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Edited Transcript of SEAC earnings conference call or presentation 10-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 SeaChange International Inc Earnings Call

Acton Apr 11, 2017 (Thomson StreetEvents) -- Edited Transcript of SeaChange International Inc earnings conference call or presentation Monday, April 10, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Terino

SeaChange International, Inc. - CEO and Director

* Peter Faubert

SeaChange International, Inc. - CFO, SVP and Treasurer

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Conference Call Participants

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* Gregory Mesniaeff

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

* Hamed Khorsand

BWS Financial Inc. - Principal and Research Analyst

* Jaeson Schmidt

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

* Matthew Galinko

Sidoti & Company, LLC - Research Analyst

* Steven B. Frankel

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the SeaChange International Fourth Quarter and Full Year Fiscal Year 2017 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, Ms. [ Lindsey Sabaris ]. Thank you. You may begin.

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Unidentified Company Representative, [2]

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Thank you, Darren. Good afternoon, everyone, and thank you for joining us. SeaChange released results for the fourth quarter of fiscal 2017 ended January 31, 2017, today, after the market closed. If you would like a copy of the release, you can access it on the IR section of our website at schange.com/ir. With me on today's call are Ed Terino, Chief Executive Officer; and Peter Faubert, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before Ed 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 annual report on Form 10-K, which was filed on April 13, 2016. Any forward-looking statement 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 Ed for opening remarks.

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Edward Terino, SeaChange International, Inc. - CEO and Director [3]

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Thank you, [ Lindsey ]. Good afternoon, everyone, and thank you for joining SeaChange's call today. We're very pleased to report that our fourth quarter revenues and non-GAAP EPS came in at the high end of our guidance range. Overall, we are making great progress in our turnaround efforts and cost reduction program that we will discuss here on the -- on today's call.

Total revenues of $23.8 million were driven by strong product revenues, which rose 38% year-over-year in the quarter. The increase in product revenues was partially offset by a decline in support revenues related to our installed base of legacy video streamers.

Now let me highlight the revenue successes in the fourth fiscal quarter. First, we achieved a significant milestone during the quarter when a large European customer, Quickline, deployed an end-to-end multiscreen solution, including our Adrenalin video platform and Nucleus RDK-based video home gateway, to enable a personalized TV service called Quickline TV. Quickline TV gives multiple viewers in a subscribing household the ability to enjoy uniquely curated experiences with thousands of hours of on-demand video, recommendations and time-shifted TV programming to suit an individual's own content taste and viewing preferences on any device they choose. Additionally, we also delivered Quickline TVs OTT device apps for Android and iOS. Further, we were responsible for leading end-to-end integration of third-party technology providers.

Second, during the fourth quarter, we recorded substantial product revenues from the deployment of a virtualized Adrenalin video platform for our largest customer. As discussed on our Q3 conference call, this cloud-based Adrenalin deployment will support our customers' operations in numerous European countries, enabling maintenance and upgrades at significantly lower cost with far more frequency than is possible today.

Third, we continue to execute on our plan to migrate our legacy Axiom video platform customers to our multiscreen-capable Adrenalin video platform. During the fourth quarter, we were successful in closing 2 Axiom migrations to Adrenalin. And subsequent to the quarter end, we announced another North American longtime customer, Midco, is migrating to Adrenalin. Moreover, we continue to have over 20 customers quoted for migrations. A large portion of our Q1 '18 pipeline includes the Axiom-to-Adrenalin migrations, and we expect to close several more migrations in the first quarter of fiscal 2018.

Fourth, as mentioned during our last conference call, early in the fourth quarter, we won a new mobile customer in the Middle East, where we are deploying Adrenalin in a private cloud on a SaaS basis.

Now for some other customer and revenue highlights. In January, SeaChange successfully completed the first [ BACA ] trial of its OTT-managed SaaS joint offering with Filmbank, a leading non-theatrical distributor for film and TV, where students at a number of U.K. colleges and universities enjoyed on-demand streaming over IP. As we continue to go to market with Filmbank, we will be looking to integrate SeaChange's next-generation NitroX user experience to optimize multiscreen content engagement.

Now let me discuss our pipeline and revenue backlog. Overall, our focus on growing and strengthening our sales organization has led to an improved pipeline of business as we enter fiscal 2018. We now have a pipeline -- we now have pipeline coverage of 3x bookings for the first quarter of fiscal 2018 and 2x bookings for the full fiscal year. Moreover, we're seeing more and more of our pipeline defined in terms of end-to-end solutions that combine traditional cable delivery with IPTV delivery over multiple devices, with most of these opportunities priced on a monthly subscription basis or SaaS.

