SeaChange International, Inc. (NASDAQ:SEAC) Q4 2023 Earnings Call Transcript

SeaChange International, Inc. (NASDAQ:SEAC) Q4 2023 Earnings Call Transcript April 5, 2023

Operator: Good afternoon, and welcome to SeaChange's Fiscal Fourth Quarter and Full-Year 2023 Conference Call for the period ended January 31, 2023. My name is Diego and I'll be your operator this afternoon. Joining us from the company is Chairman and Chief Executive Officer, Peter D. Aquino; President, Chris Klimmer; and Chief Financial Officer, Mark Szynkowski. After the market closed today, SeaChange issued its financial results for the fiscal fourth quarter and full year in a press release, a copy of which is available in the Investors section of the company's website at www.seachange.com. Before we begin today's call, I'd like everyone to please take note of the Safe Harbor paragraph that is included at the end of today's press release.

This paragraph emphasizes the major uncertainties and risks inherent in the forward-looking statements that management will be making today. As indicated, forward-looking statements are based on management's current expectations and are subject to a number of risks and uncertainties that may cause actual results to differ materially from expectations. These risks and uncertainties are also outlined in the company's SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement should be considered in light of these factors. Additionally, this call contains certain non-GAAP financial measures as that term is defined by the SEC and Regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP.

Accordingly, SeaChange has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release issued today. I'd like to remind everyone that this call is being recorded and I will be made available for replay via a link available in the Investor Relations section of SeaChange's website. Now, I'd like to turn the call over to SeaChange's Chairman and Chief Executive Officer, Peter D. Aquino. Sir, please proceed.

Peter Aquino: Thank you, operator. Good afternoon, everyone. This is Peter Aquino, Chairman and CEO of SeaChange International. Welcome to our fourth quarter and fiscal 2023 end of year call. So going back to January 2022, the beginning of our fiscal year. The leadership team at SeaChange set out to achieve three specific goals by fiscal year end. The key categories were first, improved financial performance; second, service excellence and third, executing on a large development plus project that we were planning on with VIDAA. I'm happy to report that we exceeded expectations in all three categories. And now I'll just briefly highlight the fiscal 2023 accomplishments. First, we set meaningful financial performance goals. We strive to grow top line revenue and exit the year free cash flow positive by the fourth quarter.

The numbers truly tell the story of our fiscal €˜23 accomplishments. The revenue for the year was $32.5 million and that's up from $27.3 million in fiscal '22, that's 19% up year-over-year. EBITDA was set beyond breakeven on a cumulative basis for the year and that's versus negative $4.5 million in fiscal '22. With a record $1.7 million in adjusted EBITDA in the fourth quarter, that's over a 12 quarter period. We're now EBITDA positive not only for the fourth quarter but for the entire year. EBITDA swung a positive $5 million year-over-year. And this is due in part to strong sales in fiscal '23 and continued cost control. And our management team right now is firing in all cylinders. So we're very proud of the accomplishments on the financial side.

Second, we aim for operations improvement and encourage client software upgrades that ultimately leads to better end user experience. Our customer support team goes beyond the call of duty and looks for ways to collaborate with the leading MSOs, mobile and wireline broadband operators and satellite providers, to target trouble areas and minimize disruptions. Sometimes this requires software upgrades and implementation investments on both sides that none of us can no longer put off. We view these investments as joint contributions and we also invest and talent and expertise to make these upgrades as seamless as possible. Throughout fiscal '23, we managed to upgrade nearly a dozen software platforms for the who's who of leading video and advertising providers around the world.

Customer service improvements also lead to lower costs and minimize this churn. Our customer churn rate is close to zero and that says something very positive about our core software products and our support team. And finally, we set out to execute a potentially transforming development plus deal with VIDAA and Hisense in fiscal €˜23. It was a significant test of our software engineering skills in our 100 plus developer team in Warsaw and they passed with flying colors. VIDAA required SeaChange to hire, manage and execute on a roadmap directed by VIDAA that required an entire software development joint effort carved out of our existing Poland team and we did this in about nine months. By the spring of 2022, we began to hire new experienced software engineers along with our talent pool in Poland to develop VIDAA's future streaming platform for their connected TV operating system, now hitting the market in a phased approach globally, with millions of devices to follow.

If you visit nearly any Walmart, Best Buy or Costco in the United States, you will see a VIDAA free TV marketing on Hisense Smart TV inventory on display. Your takeaway should be that SeaChange is inside. With our Development Plus contract that features a long term engagement between our company SeaChange leaps into a new chapter. We're not just work for hire, we are partners with our client. Their success is our success over the next years. It's a real step forward as SeaChange is a value added partner. And in summary, if you look at SeaChange's evolution in just 12 quarters, we create a growing profitable platform that is poised for the next step up to gain scale. We expect to be a net contributor and accretive in any combination that focuses on the tailwinds of video streaming, ad tech and fast channel development over connected TVs for the foreseeable future.

