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Edited Transcript of SEAC earnings conference call or presentation 6-Jun-19 9:00pm GMT

Q1 2020 SeaChange International Inc Earnings Call

Acton Jun 17, 2019 (Thomson StreetEvents) -- Edited Transcript of SeaChange International Inc earnings conference call or presentation Thursday, June 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark J. Bonney

SeaChange International, Inc. - Executive Chairman

* Peter R. Faubert

SeaChange International, Inc. - CFO, Senior VP & Treasurer

* Yosef Aloni

SeaChange International, Inc. - Chief Commercial Officer & Senior VP

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Conference Call Participants

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* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Steven Bruce Frankel

Dougherty & Company LLC, Research Division - Senior VP & Director of Research

* Mary Conway

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Presentation

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Operator [1]

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Greetings, and welcome to the SeaChange Corporation First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mary Conway, Investor Relations.

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Mary Conway, [2]

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Thank you, Dana. Good afternoon, everyone, and thank you for joining us. SeaChange released final results for the first quarter of fiscal 2020 ended April 30, 2019, today after the market closed. If you would like a copy of the release, you could access it on the IR section of our website at investors.seachange.com.

With me on today's call are Mark Bonney, Executive Chair; Peter Faubert, Chief Financial Officer; and Yossi Aloni, Chief Commercial Officer. Marek Kielczewski, our Chief Technical Officer (sic) [Chief Technology Officer], is also available for Q&A. 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 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 financial report on Form 10-K, which was filed on April 12, 2019. Any forward-looking statements should be considered in light of these 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 table attached to the press release.

And with that, I'd like to turn the call over to Mark who will provide opening remarks and reintroduce the rest of the team. Mark?

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [3]

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Thank you, Mary, and good afternoon, everyone. I'm pleased to be joined by Peter Faubert, our CFO; and Yossi Aloni, our Chief Commercial Officer today, to provide an update on our progress, thus far, in fiscal 2020. Also here with us is Marek Kielczewski, our Chief Technology Officer.

We have been hard at work at SeaChange over the past several months. Several important and significant changes have occurred, including the acquisition and full integration of Xstream; the addition of industry veteran, Yossi Aloni, as our Chief Commercial Officer; our shareholder settlement; the addition of 2 new independent directors; the retirement of a long-standing director; the departure of our CEO; and the adoption of a new go-to-market strategy and our framework solution. We recognize that our financial results in the first quarter were not good. Peter will provide more details later, but it's important to know that our results were impacted by the cleansing of our backlog and the removal of contracts which were required to dedicate significant engineering resources to develop client-specific features that are not in line with our framework solution. We were able to do this without significant disruption to our customers or our relationship with those customers.

It's been less than 2 months since we shared our fourth quarter and full year results along with our strategic plan to transform SeaChange and restore the company to revenue growth and positive cash flow by the end of this fiscal year. As I mentioned, that plan includes a change to our go-to-market strategy that we call our framework solution where, instead of offering individual components of our solution to our customers, we package every component and provide an end-to-end video management and delivery system to them. There are other critical elements to this strategy and our offering that we will share in more detail with you in the future. But today, for competitive reasons, we are sharing fewer specifics so as not to lose our first-mover advantage. Yossi will describe the solution and why we have such confidence in it in a few minutes. He will also provide greater detail about the launch and initial reaction to our framework approach and tell you more about the sales and marketing progress.

I'm really pleased to say that the whole sales and marketing team has been working extremely aggressively on this effort as many on the team have done this before in other environments. We know that completely altering a go-to-market approach isn't easy nor can it be done as quickly as anyone would like. That said, we are pleased that we now have important proof points that our framework is indeed appealing to both our existing and new customers. We signed our first deals, 5 significant deals as of today, and revenue from these will begin to be recorded this quarter, our second fiscal quarter of 2020.

On the financial front, as Peter will describe in a moment, we are also very focused on continuing efforts to reduce our expenses and manage our resources carefully. This includes elements such as reducing operating expenses, most particularly those in G&A, and reduce those operating expenses from the $12 million quarterly non-GAAP run rate that we had previously targeted to less than $11 million on a go-forward basis. We've taken steps to reduce third-party costs across-the-board, and we'll report on this in more detail next quarter. While none of us expect this effort to be easy, we are committed to implementing a solid and thoughtful plan. We believe we have the right ingredients between our technology, a more focused and professional sales and marketing approach, a rightsized underlying cost structure and the right people.

