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Edited Transcript of SEAC earnings conference call or presentation 29-Aug-19 9:00pm GMT

Q2 2020 SeaChange International Inc Earnings Call

Acton Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of SeaChange International Inc earnings conference call or presentation Thursday, August 29, 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. - CEO & President

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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;Conway Communications;Principal

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Presentation

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Operator [1]

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Greetings, and welcome to the SeaChange Corporation Second Quarter 2020 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce Mary Conway, Investor Relations. Thank you. You may begin.

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Mary Conway;Conway Communications;Principal, [2]

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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 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; Yossi Aloni, Chief Executive Officer; Peter Faubert, Chief Financial Officer; and Marek Kielczewski, 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 information we're about to be discussed 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 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 tables attached to the press release. And with that, I'd like to turn the call over to Mark. Mark?

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

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Thank you, Mary. Good afternoon, and thank you all for your continuing interest in SeaChange. As Mary indicated, and you've seen in our earnings press release, we announced that 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 5 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. Yossi has also demonstrated excellent leadership, and the Board and I are confident that he has the capability and passion to drive SeaChange forward. Congratulations, Yossi.

Chad Hassler, 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, Chad 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 SeaChange. We strengthened our Framework offering with the addition of the 7th generation of our Backoffice 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 non-GAAP operating profit, profitability that occurred ahead of our planned timing.

We closed 6 Framework deals in the quarter beginning -- bringing the total for the year to 7. 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 the late 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?

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Yosef Aloni, SeaChange International, Inc. - CEO & President [4]

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Thank you, Mark. First, I'd like to thank our customers, employees, Board and investors for their trust in SeaChange, me and my team. I am grateful to Mark for his mentorship as an Executive Chair over the past 5 months, and I look forward to continuing to work with Mark in his 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, validate our strategy. Earlier this year, in April, we launched the SeaChange Framework solution, which encompassed all of our previously stand-alone products. Because of the Framework, they still allow us to execute on our corporate strategy by enabling our customers to increase their revenues from their customers, to increase their customer base, to improve their customer retention and to achieve OpEx savings.

The revenue increase is achieved via dynamic and targeted by viewers and device and by using the Framework, predictive analytics to increase viewer engagement and video transactions. The ability to acquire more customers is driven by an outstanding user interface, which enhance the user experience with its intuitive look, feel and speed of operation. Higher customer retention is enabled by predictive analytics, content discovery and the user interface for both over-the-top and setup box applications. The OpEx savings are realized via unique value-based engagement where pricing for our customers is based on the OpEx savings that we enabled using the Framework engagement.

Let me take a few minutes and compare our new go-to-market strategy with engagements over the past few years. The old approach was to sell a stand-alone component of a video delivery solution. The stand-alone components were sold mainly to cable operators with a large engineering organization. It integrated the components from several vendors and created a custom delivery platform. This change is to generate revenues from component software, often the associated hardware and professional services for customization. In a sense, it was like selling a customer's car engine to a customer that later invested in acquiring all alternative components and build his own custom cars. Today, with our new go-to-market, we sell the car with little customization, which improves both the customer's cost structure and ours.

During Q2, we completed and validated the pipeline needed to enable us to meet our yearly targets in terms of revenues and number of wins. In addition to the reported wins in Q2, we are finalizing a decent number of customer engagements for both Q3 and Q4. This provides us a solid confidence in meeting our revenues and customer win goals for this year.

Our progress for -- our progress during the first half of the year is in line with our expectations. As a reminder, during Q1, we onboarded the 7 customer engineering deals or listed several offerings, aligned the R&D organization and initiated several customer engagements.

In Q2, we finalized some of these engagements, delivered projects within 90 days, initiated all the needed engagements for the next 12 months and began to deliver recognized revenues from the initial Framework customers. We continue to expect that Framework transactions will increase in the back half of the year, in line with the annual forecast we provided in April. We are confident that we will deliver the annual revenue guidance we shared in April. With that, I will turn the call over to Marek. Marek?

