-supported content.
And away from subscription-based business models.
C change.
We believe that differentiator technology can help operators and content owners protect and build incremental revenue streams.
Placing us in an excellent position to grow our market share in this rapidly expanding sector of the industry.
By extending our product and service portfolio for our existing customer base and adding new customers who adopt these AD-based business models, we can harness this opportunity to expand our market share and maximize our potential in this new growth sector driven by changes in consumer preferences.
Our ad insertion solutions incorporate more and more data-driven intelligence to personalize the ad load with relevant ads and to optimize addressability across all distribution channels, from broadcast to streaming and connected TVs.
That concludes my prepared remarks. I will now turn the call over to our CFO, Mark Schakowsky, to cover the financials.
Arc.
Thanks, Chris, and good afternoon, everyone.
Turning to our financial results for the fourth quarter and fiscal year 2023.
Total revenue for fiscal Q4, 2023 increased 23% to $10.2 million from $8.3 million in the prior quarter.
While full-year revenue increased 19% to $32.5 million compared to $27.3 million in fiscal 2022.
For Q4, the improvement was primarily driven by increases in product revenue due to the acceptance of a development project, triggering a material license fee related to the Company's connected TV software product.
For fiscal 2023, total revenue was up mainly due to increases in service revenue.
Product revenue for Q4 of 2023 increased 185% $6 2 million.
Our 61% of total revenue compared to $2.2 million or 26% of total revenue in the prior quarter.
Product revenue for fiscal 2023 increased 9% to $14.2 million, or 44% of total revenue, compared to $13 million, or 48% of total revenue in 2022.
Improvement in product revenue for both Q4 and fiscal 2023 was primarily due to increases in license revenue.
Services revenue for fiscal Q4 of 2023 decreased by 35% to $3.9 million, or 39% of total revenue, compared to $6.1 million, or 74% of total revenue in the prior quarter.
Service revenue for fiscal 2023 was $18.3 million or 56% of total revenue, compared to $14.3 million or 52% of revenue in fiscal 2022.
Sequential decrease in quarterly services revenue was primarily due to an increase in professional service revenue in the third quarter. After completing work for multiple customers.
The increase in service revenue for fiscal 2023 was primarily due to an increase in professional services revenue driven by the acceptance of completed work by multiple customers.
Revenue from our international markets in fiscal Q4 of 2023 was $33 million for 33% of the total revenue, compared to $36 million, or 44% of the total revenue in the prior-year quarter.
For fiscal 2023, revenue from international markets totaled $14.4 million, comprising 44% of total revenue. This compares to $11.8 million or 43% of total revenue in fiscal 2022.
Revenue in our U.S. markets for fiscal Q4 of 2023 is $6.8 million.
67% of total revenue, which compares to $46 million.
56% of total revenue in the prior quarter.
For fiscal 2023 revenue from our U S market contributed to $18 1 million, 56% of total revenue compared to $15 5 million or 57% of revenue in fiscal year 2022.
Looking at our margin.
Gross profit for fiscal Q4, 2023 was $74 million, or 73% of total revenue, compared to $52 million, or 62% of total revenue in the prior quarter.
Gross profit for fiscal year 2023 was $20.5 million or 63% of total revenue, which compared to $16.4 million or 60% of total revenue in fiscal 2022.
Product gross margin for fiscal fourth quarter of 2023 was 85% compared to 26% from the prior quarter.
For 2023 fiscal year product gross margin was 65% compared to 70% in the prior year with significant growth in product margin sequentially as well as the full year decrease in product margin for fiscal year 2023 can be explained by substantial increase in the amount of third party goods.
Sold to several customers in the third quarter, which carried a lower margin.
Resulting in a big jump in product gross margin sequentially and a lower average project margin for 2023 fiscal year when compared to the prior year.
Service gross margins for fiscal fourth quarter of 2023 was 53% compared to 75% for the prior quarter.
For the 2023 fiscal year service gross margin was 62% compared to 50% in 2022 fiscal year.
Looking at our expenses.
Non-GAAP operating expenses.
For fiscal fourth quarter of 2023 for $5 8 million, an increase of four 5 million the prior quarter.
Full year 2023, non-GAAP operating expenses were $20 3 million down slightly from the 27 billion in fiscal 2022.
GAAP income from operations for fiscal Q4 2023 totaled $12 million compared to a $3.7 million loss from operations in the prior quarter.
Loss from operations for the prior year of 2023 totaled $11.7 million compared to a loss of $9.4 million in fiscal 2022.
No during the year that we recorded a noncash impairment loss on goodwill during the second and third quarters of $5 8 million and $3 $3 million, respectively and.
And at quarter end, we no longer had any goodwill recorded on the balance sheet.
As a percentage of total revenue, GAAP income from operations for the fourth quarter of fiscal 2023 was 12%, which compares to a negative 44% from the previous quarter.
For the 2023 fiscal year, as a percentage of total revenue, GAAP loss from operations was a negative 36% compared to a negative 34% in the year prior.
Non-GAAP income from operations for fiscal Q4 of 2023 totaled $16 million.
<unk> <unk> per fully diluted share, which is an improvement compared to the point of $1 million or breakeven per fully diluted share in the prior quarter.
This represents our third consecutive quarter of positive non-GAAP income.