As we told you on our last call, we plan to be totally transparent in reporting our progress versus our stated goals. To that end, we are today reaffirming the guidance metrics that we provided on April 10, 2019, with one alteration on end-of-year cash balance, as I will discuss momentarily.

For fiscal year 2020, those metrics and our performance to date are: with respect to our first goal, which was to close 20 to 25 significant deals from multiple products and service offerings on an annual basis. As I mentioned, we've closed 5 significant deals since the beginning of fiscal 2020.

Our second goal, to increase total annual revenue in the low to mid-double-digit percentage range to $70 million to $80 million despite lower year-over-year service revenues. Our progress: despite the impact on revenue, both in Q1 and in future quarters of significant cleansing of our backlog in the first quarter, we are encouraged by the growth of our framework deal pipeline and we remain confident in the full year revenue target.

Goal number three was to maintain GAAP gross margins in the low 60% range. Our progress: margins that have been produced in the initial framework deals are consistent with allowing us to achieve this goal.

Our fourth goal, to complete the development of 3 significant new product offerings. I'm pleased to say our product development efforts are on track to achieve this goal.

Our fifth goal was to continue to reduce cost by focusing on reducing essential third-party costs and eliminating nonessential costs. Our progress has been that we have reduced third-party costs, we're ahead of plan and we will be completed with these cost reduction efforts in our third quarter.

Goal six, to deliver GAAP operating results between a loss of $0.09 per basic share to income of $0.07 per fully diluted share and non-GAAP operating income between $0.03 to $0.19 per fully diluted share. Based on our ability to achieve our revenue metrics and our gross margin metrics, we believe this goal can be met for the full year.

Finally, our cash goal, to increase cash by $3 million to $6 million to $33 million to $36 million from approximately $30 million at the end of fiscal 2019. On our current outlook, the cash goal is being altered to reflect the newly announced $5 million share repurchase program. The new goal is a cash balance of $28 million to $31 million at year-end fiscal 2020.

With respect to the stock buyback program, we believe that the formal establishment of the buyback, even at a modest level, demonstrates how serious we are about our plan to reinvigorate SeaChange operating and financial performance. And we believe that over the longer term, our share price should reflect that improved performance. In the meantime, especially in this transition year, we believe it's important to demonstrate to shareholders that we believe our share price is undervalued and a good investment compared to our overall potential.

Finally, as expected, the financial results from the first quarter are not yet in line with our financial goals for the full fiscal year, but we remain confident that beginning in the current quarter, as we start to generate revenue from framework transactions and continue to build a strong pipeline of deals, that will enable us to achieve our annual guidance. We also continue to believe that achieving these goals will establish the foundation for a solid business model, one that could result in sustainable double-digit revenue growth and non-GAAP operating income margins of 12% to 15% in 2 to 3 years.

With that, let me turn the call over to Yossi.

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [4]

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Thanks, Mark, and hello, everyone. I'm pleased to provide you with an update on our focus in the first quarter and the opportunities we see ahead. Earlier this year, as you know, we launched the SeaChange framework solution. This solution encompass all our standalone products to enable us to provide a unique end-to-end solution from the back office, which is used to manage the video platform business operation; to media asset management, which stores, normalize and enhance video title; to dynamic ad insertion for linear and video-on-demand. In addition, the framework solution enables service and content providers with an Internet browser-like personalized ad insertion capability as well as the client apps for connected TVs, tablets, smartphones and other devices. All of these leverages analytics and predictive insights to increase engagement and video transactions. The framework is available in on-premises, cloud or a hybrid product.

Our framework goal is to enable our customers to increase revenues, help with viewer retention and reduce the OpEx. Customers realize revenues increase is now enabled by SeaChange bringing in a browser ad experience to the TV or by video stream with dynamic and targeted ads by viewer device and household. Additionally, viewer retention is enabled within the nonviewing experience for both over-the-top and legacy set-top boxes. All of these and the operating expenses savings that the customer realizes is often greater than the cost of SeaChange's unique value-based engagement, meaning that our customers pays out of their savings.

During Q1, we also updated our sales, product, marketing teams along with customer engineering with experienced and proven talent, which is critical to support customers in key markets and regions. The team is focused on very specific target accounts, leveraging previous relationships and building confidence in SeaChange as the premier end-to-end video management and delivery solution provider. As a result, we are now going in confidence that our pipeline of core opportunities will allow us to achieve our revenues target for this year as well as our longer-term revenue and profit goals.

