Q2 2020 Earnings Call

Greetings and welcome to the Sea change Corporation second quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. If you have not already done. So please close all other programs on your computer.

If anyone should require operator or technical assistance during the conference. Please press star zero on your telephone keypad.

It is now my pleasure to introduce Mary Conway Investor Relations. Thank you you may begin.

Thank you Diego good afternoon, everyone and thank you for joining US Seachange released final results for the second quarter of fiscal 2020 ended July 31st 2019 today. After the market closed if you would like a copy of the press release you can access it on the IR section of our website at investors that Seachange Dot Com with me on today's call are Mark Bonney Executive Chair.

Yossi Aloni, Chief Executive Officer.

Peter Forebear, Chief Financial Officer America, Chile killed to ski Chief Technology Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

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

These risks are outlined in our SEC filings, including our annual report on Form 10-K , which was filed on April 12, 2019 any forward looking statements should be considered in light of those factors. Additionally, this presentation contains certain non-GAAP or adjusted financial measures as defined by the SEC. We have provided a reconciliation of these measures to the most directly comparable GAAP measures in the tables attached to the press release and with that I'd like to turn the call over to Mark Mark.

Thank you Mary good afternoon, and thank you all for your continuing interest in Seachange.

As Mary indicated and you have seen in our earnings press release, we announced the Yossi Aloni previously our Chief commercial officer has been named our President and Chief Executive Officer effective today.

I have worked very closely with yossi over the past five months and I've been impressed with his depth of knowledge of the industry. Both the people side and the technology and technical details of the various offerings in the market.

Yes. He has also demonstrated excellent leadership and the board and I are confident that he has the capability and passion to drive sea change forward Congratulations Yossi.

Chad Hasler previously our head of North American sales has replaced Yossi as Chief commercial officer.

Very well known to Yossi, having worked together for 20 years. She had is well positioned to drive the sales organization to achieve our growth objectives going forward.

Now turning to our second quarter results. The second quarter was a period of important achievements for sea change.

We strengthened our framework offering with the addition of the seventh generation of our back office solution.

Also known as Adrenalin.

As well as the addition of our Orchestrator and analytics engines.

Our financial performance compared to the second quarter last year was very impressive revenues totaled $18.8 million, an increase of $6.9 million from the same quarter a year earlier.

And that was driven entirely by revenue growth from our framework end to end video delivery solution.

Gross margins improved both year over year and sequentially.

The increase was dramatic from the prior quarter as we achieved greater than 60% gross margins on the framework revenue.

These margins coupled with effective staff realignment.

And other cost reduction efforts allowed us to achieve a 1 million dollar non-GAAP operating profit.

Profitability that occurred ahead of our planned timing.

We closed six framework deals in the quarter beginning.

Bringing the total for the year to seven.

It's important to note that these transactions were achieved in a remarkably short time, considering we launched the framework solution in April and our sales force wasn't fully in place until May.

Our backlog ended the quarter at over $16 million, an increase of $5 million or 45% from the end of our first quarter.

The only financial metric that was disappointing in the quarter was the cash burn that resulted in a cash balance of $18.8 million at quarter end.

That balance has stabilized now and we continue to believe that cash will grow as we go forward. The primary driver to the cash burn was the continued cleanup of the legacy business along with delayed collections from several of our framework deals due to the payment terms on those deals.

Peter will of course go into greater details on this and all our financial results in a few minutes.

With that introduction I will now turn the call over to our new CEO Yossi Aloni Yossi.

Thank you Mark.

Phil I'd like to thank our customers employees Golden investors will do costing Seachange me and my team.

I am grateful to Mark fully Minto cheap as an executive chair over the past five month.

And I look forward to continuing the Wolverine Mark is chairman of the board position.

Over the past quarter, we have demonstrated initial proof points with customer wins, new bookings and revenues.