Non-GAAP income from operations for fiscal 2023 totaled $3 million or one cent per fully diluted share, which was an improvement compared to the $4.3 million loss or a loss of nine cents per fully diluted share in fiscal 2022.
As a percentage of total revenue, non-GAAP income from operations was 16% compared to 2% in the prior quarter.
Non-GAAP income from operations for the 2023 fiscal year, as a percentage of revenue, was 1% compared to a negative 16% in the prior year.
GAAP net income for fiscal Q4 of 2023 totaled $1 7 million or <unk> <unk> per basic share. This was an improvement compared to a net loss of $3 7 million or a loss of seven cents per basic share in the prior quarter GAAP net loss for the fiscal year 2023 was $11 4 million inclusive of the a form.
Mentioned goodwill impairment loss or a loss of $23 per fully diluted share compared to a net loss of $7.4 million or a loss of 16 cents per fully diluted share in fiscal 2022.
Adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, for fiscal Q4 2023 totaled $1.7 billion, or $3 per fully diluted share.
For the 2023 fiscal year, adjusted EBITDA totaled <unk> 5 million or <unk> <unk> per fully diluted share compared to an adjusted EBITDA net loss of $4 1 million or a loss of nine cents per fully diluted share in fiscal 2022.
Turning to our balance sheet.
As of January 31, 2023, $13.4 million in cash and cash equivalents, and $1.2 million in marketable securities.
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 well as our annual 10-K, which we plan to file by April 17.
I will now turn over the call to Cameron Williams from Gateway Investor Relations to moderate the question and answer session for pre submitted questions before taking of you're taking your questions.
Cameron.
Thank you, Mark. This is Cameron Williams from Gateway Group C, change in Investor Relations Advisors. I will now read the top questions submitted by investors and analysts on the call.
First question is for Chris with the fourth quarter jump would you consider the connected TV deal transformational that is what percent of the company's focus is on doing more with Davita Orlando get another partner.
Thanks for the question, Cameron.
First, if you look at the market environment.
I think the premise that video consumption and, therefore, eyeballs are shifting toward streaming, and here, especially toward connected TV devices.
The advertising-funded business model is now widely accepted.
Now the question is how can a <unk> technology provider like sea change be successful in this space and help publishers and platform stakeholders alike to capitalize on this new consumer paradigm.
I am convinced that this can work best with a clear value proposition.
Focused on helping the stakeholders to increase their value of their ad inventory.
Smart ways to use data to target advertising and personalize the overall experience.
So to your question, Yes, Davita deal is very much transformational for us and it is a catalyst in so many regards.
As it catapults us right into the position that we want to be in with our products and services.
In the center of the CTV value chain.
As a company, we will put a lot of focus and resources across all departments sales R&D offs to continue to develop meaningful services for publishers and CTV stakeholders.
To increase our market share and grow our footprint.
Thank you, Chris. The next question is from Mark. After three years of right-sizing, do you feel that the company's balance sheet is now positioned for profitable growth, i.e., continuous positive free cash flow?
Thank you for this question.
As we discussed, we have $14.7 million in cash and cash equivalents, including our recent investments in marketable securities.
This exceeds our total liabilities.
We have strong accounts receivable and unbilled receivable balances.
We also remained debt-free.
Our strong balance sheet and recent cost-cutting measures provide our company with an opportunity to invest in areas that promote profitable growth and generate positive cash flows in the future. Thank you.
Thank you, Mark. The last question we received is for Chris again.
You gave some commentary on your technical and support teams; are they positioned to scale up with established leadership?
Thanks Cameron.
I must say that I'm very, very proud of our team.
We truly have top talent in our engineering powerhouse in Warsaw, Poland.
It's an in-house team there with more than 100 people.
Lot of which by the way have been with sea change for more than five sometimes even more than 10 years now.
This R&D organization is set up to continuously innovate and develop our products further, as well as to manage our cloud deployment and provide managed cloud services.
The way we were organized in Poland and state of the art agile development teams and are very strong and experienced senior leadership.
Adding value to the product in accordance with our clearly defined roadmap.
This team is organized in a way that it can be scaled up at anytime we have just recently integrated two dozen developers seamlessly and with and only a few weeks to accelerate the Vito project.
Please note that we also have a second tech team, our operations and delivery team.
Essentially, provide support and field engineering services.
They support our customers with specific deployments, help manage day-to-day operations, and provide professional services, for example, to upgrade or integrate our software.
To be embedded within our customer workflows at this level helps us to understand how we can support them better both short term, but also long term.
This team is managed from the US and organized across global regions.
Here as well, we have all the capabilities to scale up this team, for example, to provide additional managed or professional services.
Overall, both teams have an extremely strong leadership team in men's tech talent, and an organizational structure that allows us to scale up quickly and seamlessly.
Thank you, Chris. This completes the pre-submitted Q&A session. I will now turn the call back to the operator.
Thank you.
At this time this concludes our question and answer session if.
If your question was not taken, please contact SEA Changes IR team at S.E.A.C at gateway IR dot com.
I would now like to turn the call back over to Mr. Quito for his closing remarks.
Thank you all for your attention to today's fourth quarter and end of year fiscal 'twenty three call have a great afternoon, everyone.
Thank you for joining us today for the Sea Changes conference call. You may disconnect your lines. Thank you.