These market developments are having an impact on our fiscal 2018 revenue outlook, especially as we complete Axiom-to-Adrenalin migrations and Adrenalin upgrades in the first half of fiscal 2018, and we will rely on more end-to-end deals in the second half of fiscal 2018. As we enter fiscal 2018, we continue to see our pipeline for OTT growing, particularly in the Americas. However, we are experiencing continued delays in decision-making and we are starting to see more OTT opportunity shifting to service providers looking to bundle their IPTV services. Based on the success that we had in the fiscal fourth quarter, we increased our backlog of revenue sequentially over the fiscal third quarter of 2017.

Now I'll provide an update on our product positioning and development road map. During fiscal 2017, we focused our efforts on getting SeaChange healthy and returning the company to profitability while sustaining product development. We're becoming a company that is very much engaged with our customers, and we have deepened our understanding of their needs in order to better focus on product development efforts and solidify our road map. As a result, we have several new products that we plan to introduce in fiscal 2018 that we believe will help improve our customers' revenue opportunity in addition to broadening SeaChange's customer base and driving future revenue growth.

First and foremost, we are seeing strong demand from customers for total multiscreen solutions, like we recently rolled out for Quickline in Switzerland, as opposed to best-of-breed products that need to be integrated. As such, our marketing efforts are now shifting to providing customers with an end-to-end solution for multiscreen, which combines our software solution for content management, delivery, advertising and user experience. This approach will further improve the efficiency of our R&D and marketing spend and reduce our support cost. We are offering end-to-end solutions both on an installed -- both as installed software on a perpetual license basis and as virtualized software that can be deployed either in a private or public cloud setting on a monthly subscription basis or SaaS. What we are seeing in the market is that Tier 1 operators prefer a perpetual license model, while Tier 2 through Tier 4 operators prefer a SaaS model.

In the third quarter of fiscal 2017, we introduced NitroX, a multi-platform user experience that provides a common user interface, features and functionality across multiple devices, including RDK-based set-top boxes, Android set-top boxes, legacy set-top boxes and mobile devices such as smartphones and tablets. Based on early market reaction, we have decided to expand the scope of NitroX and accelerate our product road map for an end-to-end solution. As a result, several products will be delivered earlier in fiscal 2018.

Over the course of fiscal 2018, we intend to grow NitroX to support OTT devices like Apple TV, Chromecast, Amazon Fire, Roku, PC browsers and smart TVs. So far, early customer feedback on NitroX has been very positive. Customers love the look and feel of the interface and view it as a quick and easy deployment that enables a consistent user experience across devices. Moreover, our go-to-market strategy and revenue model provide the flexibility to roll out an end-to-end solution faster with less professional services required. This approach enables SeaChange to leverage third-party partners and pursue broader channels of geographic and vertical industry distribution, thus creating a greater pipeline and greater revenue opportunities. We believe our end-to-end solution with NitroX will serve as our main entry point into new cable, telco and mobile service providers that are looking to deploy end-to-end multiscreen video delivery platforms.

Continuing on the product road map front, we are in the process of preparing to launch an upgraded version of our AssetFlow content management system in the second half of fiscal 2018, which will dramatically increase scalability and performance by allowing our customers to manage more assets and more metadata per asset. This upgrade will provide for centralized management of content and metadata workflow, content navigation and merchandising.

Finally, we plan to introduce the next release of Adrenalin in the second half of the year, which will provide further time-shifting capabilities, network DVR integrations for additional third parties and enhanced content monetization features. We are excited about our market-driven product road map, and we believe that these new and upgraded releases of our software products will help drive revenue growth in the second half of fiscal 2018 and beyond.

During the quarter, we made significant progress on our cost reduction program. And subsequent to our fiscal 2017 year-end, we lowered our headcount below 400 people currently, from 660 at the end of fiscal 2016. We expect to complete our restructuring in the first half of fiscal 2018 with further reductions in force to approximately 300 employees. We believe that these reductions will enable SeaChange to return to profitability in the second half of fiscal 2018.

Now let me address the approach we took to our restructuring actions. First, we've consolidated our operations to fewer geographic locations and have reduced our presence in the Philippines. We have also expanded our presence in Poland and shifted engineering and technical support responsibilities to that office. Second, we are phasing out support for legacy products in video platform advertising and selected client software. Third, we are leveraging third parties to complete selected development, professional service deliveries and sales and marketing activities globally. And fourth, we are implementing improved business processes and systems to streamline operational activities that are enabling SeaChange to run more efficiently.

To summarize, fiscal 2017 was a transition year for SeaChange. We took the necessary steps to reduce cost and to significantly reduce our cash burn to better position the company for growth and profitability. We saw the results of our actions reflected in our fourth quarter results.