We believe these wins as well as the additional customer agreements. We are finalizing these days along with our ability to deliver an end to end solution within 90 days validates our strategy.

Earlier this year in April .

We launched the Seachange full solution, which encompass all our previously standalone products.

The goal of Deflate Wolk, you still allow us to execute on our corporate strategy by enabling our customers to increase their revenues from their customers.

Green case did a customer base.

Three improved customer retention and to achieve Opex savings.

The revenue increase is achieved via dynamic in target did quite jewell device.

And by using different predictive analytics to increased fuel engagement and video transactions.

The ability to acquire more customers is driven by an outstanding user interface.

We did announce the user experience, we didnt intrusive loop field and speed of operation.

I have customer retention is enabled by predictive analytics Clinton discovery and the user interface for both the little bit dope and physical books applications.

You hope it savings are realized via unique value based engagement, we're pricing for customers is based on the Opex savings that we a neighborhood using different will control engagement.

Let me take a few minutes and compare our new go to market strategy through the engagement engagement over the past few years.

Do you want to poach, well sell extended on components or video delivery solution.

The Standalone components will souls, mainly to cable TV note with a large engineering organization.

The integrated the component from civil window, and created a custom delivery platform.

Seachange used to generate revenue from components of quilt, often get associated out will.

And professional services from customization.

In a sense it was like sending to customers commie engine to a customer out of the fleet do invested in acquiring all I did a major components.

And 50 zone custom costs.

To date.

We don't go new go to market.

We sell the car with little customization, which improved both the customers cost structure in ours.

During Q2, we completed invalidated the pipeline needed to enable us to meet our usually target in terms of revenues a number of wins.

In addition to the reported wins in Q2, we are finalizing a decent not bills customer engagement.

For both Q3 and Q4.

This provides us a solid confidence in meeting our revenues and customer win goes.

For this year.

I will focus on our progress during the first half of the year is in line with our expectations.

Is there any mine do.

During Q1, we on boarded decision custom engineering team.

Bullish to full capacity.

Align the R&D organization and initiated several customer engagement.

In Q2.

We finalize some of disengagement delivered objectivity in 90 days.

[noise] initiated the only been needed engagement for the next 12 months.

And begin to deliver recognized revenues from the initial flammable customers.

We continue to expect that framework transactions will increase in the back half of deal in line with the annual forecast we provided the navy.

We are confident that we will deliver the annual revenue guidance as we showed in a bit.

With that I will turn the call over to Molly.

Mike.

[noise].

Good afternoon.

This past quarter has seen a rapid uptake and framework deployments, which our engineering teams have delivered record breaking time.

Typical integration and delivery of an end to end framework solution from agreement to production is now less than 90 days.

Our engineering organization is significantly improving efficiency in the way, we manage and execute on deployment projects things through the use of infrastructure deployment automation and better tooling.

At the same time, our managed services team has reduced the amount of time needed to deploy production grade tenant incidents of our end to end solution hosted in the cloud, which now takes less than one hour.

All in all Onboarding, new customers take significantly less time today than it did in prior quarters.

In addition, during this quarter R&D completed delivery of two significant product innovations that will enable our teams to deploy framework solutions, even more rapidly in the future.

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

This element of the framework will enhance our ability to offer elastic scaling and deployment flexibility by leveraging hybrid and on from infrastructure as well as provide a risk free migration path for customers using previous versions of the back office also known as a journalist.

The analytics component will allow our customers better insights into revenue performance of their promotional campaigns as well as improve their ability to tackle churn.

During the past quarter. We also released the next generation of our client apps, which now offer a significantly redesigned and much more modern user experience.

Importantly, the app support more than 10 different consumer over the top platforms today, a number that is expected to grow in the future.

Version five of the client ops benefits from tight integration with our cloud back office content management system, which enables our customers product and marketing teams the easily change branding and promotional content as well as personalized user experience for the benefit of their subscribers.