We are demonstrating initial proof points with 5 significant customer wins, contributing more than $15 million in total committed contract value. We believe these wins validate our strategy even if they are not yet evident in our financial results. Contractions involving the framework platform will begin producing revenues in the current quarter and are expected to increase in the back half of the year in line with the annual focus we provided in April. We remain confident about our ability to achieve the annual revenue guidance we shared in April.

To ensure high-quality framework deployment, our highly skilled engineering leadership is working closely with our R&D and delivery teams. We recognize that we must restore confidence in SeaChange with our customers and the investment community by demonstrating our ability to meet our targets. To that end, we are focusing on delivering growth and driving results.

With that, let me turn the call over to Peter.

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [5]

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Thank you, Yossi. Good afternoon, everyone. I'll start by reviewing our first quarter results. We entered the first quarter of fiscal 2020 with $9.7 million in total backlog, excluding maintenance and support. We booked new business of $4.9 million during the first quarter and ended the quarter with a backlog of $11.3 million. Thus far, in the second quarter, we have closed 5 framework deals with a total value of more than $15 million. Given that framework engagements contribute revenue from multiple products over multiple years, we expect that our backlog will continue to grow, and our recurring revenue from that backlog will become more predictable.

Total revenue in the first quarter was $8.5 million compared to $14.9 million in the first quarter of the prior fiscal year. Both product and service revenues were lower compared to the same quarter last year primarily due to our more aggressive shift to framework engagements as the primary driver of new sales this fiscal year. As Yossi stated, these framework engagements will begin to contribute revenue starting in the second quarter of this fiscal year and will continue throughout the second half. As discussed previously, revenue in the first quarter of this year was solely related to working through backlog related to legacy engagements, and there was no revenue recognized from framework engagements during the first quarter.

Total product revenue was $1.2 million in the first quarter or 14% of total revenue compared to $3.1 million in the year-ago quarter or 24% of total revenue. Product revenue was driven primarily by our OVP platform and advertising license and hardware revenue with 1 customer upgrade during the quarter. Total services revenue for the first quarter was $7.3 million or 86% of total revenue compared to $11.8 million or 76% of total revenue in the first quarter of last fiscal year.

As we transition more aggressively to framework engagements with existing customers, we expect an acceleration and a decline of maintenance and support revenue from those customers related to the legacy products. We expect a lower rate of renewals of maintenance and support agreements with those customers. So those agreements will be replaced by framework arrangements going forward. In addition, our professional services function will transition to a newly created customer engineering organization, which will directly support our customers as part of the framework.

Of the total services revenue in the quarter, maintenance and support was $5.2 million, and professional services was $1.9 million compared to $7.2 million and $4.4 million in the prior year quarter, respectively. Revenue from international customers of $5.1 million in the first quarter this year represented 60% of total revenue compared to $9.1 million or 61% of total revenue in the prior year quarter. One customer comprised more than 10% of total revenue in the first quarter of this fiscal year whereas in the same quarter of last year, 2 customers each comprised of more than 10%.

In the first quarter of fiscal 2020, non-GAAP gross profit margin was 34% compared to 61% in the prior year quarter driven primarily by Amazon Web Services costs related to the OVP platform and third-party hardware costs this year versus primarily software license sales in the prior year quarter. Non-GAAP service gross margin in the first quarter was 36% compared to 53% in the prior year quarter, primarily resulting from the decline in overall service revenue. We expect to complete legacy professional service engagements and ramp our customer engineering organization in the first half of this fiscal year. As we make this transition to customer engineering, we expect to reduce fixed cost in both professional service and support functions, thus normalizing services gross margins in the future.

Non-GAAP operating expenses in the first quarter of fiscal 2020 were $10.4 million compared to $12.9 million in the same quarter of the prior year, well under the target of $12 million quarterly number to which we have been managing. The decline reflects the cost-reduction initiatives that we announced last September, including reduction of head count across all functions worldwide and other expense savings related to decommissioning certain internal software tools. During fiscal 2020, we will continue to control costs by focusing on reducing third-party costs and eliminating nonessential internal costs throughout the organization.

For the quarter we posted a net loss of $0.30 per basic share, which translates to a non-GAAP operating loss of $0.20 per basic share. This compares to a net loss of $0.15 per basic share in the first quarter of fiscal 2019 and a non-GAAP operating loss of $0.11 per basic share.