During fiscal 2018, we will continue to innovate our products to help our customers monetize their video assets while optimizing our operating expenses to drive profitability. We expect to complete our restructuring in the first half of the fiscal year. We are focused on making strategic decisions to drive revenue growth. And based on our progress that we have made last year, we believe we are well positioned to execute our revenue growth and profitability in the second half of fiscal 2018.

With that, I'll turn the call over to Peter to walk you through our financial results and to provide our outlook for the fiscal first quarter and full year 2018. Peter, please go ahead.

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [4]

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Thank you, Ed. Good afternoon, everyone. I'll start by reviewing our fourth quarter results before providing you with an outlook for the first quarter and full fiscal year of 2018.

We are pleased that our fourth quarter revenue and non-GAAP EPS came in at the high end of our guidance range. Total revenue in the fourth quarter was $23.8 million compared to $27.2 million in the fourth quarter of last year. Our revenue performance in the fourth quarter was driven primarily by the implementation of 2 large projects during the quarter that Ed mentioned in his remarks. These projects included the on-premise cloud deployment of Adrenalin for our largest customer and the end-to-end video delivery platform for Quickline.

We entered fiscal 2017 with $12 million in total backlog, excluding maintenance and support. We booked new business of $43 million during fiscal 2017 and ended the year with backlog of $8 million. During the year, we generated $37 million in revenue from maintenance and support. We have also experienced increased demand for the end-to-end cloud-based solutions, where customers are looking to implement our offerings on a subscription basis. We expect these subscription products to continue to increase as a percentage of total product sales in fiscal 2018.

Total product revenue was $7.7 million in the fourth quarter or 32% of total revenue compared to $5.6 million in the year-ago quarter or 21% of total revenue. Video platform software revenue was $6.2 million and accounted for 80% of total product revenue compared to $2.8 million or 51% of the total product revenue in the fourth quarter of last year. The remaining product revenues of $1.5 million include revenues for advertising software, user experience software, hardware and third-party products.

Total service revenue in the fourth quarter was $16.1 million or 68% of total revenue, down from $21.6 million or 79% of total revenue in the fourth quarter of last year. The decline was due to a decrease in professional service and maintenance and support revenue. The decline in professional service revenue was due to lower in-home services related to the commercial launch of a project for our largest customer. The decline in maintenance and support revenue was primarily related to our legacy installed base of video streamers, which are gradually being replaced by next-generation hardware.

Video platform professional service revenue totaled $5.6 million, down from $6.9 million last year. Maintenance revenue totaled $9 million or 56% of total service revenue compared to $9.9 million or 46% of total service revenue in the fourth quarter of last year. The decline in maintenance revenue was driven by the decrease in legacy video streamer support. The remaining service revenues of $1.5 million include Software-as-a-Service and user experience revenue.

Revenue from international customers of $15.8 million in the fourth quarter accounted for 66% of total revenue compared to $15.8 million or 58% of total revenue in the prior year quarter. We had 2 customers each account for more than 10% of total revenue in the fourth quarter, with Liberty Global at 27% and Quickline at 11%. For the year -- for the full year, Liberty Global accounted for 30% of revenue.

Our blended GAAP gross profit margin increased to 66% in the fourth quarter compared to 57% in the prior year quarter due to the increase in product revenues from software licenses. Excluding the provision for loss contract and other non-GAAP charges in the fourth quarter of fiscal '17, our blended non-GAAP gross profit margin was 50% in the fourth quarter and compared to 57% in the prior year quarter due to lower services gross margin on revenue generated from the Quickline project in the fourth quarter of this year.

Our non-GAAP gross margin was lower than our GAAP gross margin in the quarter due to the cost-of-sales benefit from the reversal on the loss contract due to scope changes as well as cost efficiencies from the transition of our development to our DCC Labs unit in Poland compared to the use of external contractors. Our non-GAAP product gross margin in the fourth quarter was 75% compared to 78% in the prior year quarter due primarily to an increase in third-party products revenue as a percentage of total product revenue for the same quarter in the prior year. Non-GAAP service gross margin in the fourth quarter was 39% compared to 52% in the fourth quarter of last year due to the exclusion of the cost-of-sales benefit from the reversal on the loss contract.

Non-GAAP operating expenses declined 9% year-over-year to $14.1 million in the fourth quarter of this year from $15.5 million in the fourth quarter of last year. The reduction was driven by lower labor costs, which were reflected in the benefits of transitioning our in-home software development to our recently acquired DCC Labs group in Poland as well as other restructuring efforts and headcount reductions. Our non-GAAP total operating expenses of $14.1 million included seasonal expenses related to our fiscal year-end, largely consisting of professional fees, and other expenses that were subsequently cut. Currently, we have reduced our headcount to below 400 people from 660 at the end of the prior fiscal year. Together with our cost savings actions, we believe this will enable us to achieve ongoing operating expenses of $12 million per quarter, excluding non-GAAP expenses consistent with the accompanying reconciliation and other nonrecurring items that we may experience.

