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Edited Transcript of SEAC earnings conference call or presentation 10-Apr-19 9:00pm GMT

Q4 2019 SeaChange International Inc Earnings Call

Acton May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of SeaChange International Inc earnings conference call or presentation Wednesday, April 10, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marek Kielczewski

SeaChange International, Inc. - CTO & Senior VP

* 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 Fourth Quarter 2019 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. Thank you, you may begin.

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Mary Conway, [2]

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Thank you, Matt. Good afternoon, everyone, and thank you for joining us today.

SeaChange released final results for the fourth quarter and full year fiscal 2019 ended January 31, 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.seachange.com.

With me on today's call are Mark Bonney, Executive Chair; Peter Faubert, Chief Financial Officer; Marek Kielczewski, Chief Technical Officer; and Yossi Aloni, Chief Commercial 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 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 final report on Form 10-K which was filed on April 16, 2018, and our most recent Form 10-Qa which was filed on December 17, 2018. 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 introduce 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 join the SeaChange management team today and share some insights about the company's direction and objectives for fiscal 2020.

I would like to start by explaining the recent board and management changes, including our recent agreement with our largest shareholder, TAR Holdings. I will also discuss our announcement last Friday and specifically my plans to enhance SeaChange's leadership and indeed instill greater confidence and excitement in our ability to execute and grow the company.

As you are aware, we entered into a cooperation agreement with TAR Holdings, the holder of approximately 20% of our stock in early March. Through the interaction with TAR, we welcome 2 highly professional individuals to our board: Robert Pons and Jeffrey Tuder. Both Bob and Jeff bring significant experience with technology companies of similar size and scale as SeaChange. Both are experienced independent directors of public companies and we welcome them.

You're also aware that our former CEO, Ed Terino, resigned without warning in late February. The Board was clearly surprised by this but responded immediately by creating an interim solution, an Office of the CEO comprised of the 4 top leaders in the company. Frankly, that has been working well, but we all know it's difficult to run a company, especially one with a lot of challenges when no one person is responsible for the entire operation.

While this was happening, the merger of RhythmOne, where I was CEO, with Taptica became effective, and as planned, I completed my service with RhythmOne on April 1. Knowing that the team at SeaChange could benefit by my experience in similar situations, the Board asked me to become Executive Chair, and I agreed to join the leadership team in that role and as the principal executive officer.

I have a great deal of experience in managing companies in similarly challenging solutions -- situations, with a good track record of successful outcomes. Thus, it's an ideal solution for me to mentor the team and enable each member to focus on their area of responsibility while building confidence in each other with the objective of driving the company forward. This collaboration is important because one of our goals is to better engage our entire employee base in achieving all of our objectives.

In order to provide a view as to where the company is today and what we see as opportunities, I have asked Marek Kielczewski and Yossi Aloni to be part of this call to articulate to investors what the company has done and is doing to turn SeaChange around and generate results that we believe can be produced and which we will be proud of.

Peter Faubert, our CFO, Marek, Yossi and our General Counsel, Dave McEvoy, bring substantial experience in the markets in which SeaChange competes and they recognize the work needed to evolve the company's model into one that can be successful in today's competitive environment. 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, especially on the go-to-market side, as Yossi will describe.

As Peter will detail momentarily, SeaChange faced several challenges in fiscal 2019, including declining revenues and customer delays. While our revenue shortfall was quite painful, the company did respond and implement additional restructuring initiatives to reduce operating expense levels.

After Peter reviews the financials, Marek will discuss SeaChange's technology position, including the benefits of the Xstream acquisition announced in early February. We are very excited about the technology and market positioning gained through this acquisition. Marek will also share more details about our recent technical progress, our overall technology roadmap, our R&D organization and planned enhancements to SeaChange's core technology over the coming year.