Turning now to our balance sheet. We ended the first quarter of fiscal 2020 with cash and cash equivalents of approximately $24.3 million and no debt compared to approximately $30.7 million at the end of fiscal 2019. You will recall that we used approximately $4.6 million in cash as well as 541,000 shares of common stock for the acquisition of Xstream in early February 2019. The remainder of the cash decrease in the first quarter reflects funds used for operations during the quarter and cash payments related to cost savings initiatives as well as working capital fluctuations during the quarter.

Deferred revenue of $9.9 million decreased from $10.8 million as of January 31, 2019, and $11.3 million in last year's first quarter driven primarily by the timing of revenue recognized and the renewal of post maintenance and support agreements during the quarter.

Days sales outstanding, excluding unbilled receivables, was 106 days at the end of the first quarter of this fiscal year compared to 73 days in the first quarter of last fiscal year. Including unbilled receivables, days sales outstanding totaled 170 days in the first quarter of this year compared to 104 days in the first quarter of last fiscal year.

Our unbilled receivables were $6 million in the first quarter of this fiscal year compared to $6.3 million in the first quarter of last fiscal year. The decrease is the result of the timing of invoicing milestones on legacy professional service projects.

As Yossi stated, this year we are laser-focused on opportunities to sell multiple products and support -- multiple support services under multiyear arrangements with both existing and new customers. We are pleased with our initial success with this approach and anticipate they will contribute significantly to revenue this fiscal year, beginning in the second quarter and through the second half. These arrangements demonstrate the commitment and reputation that SeaChange has to delivering best-of-breed products now packaged in an end-to-end video delivery capability and with modernization through dynamic ad insertion.

The positive response to framework from new and existing customers continues to provide us confidence that we will return to revenue growth in fiscal 2020. More importantly, the multiyear element of these transactions will allow us to grow our backlog and increase predictability of revenue.

As we stated last quarter, we continue to believe that based upon lower revenue expectations for the first part of fiscal 2020 related to our transition to multiyear revenue arrangements with customers, we will reach operating profitability and positive cash flow in the second half of this fiscal year.

And with that, I'll hand the call back over to Mark.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [6]

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Thanks, Peter. One final point before we open the call for questions, changes of the magnitude that we are implementing are not easy on the team. I am very pleased that there is clear evidence that our employees are responding well and are embracing a new level of engagement and accountability, enhancing our ability to significantly improve the company's operations and achieve our fiscal 2020 goals.

With that, Dana, we are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steven Frankel with Dougherty & Company.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [2]

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I've got lots of questions. But let's start with this notion of purging the backlog. I'd like to know exactly what you did because I don't see the backlog going down or the deferred revenue going down. So how does that impact the revenue that we saw in Q1 and the go-forward run rate in revenue?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [3]

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Steve, this is Peter. So in terms of deferred revenue, we do have some projects that were sold last fiscal year that we're working through with customers. And part of working through those legacy projects is essentially creating and trying to customize the solution for those customers. As we work through the scope of those arrangements and what was to be delivered under those arrangements, we are deferring revenue until we're able to meet some of those milestones. So we're committing some significant resources to working through those legacy arrangements that are largely customized development arrangements and, frankly, not what we want to be doing going forward under the framework arrangements.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [4]

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So how much revenue would have hit in Q1 but because of this rescoping didn't hit in Q1?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [5]

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I think a lot of the decline in revenue that we're seeing is coming from nonrenewal of maintenance and support agreements as we enter into framework agreements with existing customers. So a majority of the deals that we announced were deals with existing customers this quarter. And in lieu of signing those framework arrangements, obviously, they're not going to renew the maintenance and support agreements on the legacy platforms.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [6]

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So that leads to the question of where does maintenance bottom. If it's already down significantly sequentially, what does it look like in the next couple of quarters? Is it -- does it go closer to $4 million or below that?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [7]

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Yes. I think you're going to see some pretty significant declines in maintenance and support agreements just given the fact that we're trying to move off of those legacy platforms.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [8]

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And Yossi, you have some thoughts on Steve's questions.

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [9]

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Yes. Steve, this is Yossi. With some of the customers that we have committed to provide to them custom solutions in the future, what we are doing these days, and it's very likely that we will be successful with some of them, is to convert them into a framework engagement where we are going to provide them a cookie-cutter solution, so they will get more functionality and we are going to save the customization that they may or may not need. So that's a win-win situation.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [10]

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Okay. So let me just go back one more time because, Peter, I understand that maintenance went down, but your product revenue went from $3 million last year to $1 million and change this year, a big piece of which was OVP. So I guess would it be fair to say there was also an air pocket in current business? It's not -- this is not just the purging of backlog that caused the poor results in Q1. The backlog really didn't impact any of the revenue production in Q1, there were other issues.