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

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Good afternoon. This past quarter has seen a rapid uptake in Framework deployments, which our engineering teams have delivered in 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 and the way we manage and execute on deployment projects, thanks to 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 1 hour. All-in-all, on-boarding new customers takes significantly less time today than it did in prior quarters.

In addition, during this quarter, R&D completed delivery of 2 significant product innovations that will enable our teams to deploy Framework solutions even more rapidly in the future. We announced the availability of version 7 of our cloud-native Backoffice 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-prem infrastructure as well as provide a risk-free migration path for customers using previous versions of the Backoffice, also known as Adrenalin. 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 apps support more than 10 different consumer over-the-top platforms today, a number that is expected to grow in the future. Version 5 of the client apps benefit from tight integration with our cloud Backoffice content management system, which enables our customer's product and marketing teams to easily change branding and promotional content as well as personalize these experiences for the benefit of their subscribers. We will be showcasing the new client apps as well as other product innovation at the IBC show in Amsterdam in the Netherlands starting in the second week of September.

We're also making great progress in 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 innovations as part of the Framework. With that, let me turn the call over to Peter.

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [6]

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Thanks, Marek. Good afternoon, everyone. I'll start by reviewing our second quarter results. We entered the second quarter of fiscal 2020 with $11,300,000 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 have closed 7 Framework deals with a total value of more than $20 million. This includes the 5 deals valued at more than $15 million in total revenue that we told you about in June. Given that Framework engagements contribute revenue from multiple products over multiple years, we expect that our backlog will continue to grow as we close additional Framework engagements in the second half of this fiscal year and our current 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 the 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 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, 1 customer comprised more than 10%.

Second quarter of 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 of this year was 29% compared to 53% in the prior year quarter primarily resulting from the decline in overall service revenue with fixed cost that I -- 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 a process of 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 nonessential internal costs throughout the organization.

In fact, our excellent progress on this front in the first half of the year 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 $0.03 per fully diluted share. This compares to a net loss of $0.26 per basic share and a non-GAAP operating loss of $0.18 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 $140,000 to repurchase 100,000 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 Xstream. As a result of having better visibility into Framework payment terms, we have revised our year-end cash balance expectations to be $22 million 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 of post-warranty maintenance and support agreements during the quarter. Days sales outstanding, excluding unbilled receivables, were up 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 in the second half of this fiscal year. With that, let me hand the floor back to Mark. Thank you.

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

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Thank you, Peter. As I mentioned upfront, 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. Yossi, congratulations again, the floor is yours.

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Yosef Aloni, SeaChange International, Inc. - CEO & President [8]

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Thank you, Mark. SeaChange is a different company now than it was 6 months ago. We have new vision and strategy along with the tactics and measures of success in place. Over the past years, the SeaChange engineering team led by Marek, our talented CTO, has developed the best technology and products in the market. Earlier this year, in a record time, Marek and his team integrated the stand-alone product, enabling the Framework platform launch at NAB in April. This, in turn, enabled the new sales team to initiate immediate engagements and deliver in Q2. In closing, we recognize that we love to gain investment community's confidence by demonstrating our ability to meet our targets. To that end, we remain focused on driving growth and delivering results. With that, let me turn the call over to the operator and begin the questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Steven Frankel with Dougherty.

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

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Congratulations, Yossi, on your elevation.

So I wonder if you might take a look at those 7 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 -- on the Framework versus kind of new greenfield opportunities and maybe even kind of the little finer in terms of these greenfield opportunities in nontraditional customers of SeaChange.

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Yosef Aloni, SeaChange International, Inc. - CEO & President [3]

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Thanks, Steven. So there are 3 types of customers in these 7 wins and it's likely to -- we will continue to have these 3 types of customers. Obviously, there are existing customers that used to use SeaChange for a component and now are doing or will soon do more with SeaChange. The second type of customers, these are new customers, and we have a few of those. Some of them are what you call traditional, some of them may be a bit less traditional. The third type of customers that we won is customers that used to work with SeaChange in the past and, if you will, now they are coming back home. And this, I believe, shows trust in our product and technology.