Yossi, who joined SeaChange in early January in the critical role as Chief Commercial Officer, will then share his perspectives on SeaChange's competitive position and his focus for sales and marketing this fiscal year. Yossi brings substantial experience in the video technology market, having most recently served as the Chief of Corporate Operations at ATEME where he and his team were quite effective in expanding the company's customer base and significantly growing revenue. He has already made significant changes to the sales and marketing team, adding experienced talent and developing a well-crafted approach to the market.

Following Yossi's comments, I will be back on to discuss fiscal 2020 guidance, our approach and the objectives that we believe can be obtained, and then we will open the call to questions.

While this is a slightly longer format than we have previously used, we hope that given the recent changes at the company, you will appreciate our efforts to be transparent and thorough about our plans to restore SeaChange to revenue growth, profitability and positive cash generation this year.

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

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [4]

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Thank you, Mark. Good afternoon, everyone. I'll start by reviewing our fourth quarter results.

We entered the fourth quarter of fiscal 2019 with $6.5 million in total backlog, excluding maintenance and support. We booked new business of $13.9 million during the fourth quarter and ended the quarter with backlog of $9.7 million.

Total revenue in the fourth quarter was $17 million which was at the lower end of the range of our revenue guidance compared to $22.9 million in the fourth quarter of the prior fiscal year. Both products and services revenues were lower compared to last year primarily as a result of lower sales to our largest customer.

Total product revenue was $7.8 million in the fourth quarter or 46% of total revenue compared to $9.9 million in the year ago quarter or 43% of total revenue. Product revenue this quarter primarily consisted of video platform revenue of $6.7 million.

Total services revenue in the fourth quarter was $9.1 million or 54% of total revenue compared to $13.1 million or 57% of total revenue in the fourth quarter of last fiscal year. As expected, we continue to see deterioration of maintenance and support revenue for our legacy products. In addition, as we migrate to multiyear arrangements with customers, we have finished many professional service projects and will consolidate the professional service activities going forward into support services, including outbound engineering under those arrangements.

Of the total services revenue in the quarter, maintenance and support was $6.3 million and professional services was $2.7 million compared to $8.1 million and $4.5 million in the prior year quarter, respectively.

Revenue from international customers of $12.4 million in the fourth quarter this year represented 73% of total revenue compared to $15.2 million or 66% of total revenue in the prior year quarter. Two customers each comprised of more than 10% of our total revenue in the fourth quarter of this fiscal year, whereas in the same quarter of last year, 4 customers each comprised of more than 10%.

Fourth quarter fiscal 2019 non-GAAP gross profit margin was 65% compared to 62% in the prior year quarter. Of this, product margin was 95% compared to 90% in the prior year quarter, primarily driven by product mix.

Non-GAAP service gross margin in the fourth quarter was 39% compared to 58% in the prior year quarter primarily as a result of maintenance and professional service revenue declining faster than fixed cost compared to the prior year's quarter.

Non-GAAP operating expenses in the fourth quarter of fiscal 2019 were $12.3 million which includes $1.8 million of bad debt reserve compared to $13.1 million in the same quarter of the prior year, slightly higher than the targeted $12 million to which we have been managing.

The cost reduction initiatives that we announced in September, including a reduction of headcount across all functions worldwide and other expense savings related to decommissioning of certain internal software tools, helped to reduce the total compared to the prior year quarter.

For the quarter, our non-GAAP operating loss of $0.03 per fully diluted share was in the middle of our EPS guidance compares to a non-GAAP operating income of 10% -- I'm sorry, $0.10 per fully diluted share in the fourth quarter of last fiscal year.

Turning to our balance sheet. We ended the fiscal year with cash and cash equivalents of approximately $30.7 million and no debt compared to approximately $32.4 million at the end of the third quarter of the fiscal year. The cash decrease from the fourth quarter was driven by funds used for operations during the quarter and cash payments related to our cost savings initiatives as well as working capital fluctuations during the quarter.