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [11]

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Yes. So product revenue for this quarter, you're absolutely correct, we're not selling individual components anymore. So really the only product revenue outside of OVP for the quarter was an upgrade of a customer's spot advertising solution, but we're not aggressively marketing individual components because we've shifted to the -- providing the framework solution to all the customers that we're pitching going forward. Now that's not to say if a customer comes to us and says they want to upgrade a legacy platform, we wouldn't do it, but our sales team is not out there trying to sell those upgrades anymore.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [12]

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I'm trying to square where you are today with what looks like aggressive guidance of $70 million to $80 million. So the $15 million worth of framework deals that you've gotten in early Q2, how much of that $15 million in revenue gets recognized in the current fiscal year? If you're all...

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [13]

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Yes, under the current revenue recognition guidance, we'll recognize revenue related to software licenses when we ship the licenses. So if you think about what historically has been our mix of product license versus service revenue, we've generally said it's been 60% licenses or product revenue and 40% services, which would be taken over time. So as we're shipping the 4 individual licenses for the products under the framework solution, we would recognize the revenue upon shipment for the licensed portion of those deals based on the stand-alone selling price for those licenses.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [14]

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But doesn't that make the climb between $8 million and change and the $20-plus million and change you need to do each quarter to get to $70 million a pretty aggressive ramp from here?

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [15]

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Well, you have to think about the fact that we've just launched the framework, and we've got 5 significant deals producing $15 million in total contract value. Literally just launched.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [16]

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But you just said that about 6% of that 15% gets organized -- gets recognized here.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [17]

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That's correct. That's how much we'll get in revenue this year, you're right. But my point is that we've got a significant -- we got -- we've made significant progress with 5 already in the books against 20 to 25 that we're going to get for the year. And many of those are very substantial in future revenue. So we don't -- we see your issue. You're from Missouri, and you need to see it. I get that. But we know what's in the pipeline, and we're very much convinced that we can get there particularly based on the activity that we've had since the beginning of the first quarter.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [18]

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Okay. And of these 20 to 25 deals, kind of how do you expect those split between existing customers and greenfield opportunities and new areas where you weren't traditionally playing?

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [19]

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Yes. So if you don't mind, I'm going to -- not going to share with you the exact numbers even though we are -- let me take a step back. At this stage, we already know how to achieve the number, the target for this year. So the targets are mapped, we know where we stand and we know where we're ahead in terms of closing the engagement with each one of these targets. Many of these targets are new customers. Many, many of them did not use to be SeaChange customers in the past. This is not to say that they are greenfields, meaning these are existing content providers or service providers.

Now going back to Mark's comment, please keep in mind, we are in early June. I joined the company in January. Marek and his team, our CTO, started the modification and the packaging in the -- of the product early this year. We onboarded the team in Q1. We launched the solution at NAB. NAB was less than 60 days ago. Since NAB until today, within less than 60 days, getting completed, signed and in the books 5 deals, it's not that bad. Now obviously, if we have 5 in the books, probably we have a few more that are getting ready to be completed. And this is the reason for the confidence.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [20]

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All right. I get it. And the stock buyback seems a little bit more symbolic than something where you can take down and make a meaningful impact on the overall situation. But it does show your confidence, so I'll give you credit for that.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [21]

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Thank you, appreciate it.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [22]

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And last one, just the time to revenue on these pipeline -- on these framework deals. These are pure license revenues, so you signed the paper and you can ship the licenses. Or what else needs to get done?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [23]

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Yes. So the implementation of the framework arrangements, given that they're pretty integrated and they're all SeaChange products, we are targeting a 90-day kind of implementation of those products, and it should be repeatable. At some point early in that 90-day implementation period, software licenses will ship.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [24]

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Okay. And to Yossi, who are you competing with on these deals today?

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [25]

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The usual suspects that play in our domain. I think that in terms of competitive landscape, it's much easier these days. We have covered that in the Needham conference. I'll be delighted to set up a one-on-one and review it with you because that's probably a longer discussion.

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Operator [26]

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Our next question comes from the line of Jaeson Schmidt with Lake Street Capital Markets.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [27]

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Peter, sorry if I missed it, but did you quantify the impact from the kind of backlog purge and what the revenue headwind that was for April?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [28]

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I did -- so I didn't really quantify what the impact was. I did say it was focused -- there's a couple of components to working through the backlog. The first component is delivering customized solutions that were contracted last year as part of offerings to some of the customers that we just needed to work through. And in some cases there, there's value in the backlog that we need to solve some problems to tap into, and we're working through that. So in some cases, we can't recognize the revenue, and we can't really invoice. And we're working through that professional service backlog.