Our mantra is to continue to improve our recurring and SaaS revenues with our existing and new logo operators and content publishers alike. And we want to remain in the best position to be opportunistic as we explore our strategic alternatives. So at this point, let me turn the call over to our President, Chris Klimmer. Chris?

Chris Klimmer: Thanks, Pete and good afternoon, everyone. Thank you for joining us today. As Peter has already laid forth, we did end fiscal €˜23 on a high note. And I'm happy to report that we generated substantial growth across all of our main KPIs. Our financial performance reflects our company's transition to a more sustainable level of growth and profitability. It also shows that our core value proposition that is focused on helping our customers to distribute and monetize their content portfolio continues to gain traction in the exciting dynamic and rapidly growing TV streaming and video advertising markets. Instrumental to our successful operational performance in fiscal €˜23 and our positive outlook into fiscal €˜24, are our three drivers for success.

First, our team. More than 100 in-house video software developers in our R&D hub in Warsaw and 50 field engineers globally continue to develop innovative TV streaming and advertising solutions to add significant value to new and existing customers, both by increasing operational efficiency in fairly complex TV and streaming ecosystems and by introducing services that generate new and incremental video revenues, such as our ad insertion solutions. Second, our portfolio of state-of-the-art video software products. These products are built to deliver premium multi-screen and streaming experiences across all device platforms, content types and business models, leveraging vast monetization capabilities, especially through smart and targeted ad insertion.

They are continuously iterated using the latest back end and front end technology stacks and are designed to capture the opportunities that arise along shifting consumer trends. Third, our customer base. We are privileged to call the who is who of global MSOs, cable companies and mobile operators, our customers. For most of them, we have been providing our solutions for many years now. Our engagement models with them are based on continuity, stability and continued optimizations and upgrades of the deployed SeaChange software. With frequent upgrades and extensions, we ensure that our customers remain on the up to-date technology and continue to receive value add services to their ecosystem, which they can roll out for their subscribers. I would now like to take a closer look at the fourth quarter of fiscal '23.

As Pete had mentioned before, we executed on our strategic growth plan centered around three core pillars. First, and in line with my previous remarks, concentrating on renewing and fortifying relationships with our long standing TV operator customers, which has successfully led to multiple engagement renewals and upgrades. Second, bolstering our recurring revenue stream by securing higher margin SaaS deals. And third, by innovating with new and expanded products and services that can help our customers optimize returns across all TV and streaming channels, as well as enhancing end user retention and engagement. To start, I'd like to highlight two key announcements we made in the past quarter. Including the launch of Xstream, our cloud-based content monetization platform designed to maximize ad revenue on connected TVs, as well as the launch of VIDAA Free, VIDAA's streaming hub of free advertising supported video leveraging the same Xstream technology.

People, Job, Office

Photo by Sigmund on Unsplash

The launch of Xstream signifies SeaChange's commitment to capitalize on the consumer evolution to content consumption and connected TVs and provides new products and services that help our customers to maximize returns across all TV and streaming channels. As consumer preference shifts away from linear and pay TV to streaming and from subscription services to advertising fund the television and content offerings, We've seen an explosion of consumer demand for comprehensive content aggregation and discovery on connected TVs. With the launch of Xstream, we are able to address this trend in consumer demand, enabling access to wide selection of content independent of a cable subscription or set top box. While providing a premium streaming experience for the end user and benefits to content owners and advertisers.

Xstream provides significant value add to content owners by providing them with a new distribution channel and revenue stream to maximize return on content costs. On the other hand, the platform provides advertisers with intelligent tracking and targeting through big data to help improve conversion rates with fast advertising. The Xstream platform, in addition to being another innovative offering we have released, will also help SeaChange expanded SaaS offering to customers and generate recurring higher margin revenue. Leveraging the same Xstream technology, we also were able to jointly develop the VIDAA Free solution, which was rolled out on millions of VIDAA powered smart TVs from Hisense and other TV brands this past January. With SeaChange Xstream technology, VIDAA will now be able to provide a superior streaming and advertising insertion solution to accelerate the expansion of free ad supported content globally on smart TVs powered by VIDAA, in addition to enabling full control of video content and the ability to seamlessly manage, curate, publish and monetize this content.

As more content becomes available under advertising business models, smart TV operating systems like VIDAA are becoming the primary gateway to publish our partnerships. The launch with VIDAA validates the consumer shift we've seen away from cable and subscription models for advertising content. While allowing us to further expand our strategic partnership with VIDAA as well as participate in their continued success. This increased partnership with VIDAA has been the result of continued innovation from SeaChange and will play a meaningful role in our growth going forward. Speaking more to our developments with existing customers, the company closed on multiple renewals during the quarter with Tier 1 and Tier 2 operators in all three of our main geographic markets, including North America, EMEA and Latin America.