Deferred revenue of $10.8 million increased from $7.1 million as of October 31, 2018, but declined from $14.4 million in last year's fourth quarter driven primarily by the timing of revenues recognized and renewal of post-warranty maintenance and support agreements during the quarter.

Days sales outstanding, excluding unbilled receivables, was 90 days at the end of the fourth quarter of this fiscal year compared to 89 days in the fourth quarter of last fiscal year. Including unbilled receivables, days sales outstanding totaled 133 days in the fourth quarter of this year compared to 101 days in the fourth quarter of last fiscal year.

Our unbilled receivables were $5.4 million in the fourth quarter of this fiscal year compared to $3.1 million in the fourth quarter of last fiscal year. The increase is a result of timing of invoicing on 2 ongoing projects in North America and 1 ongoing project in Central America.

In the fourth quarter of fiscal 2019, we determined that there was a triggering event that prompted us to test our goodwill for impairment. We have determined that as of Q4 fiscal 2019, the carrying value of our single reporting unit exceeded its fair value. As a result, we have recorded an impairment charge against our goodwill balance of $15.6 million. In addition, we conducted an analysis of impairment of certain long-lived assets mainly consisting of our corporate headquarters building. We compared the sum of the undiscounted cash flows from the asset group to its carrying value and concluded that the carrying value exceeds the fair value. As such, we recorded an impairment charge of $1.2 million against the carrying value of the asset group.

As Yossi will discuss further, we are focused on opportunities to sell multiple products and support services under multiyear arrangements with both existing and greenfield customers this fiscal year. These arrangements demonstrate the commitment and reputation that SeaChange has to deliver investor-breed products. The initial response from customers has been positive, giving 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 our recurring revenues going forward.

While we have previously estimated that operating profitability and positive cash flow will occur in Q1 of fiscal 2020, we now believe that based upon lower revenue expectations in the first part of fiscal 2020 related to our transition to multiyear revenue arrangement with customers, we now expect to reach operating profitability and positive cash flow in the second half of this fiscal year.

With that, I'll hand the call to Marek to discuss our approach to driving product innovation. Thank you very much.

Marek?

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Marek Kielczewski, SeaChange International, Inc. - CTO & Senior VP [5]

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Thanks, Peter.

I'm very pleased to speak with you today about SeaChange's research and development focus, especially now that I'm based in our Acton headquarters. I'll also discuss our acquisition of Xstream in early February this year and how it affords us an immediate opportunity to capture significant customers with market-leading technology and proven scalability.

I'll start by sharing some exciting recent developments in our technology portfolio. We have adopted dotNET Core 3 for our cloud back office products and have moved to containerize deployments using docker with elastic scaling of publisher nodes. These enhance our capability to rapidly deploy and scale as our customer subscriber base grows. Also, we have automated the deployment process using tools such as Ansible which dramatically reduced the time to deploy a new instance, either on-prem or in the cloud.

The client apps have seen the introduction of NXTP, which provides commoditized OS independent functionality across all platforms. In MediaMaker, which we acquired via Xstream, we added individual profile-based recommendations by leveraging machine learning provided by Amazon Web Services. All of these technology developments are supported by advances in automated quality assurance with a common technology stack for the entire product portfolio and automated CI/CD, or continuous delivery, which is now done directly through a cloud-based container registry where they are picked up by our DevOps engineers.

I'll now move to SeaChange's overall product roadmap, how we are organized and where we are focusing our efforts in fiscal 2020. This focus is informed by both the changes in the marketplace as well as the new opportunities we see to deploy our industry-leading technology with both existing and new customer segments.

Our overall goal is to move most of our products and solutions to the cloud while leveraging hybrid cloud deployment where applicable. This evolution will accelerate deployment times, reduce operating costs and allow for faster delivery of new feature enhancements. To that end, we have already completed the cloud transition for the Adrenalin back office suite which has enabled our customers to take advantage of better scaling and more deployment flexibility.