The second component to the legacy revenue was the maintenance and support renewals with existing customers. And in some of those cases when we're selling framework arrangements to existing maintenance and support customers, we would rather sell the main framework arrangement than renew their legacy maintenance and support agreements. And so those are the 2 real headwinds that we're facing from a legacy product standpoint.

The third piece that I talked about was the fact that with the new sales team and the new go-to-market strategy, we're not out there actively selling legacy products on a one-off basis. So you're also going to see less product revenue unless a customer comes to us and explicitly ask for an upgrade of their platform.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [29]

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Jaeson, one other point there, on the first portion of what Peter was talking about. We haven't -- in many cases, we haven't actually taken those amounts out of the backlog. They're sitting in backlog. We're not taking revenue on them now, and we don't necessarily know when we'll be able to. In fact, in some cases, we're trying to move the customer away from that required development and into a framework deal, which benefits both of us, quite frankly, which means that we will never get that revenue, but we will get framework revenue as and when it comes. So I hope that helps you.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [30]

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No, that makes sense. And then just following up on the previous questions. I know you have these 5 deals going to over $15 million in revenue, but I mean after 6 years of annual revenue declines and starting Q1 of this year in a pretty sizable hole, how do we get comfortable that you can achieve 20% top line growth all of a sudden at the midpoint of your guidance? Can you just talk about how the engagement pipeline has grown? Or if you could quantify what is in that engagement pipeline deal size? Any additional color would be helpful.

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [31]

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So this is Yossi, Jaeson. First, the confidence. The go-to-market team that we have today at SeaChange, it's a go-to-market team that have done it in the past. And if you're looking at many of the guys we have today, whether it's in North America, Latin America or Europe, we have done it in these domains with these customers with complemented solutions -- not competing, complemented solutions. And they've delivered growth for many years over 20%. So that's part of the confidence.

Second reason for the confidence is the feedback that we are receiving from customers. So right now, our validated pipeline, meaning pipeline where not only there's an opportunity, we are also considered as one of the key solution providers, is probably well over 140. And again, do keep in -- please keep in mind, we launched the solution and the team onboarding was completed around NAB time frame. So that's the next reason for the confidence in the solution.

And obviously, and this will be a bit harder for you to judge, is the feedback that we are receiving from the market. We have a great product. The feedback from customers when they see our product, the one that we demonstrated in Needham, is just outstanding. And when you have a great product and there is a demand and there is a simplified competitive landscape, usually you're confident that you can do it.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [32]

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Okay. And I know you're shoring up some costs on the third-party costs side. Do you plan to add to head count and to build out kind of the sales strategy going forward? Or will head count remain relatively flat going forward?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [33]

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So I think we'll see some cost savings in some areas, and that will come from headcount reductions, in some cases. We're also building out the customer engineering organization, so we are hiring to support the framework go-to-market strategy for sure. So the transition from a head count perspective will continue, but we haven't really put a head count restructuring plan in place per se.

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [34]

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It will be more or less flat, it's safe to say.

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [35]

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Yes.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [36]

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The other important point here is that the sales organization is built. The customer support organization -- or the customer engineering group needs to be built out a little bit further. But the sales team is here. And Yossi was modest when he said that the team has done this previously. It's important to note that the team has done this previously with Yossi leading the team, so that is an important point for you to understand as well.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [37]

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Okay. And then finally, when we think about fiscal '20, what sort of split between product and service are you guys ultimately targeting?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [38]

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Yes. So like I said before, and obviously we're going to revisit this as we continue to sell the framework engagements and really understand what the stand-alone selling prices look like, but what we've modeled is 60% product-40% services, which is pretty consistent with how our multielement arrangements had been structured historically. So even though the go-to-market strategy is different, the economics around what we're selling because they're still our products and our services should be in that kind of 60-40 split.

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Operator [39]

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Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mark Bonney for closing remarks.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [40]

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Thank you, Dana. Thank you all for your attendance today. We look forward to updating you on our progress against our full year goals at the end of the next -- this current quarter when we hold -- and when we hold our Q2 2020 call. Please feel free to reach out with any questions. Until then, thank you for your continued interest in SeaChange.

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Operator [41]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.