Our non-GAAP operating loss of $0.06 per basic share came in at the high end of our guidance range compared to breakeven per diluted share in the fourth quarter of last year.

Turning to our balance sheet. We ended the fourth quarter with cash and cash equivalents of approximately $39 million and no debt. Cash burn from operations during the quarter was offset by positive working capital driven largely by the decrease in unbilled receivables from the previous quarter. We expect positive working capital in the first quarter of fiscal 2018 from strong collections of accounts receivable. As a result, we expect cash flow to be neutral to positive in the first quarter of fiscal 2018. In addition, we expect the cash balance during the year to remain in the $35 million to $40 million range. We intend to liquidate our investment in Layer3 TV in fiscal 2018 if given the opportunity. In addition, we will dispose of underutilized real estate created by our restructuring efforts. Cash generated from these activities provide upside to our current estimates. We do not anticipate any material capital expenditures in fiscal 2018.

Deferred revenue of $14.9 million declined from $17.4 million in the year-ago quarter due to a reduction in maintenance contracts related to the run-off of our legacy hardware business and, to a lesser extent, Axiom customers transitioning to other internally developed solutions and to other vendor solutions.

DSOs, excluding unbilled receivables, were 97 days at the end of the quarter compared to 83 days in the fourth quarter of last year. In fiscal 2018, we will continue to focus on collections with the goal of maintaining DSOs of less than 80 days. Including unbilled receivables, DSOs were 116 days compared to 121 days in the fourth quarter of last year. We reduced our unbilled receivables by 39% to $6.6 million in the fourth quarter from $10.7 million in the fourth quarter of last year. We expect unbilled receivables to continue to decline in fiscal 2018 as we continue to align our billings with our delivery efforts.

As Ed mentioned, in the fourth quarter, we made substantial progress on the cost reduction program that we announced last year and anticipate completing the remaining actions in the first half of fiscal 2018. Once all of these actions are complete, we will have reduced our headcount by more than half and taken $38 million in annual cost out of the business, enabling the company to be profitable at an $80 million annual run rate. As such, we expect our quarterly operating expense run rate to further decline to $11 million a quarter by the second -- end of the second quarter.

In fiscal 2018, we expect product revenue will contribute between 20% and 25% of total revenue for the year, which is consistent with the contribution from fiscal '17. We expect maintenance revenue to decrease from 43% of total revenue in fiscal 2017 to approximately 40% of total revenue in fiscal 2018. We expect professional services revenue to contribute approximately 30% of total revenue in fiscal 2018, which is up slightly from fiscal 2017. The remaining revenue in fiscal 2018 will consist of user interface and cloud-deployed products. We expect the ongoing cost-cutting initiatives to drive gross margins to close to 60% by the latter half of fiscal 2018.

As previously mentioned, I would like to note that over the course of 2018, as customers shift to cloud-based deployment models, we expect our revenue mix to transition from perpetual license to monthly recurring revenue or SaaS. As this transition is made, we expect this trend to impact our revenue and deferred revenue in the short term. Longer term, we expect better predictability and more consistency in our revenue base. With this in mind, we anticipate revenue in the first quarter of fiscal 2018 to be in the range of $16 million to $18 million and non-GAAP operating loss to be in the range of $0.15 to $0.11 per basic share. For the full year, we expect revenue in the range of $80 million to $90 million and non-GAAP operating loss to be in the range of $0.10 loss to a non-GAAP operating income of $0.02 per basic share.

With that, I'll hand the call back to [ Lindsey ]. Thank you very much.

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Unidentified Company Representative, [5]

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Thank you, Peter. Darren, could you please provide instructions for the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Steve Frankel of Dougherty.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [2]

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I'd like to dig into the guidance a little bit. I understand the SaaS transition you're talking about, yet if you look at the revenue level in Q1 versus what's implied in the full year, that's a significant pick-up in the quarterly run rate, which you typically don't see in a SaaS business. So what kind of visibility do you have? And how should we think of the quarterly ramp from what hopefully is the low point in Q1?

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [3]

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Yes. So Steve, thanks for the question. I think first off, we will see the impact on quarterly revenues right away with our sale to our partner, the Israeli company, where we'll have a booking in the quarter of $1.5 million that will be amortized over a period of time, whereas normally, under a perpetual license model, we would be able to recognize a majority of that revenue during the quarter. So that's the first item that I'd like to highlight. Secondly, we do continue to see deterioration of our maintenance revenue. And in order to make up for that deterioration in maintenance, we need to build more product revenue to offset that deterioration. And we'll start to see that pick up as we're releasing some of the new versions of our Adrenalin product as well as some of the investments that we're making in user interface and content management products. So what we're trying to do is backfill that decline in maintenance revenue in the latter half of the year by really leveraging the launch of those new products, and that's where we should start to see quarter-over-quarter revenue growth pick up.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [4]

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But again, I guess you didn't make me feel any better that you had visibility into bridging from, call it, $16 million in Q1 to mid-20s by the end of the year to even get to the low end of your revenue range. And did you confirm that Q1 will be the low point in revenue? Or might it dip down in Q2 until you get these new products starting to contribute?