As I mentioned in the beginning, we're very pleased with the acquisition of Xstream. Already we have integrated its core technology MediaMaker into our product portfolio, and we have completed the transition to the latest version, MediaMaker 9, across the customer base.

The Xstream R&D organization has been fully integrated with our Poland-based R&D center. As a result of this transition, we are now able to provide live microservers updates to all customers through Amazon Web Services, supported by a dedicated cloud managed services team.

In addition, we have fully automated the managed services rollout. We are now prepared to bring the latest version of MediaMaker to a wider range of customers around the world as it provides distinctive competitive advantages such as unparalleled time-to-market and operational efficiencies in app content management.

In addition, we have extended the client app ecosystem with support for more platforms, including the latest version of Android TV for operators, bringing important ease-of-use functionality to more deployments. We have also added support for new platforms through our app ecosystems, and this will be a continuing focus for our R&D team over the course of the year.

Overall, it's our goal to pivot our engineering efforts in terms of our organization to a greater emphasis on innovation and lessen the amount of time dedicated to sustaining efforts as we continue to drive technological leadership in video platform solutions.

Earlier this year, we restructured our R&D teams to become more product focused and aligned with our go-to-market activities with dedicated teams for individual roadmap deliveries and separate resources focused on sustaining engineering. For cloud-based solutions, it's our intent to develop a steady and reliable cadence for Agile releases across all products.

What does this mean for SeaChange? This year, we'll be incorporating into our full product portfolio key features and functionality that provide a better user experience, easier cloud-based implementation and seamless updating capabilities. We'll be focused on adding analytics capabilities across the entire product portfolio, especially those leveraging machine learning to power predictive insights. Personalization will also be a key theme across our video platform products. This also includes framework orchestration as well as providing a client app content management system which is made possible by our MediaMaker technology suite.

In the advertising segment, where our business has grown nicely this past year, we are expanding our advertising delivery to cloud-based OTT providers and adding more powerful analytics. We are also upgrading our core Adrenalin platform to build in more live updates as well as take advantage of cloud-based optionality.

In closing, let me repeat how excited I am about the opportunities that I see ahead for SeaChange, especially with the integration of Xstream and the addition of the market-leading scalable technology that can be appealing to a broader range of customers.

With that, let me hand the call over to Yossi Aloni. Yossi?

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [6]

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Thanks, Marek, and hello, everyone.

Let me start by sharing why I joined SeaChange in January. First, SeaChange has a great engineering team with proven ability to deliver. Second, SeaChange has solely installed base, servicing millions of subscribers on a daily basis, meaning we have a proven solution with access to a loyal installed base which is open to utilize the rest of our product portfolio. In addition, we are facing a simplified competitive landscape and favorable market trends driving demand for video delivery solutions.

We recently launched the SeaChange framework solution, which encompass all of our standalone products to enable us to provide a unique end-to-end solution from back office and media asset management to personalized ad insertion and client application for set-top boxes and mobile devices. This solution is available as an on-prem solution, a cloud or an hybrid product.

Over the last few weeks, we have also revamped our sales product and marketing teams with experienced and proven talent. The new structure improved our access to market and increased the opportunity for a more meaningful interaction. We have the largest team based next to our current and target customers, all while keeping our OpEx in check. The team is overseen by regional leaders with proven track records of delivering growth. Our account managers have sales, industry and engineering background. They all are well collected which is beginning to enable us to win the confidence of customers' engineering and C-level teams.

Already, our product team is starting to deliver innovation on the framework packaging to new disruptive solutions. In addition, our product team is initiating partnerships with technology vendor to support our innovation. Our new marketing team is supporting our simplified and focused approach.

Essentially, all of our sales, product and marketing resources are focused on driving our new go-to-market strategy, utilizing our unique product offering with a value-based engagement. Initial indications from current and new customers are very promising.

Also, we recognize that we must instill confidence in SeaChange with our employees, customers and the investment community by demonstrating our ability to meet our targets. To that end, we are focusing on driving growth and delivering results.