We will be showcasing the new client apps as well as other product innovation at the ABC show in Amsterdam in the Netherlands, starting in the second week of September .

We're also making great progress and improving the efficiency of our R&D organization by simplifying architecture, and reducing code overlap among adjacent product lines.

Thanks to these efforts a significant majority of our R&D effort is now applied to product roadmap deliveries as opposed to sustaining engineering.

We expect this trend to continue in the future as we implement new technology innovation as part of the framework.

With that let me turn the call over to Peter.

Okay.

Thanks, Mark good afternoon, everyone I'll start by reviewing our second quarter results.

We entered the second quarter of fiscal 2020.

With $11.300 million in total backlog, excluding maintenance and support.

We booked new business of $19.1 million during the quarter.

And ended the quarter with backlog of $16.3 million.

So far this fiscal year, we've closed seven framework deals with a total value of more than $20 million.

This includes the five deals valued at more than $15 million in total revenue that we told you about in June .

Given the framework in engagements contribute revenue from multiple products over multiple years, we expect that our backlog will continue to grow as we close additional framework arrangements in the second half of this fiscal year.

And our recurring revenue from backlog will become more predictable.

Total revenue in the second quarter was $18.8 million, a 58% increase compared to $11.9 million in the second quarter of the prior fiscal year.

Revenue was driven by framework engagements that were delivered during the quarter.

Total product revenue was significantly higher in the second quarter of fiscal 2020 at $12 million or 64% of total revenue compared to $1.5 million in the year ago quarter or 12% of total revenue.

Product revenue was driven primarily by software licenses delivered to customers related to framework arrangements.

Total services revenue in the second quarter was $6.8 million or 36% of total revenue compared to $10.4 million or 88% of total revenue in the second quarter of last fiscal year.

We continue to see good clients in both professional services and support revenue from customers related to legacy products.

This quarter, we have seen successful transitions of some legacy customers to new framework arrangements.

In addition, we have continued to transition our professional services organization to our customer customer engineering organization as we complete these legacy professional service projects.

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

Of the total services revenue in the quarter maintenance and support was $5 million and professional services was $1.5 million compared to $7 million and $3.4 million in the prior year quarter, respectively.

Revenue from international customers of $9.2 million in the second quarter of this year represented 49% of total revenue compared to $6.8 million or 57% of total revenue in the prior year quarter.

Two customers comprised more than 10% of our total revenue in the second quarter of this fiscal year, one being a framework customer, whereas in the same quarter last year, one customer comprise more more than 10%.

Second quarter fiscal 2020, gross profit margin was 58% compared to 53% in the prior year quarter.

Driven by the increase in product revenue this quarter compared to the same quarter in the last fiscal year.

Product gross margin in the second quarter was 75% compared to 55% in the prior year.

Service gross margin in the second quarter this year was 29%.

Compared to 53% in the prior year quarter.

Primarily resulting from the decline in overall service revenue.

With fixed cost today that as I have mentioned earlier, we are in the process of reducing.

At this point legacy professional service engagements are substantially complete as a result, we are in the process of reduced reducing fixed costs in both professional services and support functions.

These actions are expected to be completed by the end of this fiscal year.

non-GAAP operating expenses in the second quarter of fiscal 2020 were approximately $10 million compared to almost $13 million in the same quarter of the prior year once again, well under the targeted $12 million of quarterly $12 million quarterly run rate to which we have been managing.

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

In fact, our excellent progress on this front in the first half of the year enable up enabled us to be more efficient and to achieve non-GAAP operating profitability earlier than we had planned.

During the first half of this fiscal year, we have been carrying resources to complete legacy professional service and support arrangements.

We will continue to reduce costs related to these legacy projects once they are completed.

For the quarter, we posted breakeven results on a per share basis.

Which translates to non-GAAP operating income of three cents per fully diluted share.

This compares to a net loss of 26 cents per basic share in a non-GAAP operating loss of 18 cents per basic share in the second quarter of last fiscal year.