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [5]

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Yes, right now, we see Q1 as the low point.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [6]

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But do -- you don't have today a pipeline that gives you high confidence in that ramp in the back half? You're just assuming that what you have in development should help drive higher revenue?

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Edward Terino, SeaChange International, Inc. - CEO and Director [7]

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Well, that's not -- Steve, that's really not true. We do have a pipeline, especially with OTT opportunities, that has improved, I think, quarter-over-quarter over the last several quarters. So it's -- I do think that we have that pipeline. One thing I will add to what Peter said is Peter talked about what our bookings were in fiscal 2017. And while we haven't really talked about bookings specifically in 2018, I can tell you that they are projected to grow by more than 20%. So the pipeline does support that and we do expect to get significant growth in bookings, but those bookings don't translate into revenue recognition for not only the SaaS because they are SaaS revenues, but there is also other reasons why they may be delayed given we have to execute on projects.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [8]

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I totally understand that, and that's why I have trouble visualizing you getting from where you are today to $85 million in revenue. That's exactly my question, as it seems if more of the business is SaaS-based and you're starting at $16 million a quarter, it's hard to see how you get to $25 million a quarter.

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Edward Terino, SeaChange International, Inc. - CEO and Director [9]

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I don't think we have to get to $25 million a quarter to get to the midpoint of our range.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [10]

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Maybe I'll continue work on my model. Let me ask a couple more questions before I pass the baton. So congratulations on the next stage and relationship with Liberty, but help us understand what the economic impact of this is, that new deployment at Liberty that -- the unbilled that hasn't -- we haven't seen yet or have we already seen the revenue from that in Q4?

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Edward Terino, SeaChange International, Inc. - CEO and Director [11]

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So I'll talk first about the evolving relationship with Liberty. As I've said on previous calls, I think that we are continuing to strengthen our overall relationship, and that comes from execution. And I think that we have, over the course of the last 12 months, improved our execution there. Second, with respect to their initiative to consolidate their back office into a cloud environment, we did realize a fairly significant number of license sales in the quarter, and we would continue to expect those license sales to happen as they roll out their platform. What we don't have visibility into is, one, their timing of rolling it out; and two, the sort of number of subscribers that it will be rolled out to. So while I think we're well positioned to continue to generate a good chunk of revenue in excess of 20%, I think this year it was 30%, in that range from Liberty, I think in order to go beyond that is a function of the timing of their roll-out and the breadth of their roll-out. On the in-home side, as I've said previously, they have decided to pull their next-generation user experience development in-house. They have a significant team. They are working on that. They're doing it themselves. We continue to generate revenues with our Poland team for their prior generation Dawn platform. And we also are working with them on some, what I would call, third-party professional services or software development services for hire on the EOS platform. But it's not anywhere near the kind of revenue opportunity that people had speculated on a year or 2 ago. Did that answer your questions, Steve?

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [12]

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Yes, yes, I think that's helpful. And then let me just try one more time to talk about this OTT opportunity. The company used to talk about OTT as kind of one-off, right? You were competing with BLAM and Brightcove and [ Ooyala ] and Kaltura. Is that what you're still talking about doing? Or are you talking about more Quickline-type applications, where it's your traditional customer or telco who looks like your traditional customer that's using you to deliver an end-to-end solution that includes an OTT component?

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Edward Terino, SeaChange International, Inc. - CEO and Director [13]

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So it's a really good question. I'm glad you brought it up because we tried to provide some clarity around that on the call here today. So we see a market opportunity growing in the area of operators who want to be able to deliver not only an IPTV solution, which will be OTT, but also a traditional set-top box type solution. And we do see some of the companies you mentioned bidding and competing for the IPTV but they don't really do a whole lot relative to any of the sort of set-top box type activities. So we see most of our OTT opportunities with operators who are looking for delivery of video over multiple devices, not only IPTV devices but traditional types of box -- set-top boxes. And we think we are very well positioned there, that we're better than a lot of the cable -- the sort of software vendors that service the cable providers today, like Ericsson and Huawei. And then we think we are better positioned than some of the IPTV providers, like the ones you mentioned.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [14]

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Okay. And one last quick one. I missed, Peter, when you told us what the product percentage of revenue would be in fiscal '18.

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [15]

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Yes, it's between 20% and 25%.