I look forward to sharing more information about our progress throughout the coming year.

And with that, let me turn the call back to Mark.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [7]

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Thank you, Yossi.

As you read in our press release, we believe that providing quarterly guidance does not serve our shareholders well. The high level of fluctuation and unpredictability in our quarterly numbers is a function of the size of the company and the business we are in. For these reasons, going forward, we will provide full year guidance and the key measures to which we are holding ourselves accountable.

For fiscal 2020, they are: first, to close 20 to 25 significant deals from multiple product and service offerings on an annual basis; second, to increase total annual revenue in the low to mid-double digits to $70 million to $80 million despite lower year-over-year service revenues, with, as Peter mentioned, the second half of the year being significantly stronger than the first half; third, to maintain GAAP gross margins in the low 60% range; fourth, to complete the development of 3 significant new product offerings; fifth, to continue to reduce costs by focusing on reducing essential third-party costs and eliminating nonessential costs; sixth, 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 and $0.19 per fully diluted share; and finally, to increase cash by $3 million to $6 million during the year from approximately $30 million at the end of the past fiscal year.

We believe that achieving these goals will establish the foundation for a business model could result in substantial -- sustainable double-digit revenue growth and non-GAAP operating income as a percent of revenue between 12% and 15% in 2 to 3 years. Next quarter, we will speak to our progress on these objectives and provide more detail on our 3-year model.

Thank you, and with that, Matt, we are 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 is from Steven Frankel from Dougherty & Company.

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

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Mark, maybe want to start with some perspective on this guidance. So you talked about scoring 20 to 25 significant deals. How many significant deals did you -- did the company win in fiscal '18 and fiscal '17 each to give us an idea of scale?

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

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Sure. So first, thanks, Steve. I appreciate the question. But first, we have to think in terms of this being a new go-to-market strategy. So when we think about the 20 to 25 deals, it's within the framework structure. We haven't had the framework structure before. And maybe last year, when you think about size and scale of the deals we did, there were, what, 2 or 3 that might fall to that category of significant deals in terms of the framework. Yossi, anything you want to add on that?

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

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Thanks, Mark. I think the key point here is that last year we were trying to sell standalone product in each and every opportunity which is a bit more challenging in terms of winning strategy and also in terms of delivery. Selling an end-to-end solution under the framework umbrella is probably easier both in terms of defining and executing on winning strategy and also in terms of delivery.

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

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Yes, and this is Peter. I'll just add to that. In fiscal '17, by far our most significant deal was LG's 1 back-office licenses for $13 million. In fiscal '18, we did sell a few Adrenalin upgrades and some advertising upgrades, the largest being with Rogers and with Altice. Rogers was an Adrenalin upgrade and Altice was an advertising upgrade. And we also sold new deals in fiscal '18 with TekSavvy and partner, and both of those were pretty significant deals for us, 7-figure deals.

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

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Okay. And while we're still on the subject of guidance, translate the gross margin for me into its non-GAAP equivalent. And what assumption are you making in the growth or shrinkage of OpEx in fiscal '19?

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

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This is Peter. In terms of...

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [8]

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Fiscal '20, sorry.

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [9]

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Yes. In terms of GAAP versus non-GAAP gross profit, there isn't really a lot of non-GAAP -- or GAAP charges that we would reverse out of gross margin at this point. The most significant GAAP charge that was reversed out historically was a loss on contract amortization charge. So those are fairly consistent between GAAP and non-GAAP going forward. In terms of OpEx, as Mark said in his statements, we are looking to continue to streamline the organization and eliminate any unnecessary costs in the organization. We've talked on previous calls about operating somewhat inefficiently in terms of having disparate systems in place which may create some inefficiencies in how we process things. And we continue to try to consolidate those tools and streamline those processes to be able to do more with less, so to speak. So we'll continue to do that. In addition, I think as we make the transition to more of a multiyear customer-facing organization, there could be some resources that we're currently utilizing to maintain legacy products and services that won't be needed going forward, and we'll look to identify those resources and potentially have some cost savings there as well.