Turning to our balance sheet. We ended the second quarter of fiscal 2020, with cash and cash equivalents of approximately $18.8 million and no debt.

Compared to approximately $30.7 million at the end of fiscal 2019.

The cash decrease in the second quarter reflects funds used for operations of $5.4 million, primarily the result of changes in accounts receivable and Unbilled revenue as a result of timing of billings related to framework deals executed during the period.

In the second quarter of this year, we also used cash of approximately $140000 to repurchase 100000 shares of common stock.

Under the stock repurchase plan approved by our board of directors in early June 2019.

Also as we previously disclosed in the first quarter of this fiscal year, we used approximately $4.6 million in cash for the acquisition of extreme.

As a result of having better visibility into framework payment terms, we have revised our year end cash balance expectations to be 22% to $25 million.

Deferred revenue of $9.2 million decreased from $10.7 million as of January 31, 2019.

And $8.5 million in last year's second quarter, respectively.

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

Day sales outstanding excluding Unbilled receivables were 55 days at the end of the second quarter of this fiscal year.

A significant improvement compared to 92 days in the second quarter of last fiscal year.

Including Unbilled receivables days sales outstanding totaled 98 days in the second quarter of this year also an improvement compared to 132 days in the second quarter of last fiscal year.

Our unbilled receivables were $12.1 million in the second quarter of this fiscal year compared to $5.3 million in the second quarter of last fiscal year.

The increase is the result of timing of collections from several of our framework deals due to payment terms on those deals.

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

As Yossi mentioned, we expect this trend to continue leading to an increase in framework transactions in the second half of this fiscal year.

The positive momentum with the framework go to market strategy with new and existing customers provides us with confidence that we will return to revenue growth in fiscal 2020.

We are today reiterating that we expect to sustain operating profitability on a non-GAAP basis and reach positive cash flow cash flow in the second half of this fiscal year.

With that let me hand, the floor back to Mark. Thank you.

Thank you Peter.

As I mentioned up front Yossi is now our CEO .

Our transition plan has been well executed and the board has full faith and confidence in Yossi.

With that I will turn the call back to Yossi for closing comments prior to taking your questions.

Congratulations again floor is yours, thank you Mark.

Switching to the different company now than it was six months ago, we have new vision and strategy.

Limited toxic and measures of success in place over the past year to future engineering team led by modeling our talented CEO is developed the best technology and product in the market.

Earlier this year.

In an equal time, Mark and his team integrated devalue standalone product, enabling the Facebook platform launch at any be in April . These interim enabled a new 15 to initiate immediate engagement and delivered in Q2.

In closing.

We recognize that we must again the investment community confidence by demonstrating our ability to meet our targets.

To that end, we remained focused on driving growth and delivering results.

With that let me turn the call over to the operator and begin to question operator.

Thank you Sir.

At this time, we will conduct a question and answer session.

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

Good afternoon, and congratulations you'll see on your elevation. So I wonder if we might take a look at those seven framework deals and could you characterize for us.

How many of those were from traditional seachange customers that are transitioning off of.

The old software in onto framework versus and a new greenfield opportunities and maybe even kind of a little finer in terms of are these greenfield opportunities in non traditional customers.

Obviously changed.

Thanks Steven.

So.

There are three types of customers Indy seven wiens any likely to come we will continue to have to stick type of customer.

Obviously, there are existing customers did used to use seachange fully component.

And now I'll do Ingo will soon due mostly to change.

The second type of customer.

These are new customers, we have a few of those some of them I'll walk you core traditional some of them may be a bit less traditional.

The type of customers that we won.

It's customers that used to walk we teach engine to past and if you will no doubt coming bickel.

And this I believe it shows cost in our product and technology.

So that in that third category would that be cable companies that went to another solution that are now coming back is that is that what you're referring to.

So we do have a mission, we prefer to avoid naming specific customers and Bob.