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Operator [16]

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

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Jaeson Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [17]

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Just following up on one of the previous questions. Given the low watermark in Q1, how should we think about the relative breakout between the first half and second half for fiscal '18? I know historically, the past few years, it's kind of been first half comprised about 47% to 48% of revenue and then the back half, 52% to 53%. Is that kind of a good ballpark breakout to use for this year as well?

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [18]

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Yes. I mean, I think that trend, we should see continue in 2018 as well with -- I think, we'll continue to see Q4 be a strong quarter for us, similar to what we did this year. So I think that trend is correct.

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Jaeson Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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Okay, that's helpful. And then, Ed, you talked about some of the OTT engagements. Can you quantify the number in the pipeline or how that pipeline has grown over the past few months?

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Edward Terino, SeaChange International, Inc. - CEO and Director [20]

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Yes, I can quantify it in terms of the number of opportunities. I think we've seen it grow from probably early in fiscal 2017 by 50% or more. But in terms of dollar value, I really don't want to comment on that. It's very hard to predict the dollar value. As we discussed on the call here today, Filmbank was a win we had a year ago, and we thought that we would be generating a lot more revenue with Filmbank than we have to date. We think we are in a great relationship. We have a great solution for them, but it's taking them more time to bring it to market and to generate revenue which we would realize than, I think, both parties expected. So I don't want to really comment on the revenue value of that. I would tell you that in the last quarter to 2, more of the pipeline has been identified from operators. So whereas probably a year ago and into the first 2 quarters that I've been CEO, most of the opportunities were with content owners who were looking to launch an OTT platform, in the last 2 quarters, the pipeline growth has been with operators and on a global basis. So we find that to be encouraging because the operators have installed subscriber bases so that when they adopt and implement, there's revenue generated faster than you would have with a pure-play content owner who wants to go out with an OTT platform.

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Jaeson Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [21]

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Okay. And then the last one from me and I'll jump back in the queue. I know, Peter, you said gross margin should trend towards 60% in the latter half of this year. Can you lay out some of the drivers beyond just the transition to the SaaS model?

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [22]

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Yes. So I think the trend towards a 60% gross profit margin will relate to some of our cost savings and restructuring initiatives around how we're delivering professional services. So we're planning on making some changes, where we're leveraging more variable cost as we're delivering projects by utilizing outsourced consulting-type firms to supplement our professional service delivery capabilities. And as we make that transition, I think we'll be able to drive a lot more margin out of the services business, which we see as the services business increasing slightly over last year. So I think we'll really be able to leverage that piece of the business going forward.

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Edward Terino, SeaChange International, Inc. - CEO and Director [23]

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I'll add a couple more. So product mix should also help that. And I think as we have talked to you today about building an end-to-end solution, part of the objective of that is to make that solution more fully integrated and require less professional service resources to implement it. So that should drive higher margins for SeaChange, but it also should enable us to leverage third-party relationships who could also help with those sales and implementations. And that should, I think, also help the margins as well.

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Operator [24]

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(Operator Instructions) Our next question comes from Hamed Khorsand of BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal and Research Analyst [25]

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Just a couple of questions here. As far as the Adrenalin roll out here, upgrade with the SaaS model, how will that affect your revenue going forward? How are you modeling that to affect your revenue scheme as far as the current customer base goes? And how you would be able to get customers to upgrade to a SaaS model versus what they've already paid for right now?

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Edward Terino, SeaChange International, Inc. - CEO and Director [26]

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So that's a really good question. With respect to our largest customer, they're really acquiring a direct -- the upgrades or the cloud-deployed Adrenalin on a SaaS basis. So what I said earlier in my comments is that in Tier 1, which we have a lot of Tier 1 customers, they like to go CapEx and like to acquire perpetual licenses and pay for them up front. And we'll -- I think we'll continue to see that. There's an -- there's less of a desire to go SaaS there. But in Tier 2 through Tier 4, there's more of a desire to go SaaS. To the degree that we have a customer that's -- has a current version of Adrenalin and wants to go in that direction, we do have to find a way to give some credit for what they purchased from us as they roll out the SaaS-based platform that we sell. But there's certainly a lot of additional features and functions we provide, especially around multi-device, that actually provides a strong case for revenue opportunity for us. So it really differs by the type of customer, and I think that you asked how we model it. That's something that, frankly, we're still struggling and working to do ourselves. We obviously have to solidify our pricing first, and we have to get some experiences. As Peter mentioned, we do have one customer that purchased in the quarter that, hopefully, we'll be able to work with them to find out how they deploy it. That was done on a per subscriber, per month basis, so we would definitely look to that as an example of how we would do future transactions.

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Hamed Khorsand, BWS Financial Inc. - Principal and Research Analyst [27]

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Okay. And then just given the dynamics around the balance sheet, at what point do you feel like you're going to start sweating as far as not having enough cash? And you're -- coming in, you guys had $60 million this time last year.