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

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And overall, OpEx in fiscal '20 should be, what, around $11 million, $12 million a quarter? What's the quarterly cadence that's built into your guidance?

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

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Yes. So build into the guidance right now we're at between $11 million and $11.5 million a quarter on a normal run rate basis. Obviously, we had some charges this quarter that pushed us above that, but I'd say between $11 million and $11.5 million a quarter.

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

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Okay. And what was LGI as a percentage of revenue in Q4? And there had been this notion that they were going to come back for more licenses because they probably were well beyond the license count they had paid for. Maybe give us an update on where you are with that.

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

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Yes. I mean as we've said, they're above 10%. That's usually what we disclose. And I'll let Yossi speak to the -- we are no longer really chasing over consumption of licenses with LG, but I'll let Yossi speak to how we are working with them in terms of future business.

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [14]

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Thanks, Peter, this is Yossi. So the approach we are taking with LG these days is to work more with partners and to see where we can support them better. And increase their inefficiency by both reducing cost and providing them more. And probably this will translate into more product revenues other than license revenues, if and when.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [15]

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Okay. And Peter, you talked about a decline in service revenue in fiscal '20, so what's your assumption for the split between product and service in fiscal '20?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [16]

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In fiscal '20, under the framework deals, we haven't finalized revenue recognition yet on those deals but the assumption is that, that will be between 70% and 80% product in instances where the customer takes ownership of the software licenses. And as a result it will be 20% to 30% services which will all be included in maintenance and support agreements.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [17]

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Right. But on -- and obviously you have a lot of maintenance that gets rolled forward. So on a consolidated basis, just roughly what do you think, product will be 40% of revenue?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [18]

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Yes, I would say -- yes, no. So I would say that probably 60% revenue, 40% services going forward with the legacy included.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [19]

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And then with SeaChange kind of losing the last few years, slipping backwards, where do you think you are competitively now? And who are you competing against with these framework deals?

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [20]

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So let me take the beginning of that, and then Yossi, you can add some color. I think one of the reasons why Marek was on the call with us today was to kind of give you a perspective of where we stand technologically as a competitor in the marketplace. And I would say based on my knowledge of the company over the past few years, but more getting into it recently as a result of the organization change that from a technological perspective, we have a very good position and the ability to compete very well which also positions the framework as the right go-to-market strategy. Yossi, why don't you add your thoughts.

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [21]

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Sure. Thanks, Mark. This is Yossi. So if you're looking at the framework approach where we provide an end-to-end solution and this solution can be either on premises or a cloud solution, but also this can be an hybrid solution which can scale up as needed or scaled down based on demand and processing and the service provider's immediate need. In this sense, this is, at this stage, a unique solution. So probably when you're looking at the changing operation structure of the current service providers and some new service providers or virtual service providers -- content providers with direct to consumer service, this is probably a solution which is somewhat unique and there's less competition in that segment.

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

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Okay. And then last question, the company spent the last 2 years talking about a transition to SaaS. Do you still see SaaS as something that customers will adopt as part of the solution? Or are those going to end up being perpetual software-type deals?

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

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So what we're -- this is Peter. So what we're seeing so far is a lot of the customers who are looking at these engagements are looking to own the software licenses. So it puts us back into more of a traditional products and service sale where the customer takes ownership and we recognize revenue on product shipment for the products that are purchased by the consumer, and this now includes all of the products in our portfolio. That being said, we also acquired a managed service capability with Xstream. And to the extent that some of our customers want to have a hands-off approach and have us manage the entire service in a managed service capacity, that would obviously be subscription. But so far, we've seen less of a transition to more of the subscription-based managed service, and we've seen customers looking to elect more of that CapEx type of purchase under the multiyear arrangements.