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

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So that -- in that third category, would that be cable companies that went to another solution that are now coming back? Is that what you're referring to?

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Yosef Aloni, SeaChange International, Inc. - CEO & President [5]

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So with your permission, we prefer to avoid naming specific customers but SeaChange in the past used to sell to mainly cable operators. In many cases, they used to sell to higher tiers, cable operators with large number of subscribers. So maybe some of those are now coming back home, if you will.

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

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Okay. And all of this $20 million or so in value and as -- maybe you can tell us that those would be a larger deal that you just referring to. What a typical Framework deal looks like that's in the pipeline in terms of size? And what's the rev rec look like in terms of what are do you recognize in the quarter that do it, and what the tail looks like on a quarterly basis going forward? And remind me these are 3-year agreements? I forgot.

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Yosef Aloni, SeaChange International, Inc. - CEO & President [7]

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So most of the Framework agreements that we have today are 5 years, including all the agreements that we are finalizing these days for Q3 and Q4. We expect that there -- we will see some agreements for less than 5 years. In terms of deal value, revenue and commission, Peter, you'll take it. In terms of deal value, so we provided a revenue number which was $70 million to $80 million. We also provided a number of wins that we expected to see this year. So Steven, if we just use our numbers and I'm picking up a number in between $75 million and 25 wins, so an average deal value is probably $75 million over 25. Of course, significant value. Some operators are larger, some operators are existing operators, some of them are new type of operators.

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [8]

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And Steve, in terms of revenue recognition what we've seen now that we've evaluated the 7 deals that we've delivered this quarter, that the allocation of deal value to the product portion -- the software license portion of these arrangements is generally in the 60% to 70% range. So that would be 40% -- 30% to 40% in the tail for the remaining 5 years of the arrangement. That gets recognized ratably over the period.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [9]

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Okay. Great. That's very helpful. And to do these -- well, let's call 13 to 18 deals between now and the end of the year, how big is the pipeline? What's your coverage on those 13 to 18 deals?

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Yosef Aloni, SeaChange International, Inc. - CEO & President [10]

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We are in very decent shape, we expect to meet our target. We are very confident in meeting our target. 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 the engagement.

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Steven Bruce Frankel, Dougherty & Company LLC, Research Division - Senior VP & Director of Research [11]

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Okay. And then for Peter, you hinted in the release about a lower run rate of OpEx. So is $10 million a quarter the lower rate that you will achieve? Or in '21 you think you can run lower than that?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [12]

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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 at a lower OpEx run rate than we are currently.

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Operator [13]

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Our next question comes from Jaeson Schmidt with Lake Street Partners.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [14]

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Just a couple from me. 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?

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Peter R. Faubert, SeaChange International, Inc. - CFO, Senior VP & Treasurer [15]

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So the professional service portion of the backlog is largely complete at this point. We still have $5 million of maintenance and support revenue related to the legacy business. That is declining quarter-over-quarter with -- as we've 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.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [16]

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Okay. And then are you still adding to the head count for the sales team? Should we still expect that to grow?

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Yosef Aloni, SeaChange International, Inc. - CEO & President [17]

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Probably not. I believe that head count-wise and OpEx-wise, to support our target for this year and next year, we are probably okay. You will see some increase in the R&D but it's going to be minor.

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Operator [18]

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There appear to be no further questions at this time. I'll turn it back to Yossi Aloni for closing remarks.

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Yosef Aloni, SeaChange International, Inc. - CEO & President [19]

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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 and the Dougherty conference in Minneapolis. Also in mid-September, we will demonstrate -- we will be demonstrating the Framework solution at the IBC conference in Amsterdam, Hall 1. We look forward to speaking again soon. Thank you all.

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Operator [20]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.