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [28]

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Yes. I think we've done a lot of work around minimizing the cash burn from operations throughout fiscal 2017, and we're continuing to focus on that in the first half of fiscal 2018. There's a couple of positive things that I think we've been able to accomplish over the last couple of quarters. One is we've been able to really drive some cash out of working capital changes, and we'll continue to do that. Right now, I've got visibility into continuing that into the -- at least the first quarter of fiscal 2018. But at the same time, I think we've minimized our cash burn to somewhere around $3 million to $4 million a quarter from operations. So we're really able to offset some of that cash burn from operations while at the same time continuing our cost-reduction efforts. So I think the $35 million to $40 million cash balance, as a low point, I feel pretty good about given the next couple of quarters and where I think we'll be as we're continuing with our cost-cutting initiatives.

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Edward Terino, SeaChange International, Inc. - CEO and Director [29]

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I would just add that, I think you all know that last year we started off the year with guidance that was well beyond where we finished the year. And that was obviously a principal driver of why we burned so much cash. And I think we took the necessary steps to reduce the cash burn. I think we now have very conservative guidance here, and I feel confident that our cash burn is aligned with what we think the revenue opportunity is. In fact, it shouldn't be our cash burn, it's our cash flow, positive cash flow. So I think given all the cost we've taken out that Peter talked about, the $38 million, given where revenue guidance is, given where operating expenses are and margins are, we feel very comfortable with our cash position heading into this fiscal year.

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Hamed Khorsand, BWS Financial Inc. - Principal and Research Analyst [30]

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Okay. And then my last question -- that was a pretty good segue to what I was going to ask you, is obviously, last year, you had a lot of headwinds as far as customers taking projects in-house. How much of that can you expect to see this year? What are you expecting? What kind of pushback are you seeing right now?

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Edward Terino, SeaChange International, Inc. - CEO and Director [31]

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Well, I would say that that's pretty much run its course. The major customers, Liberty, obviously, Altice, Rogers, that's pretty much behind us. That's why I think our outlook here is -- I feel good about our outlook. I don't have those headwinds. We do have some headwinds. I don't want to mislead you, but I feel like the headwinds I encountered a year ago are far less significant than what we have today.

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Operator [32]

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Our next question comes from Greg Mesniaeff of Drexel Hamilton.

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Gregory Mesniaeff, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [33]

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I was wondering if you can give us -- I just wanted to focus a little more on your transition to a SaaS model and how that's going to, number one, impact your visibility; and number two, how it's going to impact the stickiness of your service, of your product. Obviously, without an installed base, the costs of switching are far lower just as the costs of signing someone up is far lower, so I'm wondering how you're dealing with those changes and variables.

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Peter Faubert, SeaChange International, Inc. - CFO, SVP and Treasurer [34]

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Greg, it's Peter. So I think, first and foremost, what I would say is where we're seeing a lot of customers that are interested in a subscription-based Adrenalin license is in some of the Tier 2 through Tier 4 customers that we have that are currently running Axiom. So as Ed mentioned, the smaller operators out there find it much easier to fit an upgrade to Adrenalin in an operating OpEx business model, which I think provides us with a great opportunity to upsell and get customers migrated onto Adrenalin that may have gone in another direction if we were sticking with a perpetual license or a CapEx model. So I think we're seeing a lot of opportunity with our existing installed base that have smaller numbers of subscribers who are much more optimistic about upgrading to Adrenalin if we can work with them on financing and get them under an OpEx business model. So I think we've got an opportunity to really penetrate some installed base that we may not have under the old business model, which should result in some nice upside and recurring revenue for us.

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Edward Terino, SeaChange International, Inc. - CEO and Director [35]

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Just to give you another data point. In the past, analysts have asked us how many Axiom customers do we have or what's the path towards migration to Adrenalin, and I think you've heard numbers that have been decreasing, which means that customers, Axiom customers, have gone in a different direction. And the main reason that we see every single day that they go in a different direction is our proposal for an on-premises, licensed model Axiom-to-Adrenalin migration is too expensive for them. So this gives us an opportunity to offer them an OpEx or SaaS-type pricing model, which is far more affordable for them, and we're seeing a lot of interest from those types of customers.

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Gregory Mesniaeff, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [36]

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Sure. And I think it will be fair to say that for this transition to work, for this new model to work, you need a lot more smaller customers on an ongoing basis. Otherwise, clearly, the dependency is -- it's a different set of issues, right?