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Operator [24]

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Our next question is from Jaeson Schmidt from Lake Street Capital Market.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [25]

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Just want to -- on the Xstream business, I think in the press release you said it was doing about $6 million in revenue. How big of a contribution will it be to your annual guidance in fiscal '20?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [26]

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So this is Peter. It's obviously incorporated into the guidance. Their historical revenue run rate was $6 million. We are working to integrate their legacy revenue stream into obviously our business, so it's contributing anywhere between $1 million and $1.5 million, depending on the quarter this year and timing of subscribers and renewals of certain contracts. That being said, we've also seen opportunities to sell the Xstream service as part of the framework, and it has been very appealing to some of the customers who have been looking at the overall solutions, specifically enabling them to penetrate more rural areas in some cases. So the benefit on the revenue opportunity for the year is certainly there. May not necessarily be standalone Xstream product sales but certainly as a component of the framework, and obviously, growing the subscriber base for their legacy business and their existing business.

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

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Okay. That's helpful. And then following up on one of Steve's earlier questions, the target of 20 to 25 significant deals this year. I mean that's obviously up significantly from the 2 to 3 you mentioned in fiscal '18. Even recognizing some of the market delays and whatnot impacted that, can you just give us a sense on why you're so confident you're going to see such a big uptick this year in significant deals?

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [28]

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Sure. Yossi, why don't you take that?

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [29]

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Sure. So for the -- we see this opportunity, and this is a very doable number, because of the following reasons. A, if you look at the number of opportunities in the market these days due to the market trends, it's something that we have not seen in many, many years. There are the traditional operators. Some of them are changing their workflow. Some of them are looking to improve their workflow. So that's the first opportunity. Next, you have new service providers. The DTC, direct-to-consumer, and there many of these, not only in North America. This is true also for Europe and Latin America. And the numbers over there and the number of opportunities over there, it's something that we have not seen in our domain probably ever since the launch of cable TV in America. I mean it's unbelievable. So that's the second opportunity. The third reason that we believe that we are going to meet this target is our offering. If you think about the SeaChange framework offering, so you as a DTC, a direct-to-consumer, or a service provider looking for a solution, you have now an integrated solution on the subscriber management in the back office, including all the components all the way to the client. And this is a set-top-box client. This is a mobile client. It's already in production. And this client has some unique features. Now taking this solution as an end-to-end solution will enable you to get to market immediately within weeks. It will enable you to generate more revenues using our unique Ad Insertion and net processing technology, utilizing all the analytics that we have from the back office, the media asset management, for the title and obviously the client. So for all of these reasons, we believe that the target we are taking upon ourselves is an achievable target.

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

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Okay. That's helpful. And the last one for me and I'll pass the line, these new product offerings that you plan to complete this year, are those for new and adjacent markets? Or would these be addressing the markets you currently have?

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [31]

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This is Mark. Both. So on the one hand, we are working on new product offerings for adjacencies that are addressing some of the trends and the market that we see and have been conscious of for a while that we've worked on in terms of design for quite some time now that we will be productizing later on this year. On the other hand, we are also productizing functionality that are enhancements of existing products. And I've mentioned a few of these earlier on in the call such as our tighter integration with some of the AWS services, especially around machine learning as well as more analytics capabilities that will enable us to better address customer insights and automated segmentation of the subscriber base for our customers. I don't know, Yossi, maybe you want to expand on that. But those are the 2 areas where we see a significant amount of investments in R&D. Anything, Yossi?

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Yosef Aloni, SeaChange International, Inc. - Chief Commercial Officer & Senior VP [32]

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No, no.

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Operator [33]

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This concludes the question-and-answer session. I'd like to turn the floor back to Mr. Bonney for any closing comments.

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Mark J. Bonney, SeaChange International, Inc. - Executive Chairman [34]

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Thank you, Matt. Appreciate that.

I appreciate everybody's attendance today. We look forward to updating you on our progress against our goals that we've laid out for you on future calls. Thank you very much.

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Operator [35]

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