Search engine to past used to sell to mainly cable operator in many cases, they used to sell to higher tiers.

Cable operators not large number of subscribers.

So maybe some of those are now coming back on if you will.

Okay and I love this.

20 million or so and value.

Mhm energy, mainly maybe you could tell us and so those would be a larger deal that you're just referring to what's a typical framework deal book like that's in the pipeline in terms of size and whats the Rev. Rec look like in terms of what are you recognized in the quarter you do it and what's the tail look like on a quarterly basis going forward.

And remind me did or.

Three year agreements I forgot.

So most of the favorable commitments that we have today five years, including goes the agreements that we are finalizing these days for Q3 and Q4.

We expect that we will see some agreements for less than five years.

In terms of deal value revenue recognition Vito you'll take it in terms of deal value. So.

We provided a revenue number which was 70 to 80.

We also provided a number of wins that we expect it to CDC. So given if we'll just use on numbers and then picking up in nominal dollars between.

75.

And 25 wins, so inevitably deal values, probably 70 525 goals still significant volumes some operators are larger.

Some operators that have existing operators some of them are new type of operators.

And Steve in terms of revenue recognition, what we have seen by now than Weve evaluated the seven deals that we've delivered this quarter.

That the allocation of deal value to the product portion of a software license portion of these arrangements is generally in the 60% to 70% range.

So that would leave 40 to 30% to 40% in the tail for the remaining.

Five years of the arrangement.

That gets recognized ratably over the over the over the period.

Okay.

Great Thats.

That's very very helpful.

And.

You know to to do the.

Well, it's called in 13 to.

18 deals.

Between now and the end of the year, how how big is the pipeline what's your coverage on those 13 pay TV deals.

We are indeed, very decent shape, we expect to meet our targets. We are very confident in meeting our targets.

Meaning we are engaging with all the.

Targets that we need to finalize by the end of the year with most of them. We are in a very advanced stage of engagement.

Okay, and then then for Peter you hinted at in the release about kind of.

Lower run rate of about of Opex. So is it 10 million a quarter at a lower rate that you'll achieve or in 21, you think you can run lower than that.

Yes, no I think we're going to continue to reduce opex in the second half of this fiscal year. So the expectation would be that exiting fiscal 2020 will be a lower it will be at a lower opex run rate than than we are currently.

Okay.

That's great.

Just see if I have anything else on my list.

No I think that's it for now all call I'll come back to you I'll, let somebody else ask the question and I'll come back to you.

Thank you.

Our next question comes from Jason Schmidt with Lake Street Partners. Please state your question.

Hey, guys. Thanks for taking my questions. Just a couple from me I'm just want to clarify that the scrubbing of the backlog is now fully complete or is there still some tail that needs to be scrubbed from that.

So.

The professional service portion of the backlog is largely complete at this point, we still had $5 million of maintenance and support revenue related to the legacy business.

That is declining quarter over quarter out weve as Weve discussed in prior calls.

But that will continue for some period of time, probably through the end of this year and into 2021 and beyond.

Okay, and then are you still adding to the headcount for the sales team should we still expect that to grow.

I'm, probably know that they believed it headcount wise in Opex wise to support those targets, we'll do theater Nyx deal.

We'll probably okay, you will see some increase in the R&D, but it's going to be mined them.

Okay. That's it for me Thanks, a lot guys.

Thank you. Thank you.

Thank you.

[noise].

There's a peter appears to be no further questions. At this time I'll turn it back to you will see a nominee for closing remarks. Thank you.

Thank you.

Thank you all for your interest in Seachange, we look forward to seeing many of you next week at the Gateway Conference in San Francisco Endodontic Conference in Minneapolis.

Also in mid September we will then once that we will be demonstrating the final solution at the IVC conference in Amsterdam or one.

We look forward to speaking again soon thank you all.

Thank you. This concludes today's conference all parties may disconnect.

Have a great evening.