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Edward Terino, SeaChange International, Inc. - CEO and Director [37]

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Well, the word smaller can be -- certainly, if you look at OTT opportunities, there are some customers who are looking at 10,000 to 100,000 subscribers. I think most of the Tier 2 through Tier 4s that we look at, not only in the States but on a global basis, have a much larger subscriber bases. So while small relative to Tier 1 means one thing, relative to pure-play OTT with content owners, it's a much bigger market opportunity, much bigger revenue opportunity. So I actually think that's a really good place for us to be.

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Gregory Mesniaeff, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [38]

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Got you. Now one more question on competitive landscape-type issues. There's been some discussion about Ericsson's video business perhaps being -- changing hands or something along those lines. Do you have any color on that, or how that might impact your competitive situation?

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Edward Terino, SeaChange International, Inc. - CEO and Director [39]

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We really don't comment on speculation around our competitors. I will tell you that a lot of our effort in fiscal 2017 was focused on getting ourselves right and getting ourselves fixed. And we know that our customers like our technology. It works. They would like more of our technology. I think that positions us well for some of our competitors who are struggling with getting their customers to work or to use their software in the way that our customers are able to use our software. So I think that could present a revenue opportunity for us. But frankly, we're very focused on continuing to get our restructuring done. And if opportunities arise, we certainly will go after those from some of those competitors.

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Operator [40]

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(Operator Instructions) Our next question comes from Matthew Galinko of Sidoti & Company.

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Matthew Galinko, Sidoti & Company, LLC - Research Analyst [41]

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So I just want to make sure I understand the OTT market as that relates to you and your comments. Are you finding less of an exploitable corner of the market with content owners than you previously thought? Or should -- is it something -- the delayed decision-making you talked about, is that kind of being broadly felt, would you say? Or maybe last option being, are you more comfortable kind of reallocating the go-to-market investments you're making towards the more service provider space? Or you sort of have an easier path, a more reliable path to revenue? We're just hoping you could parse that out a little bit.

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Edward Terino, SeaChange International, Inc. - CEO and Director [42]

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I think it's the market opportunity that presents -- it's sort of what the market is looking for or asking for. So a year ago, we didn't see operators looking for an end-to-end OTT based -- it's not just OTT, it's traditional cable delivery -- platform. With respect to your question around OTT, pure-play OTT content owners, I would say that there is a lot of churn going on in that space that not many of them are making the kinds of investments that they need to. And the reason is that they're not making money at it. So the margin performance for the content owner in these ventures is not materializing, and it's obviously creating a lot of revenue pressure for the OTT solution providers. And we've seen some of that in some of the OTT victories we've had with content owners. We just think we are very uniquely positioned with the operators. That's our legacy. We now have a product with our end-to-end solution that addresses their IPTV needs. We obviously are very well regarded with respect to the traditional back-office cable delivery. So the market is kind of evolving to our benefit, in my view. We just have to be able to execute on our road map and be able to deliver in order to obviously realize those opportunities.

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Operator [43]

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Our next question is a follow-up from Steve Frankel of Dougherty.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [44]

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Quick one, maybe on the timing of Quickline. From order to revenue, how many months was that?

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Edward Terino, SeaChange International, Inc. - CEO and Director [45]

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That's a loaded question, Steve. I mean, you -- I think you can surmise that in this quarter, we took a sort of a loss, so we reduced a loss that we had taken. So about a year ago, we had to record a loss of about $9 million for that project. So that project began in 2015, and frankly, was never really on the tracks. So we're very, very fortunate that when we began to engage with the Polish company, with DCC Labs, and put them together with our (inaudible), we actually got the project back on course. So that didn't start until the fall of 2015, so I really think the project began at that point. It took us until really march of 2017 -- sorry, yes, 2017 to actually deliver that platform.

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Steven B. Frankel, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst [46]

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So maybe the better question is, if I came to you this quarter as a Tier 3, Tier 4 operator and said, "I can't just -- not a lot of customization, but give me a Quickline-like experience," is that a 6-month implementation cycle? Is that a 9-month implementation cycle?

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Edward Terino, SeaChange International, Inc. - CEO and Director [47]

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Yes, no. If all of the NitroX product features were available, and they're not right now, it would be a 3- to 6-month effort, maybe shorter. That's a really good question because when we started Quickline, we didn't have a user experience like we have today.

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Operator [48]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to Mr. Ed Terino, CEO, for closing remarks.

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Edward Terino, SeaChange International, Inc. - CEO and Director [49]

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Well, SeaChange is working very hard to complete its restructuring in a timely manner in order to return the company to profitability, improve our operations and increase our capacity to serve a very dynamic market for multiscreen video and monetization. We're looking forward to engaging with service providers and content owners at the National Association of Broadcasters conference later this month of April in pursuit of new opportunities for SeaChange solutions.

I'd like to thank you all today for joining us and for your continued support and interest in SeaChange. Have a great evening. Goodnight.

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Operator [50]

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