These renewals further demonstrate our ability to deliver on our strategy of fortifying relationships with our long standing TV operator customers. Continued execution on this strategy remains a top priority for SeaChange, as we improve our existing products, deliver increased value add professional services as well as secure system upgrades for existing customers. Continuing with other recent developments in the quarter, we launched Source Digital onto our StreamVid platform. Source is a true innovation driver in the connected TV and advertising space, who along with their partner Sansar, enable a unique Metaverse experience that can be streamed on LG devices. In September last year, we partnered with Source Digital to jointly develop the source platform with Sansar.

The platform now combines Source Digital's activated moments the web 3 alternative that creates immersive and personalized user engagement across any video or digital metaverse experience with Sansar's Metaverse platform to showcase live so-called Meta events, such as concerts or sports events. And SeaChange's StreamVid platform through which these events get streamed and monetized. Through the Source platform, users can immerse into a digital experience, interact with other users, experience concerts and purchase merchandise video optionality of switching back and forth between the live events streamed on LG TV and the 3D metaverse. In addition to adding more high-margin recurring revenue through our SaaS-based platform, the launch of Source gives us a pre-packaged solution for the Metaverse, the SeaChange together with Source Digital can co-sell to a variety of content owners globally.

In addition to co-launching the Source product, we are also finalizing a StreamVid launch with a major media company in EMEA, which we expect to go-live in the coming weeks. This is yet another company that sees tremendous value in our SaaS-based platform, which provides our customers with flexible billing and payment handling, including in-app purchases, vouchers and refunds, advanced analytics to track key service metrics and make data-driven decisions to optimize the business performance, support for all content types, including VOD, live linear and time shift with the option to add fast channels to the platform and a seamless onboarding flow for new subscribers and users. Taking a step back, we're seeing two major growth catalysts play out that are driving demand for SeaChange's solutions.

First, we're seeing growth in the connected TV market, which has largely been a result of consumer behavior trends shifting towards streaming on connected devices, particularly on larger screens. In this changing landscape, the company is well positioned as a technology vendor to help content owners realize their connected strategies and optimize monetization opportunities. Our longstanding relationships with many Tier 1 operators as well as our growing and financial presence coupled with positive reference cases from content owners and broadcasters make us an ideal partner for players in the connected TV space. We are confident that our existing technology solutions and services along with continued delivery of innovative solutions will allow us to capitalize on this growing demand.

The second growth catalyst involves the consumer shift towards free ad-supported content and away from subscription-based business models. At SeaChange, we believe our differentiated technology can help operators and content owners protect and build incremental revenue streams, placing us in an excellent position to grow our market share in this rapidly expanding sector of the industry. By extending our product and service portfolio for our existing customer base and adding new customers that adopt these ad-based business models, we can harness this opportunity to expand our market share and maximize our opportunity in this new growth sector driven by changes in consumer preferences. Our ad insertion solutions incorporate more and more data-driven intelligence to personalize the ad load with the relevant ads and to optimize addressability across all distribution channels from broadcast via streaming and connected TVs. That concludes my prepared remarks.

I will now turn the call over to our CFO, Mark Szynkowski to cover the financials. Mark?

Mark Szynkowski: Thanks, Chris, and good afternoon, everyone. Turning to our financial results for the fourth quarter and fiscal year 2023. Total revenue for fiscal Q4 2023 increased 23% to $10.2 million from $8.3 million in the prior quarter, while full year revenue increased 19% to $32.5 million compared to $27.3 million in fiscal 2022. For Q4, the improvement was primarily driven by increases in product revenue due to the acceptance of a development project, triggering a material license fee related to the company's connected TV software product. While for fiscal 2023, total revenue was up mainly due to increases in service revenue. Product revenue for Q4 2023 increased 185% to $6.2 million or 61% of total revenue compared to $2.2 million or 26% of total revenue in the prior quarter.

Product revenue for fiscal 2023 increased 9% to $14.2 million or 44% of total revenue compared to $13 million or 48% of total revenue in 2022. Improvement in product revenue for both Q4 and fiscal 2023 was primarily due to increases in licensing revenue. Services revenue for fiscal Q4 2023 decreased 35% to $3.9 million, or 39% of total revenue compared to $6.1 million or 74% of total revenue in the prior quarter. Service revenue for fiscal 2023 was $18.3 million or 56% of total revenue compared to $14.3 million or 52% of revenue in fiscal 2022. The sequential decrease in quarterly services revenue was primarily due to an increase in professional service revenue accepted in the third quarter after completed work for multiple customers. The increase in service revenue for fiscal 2023 was primarily due to an increase in professional services revenue driven by the acceptance of completed work by multiple customers.

Revenue from our international markets in fiscal Q4 2023 was $3.3 million or 33% of total revenue, which compares to $3.6 million or 44% of total revenue in the prior quarter. For fiscal 2023, revenue from international markets totaled $14.4 million, comprising 44% of total revenue, which compares to $11.8 million or 43% of total revenue in fiscal 2022. Revenue in our U.S. markets for fiscal Q4 2023 was $6.8 million or 67% of total revenue, which compares to $4.6 million or 56% of total revenue in the prior quarter. For fiscal 2023, revenue from our U.S. market contributed to $18.1 million, 56% of total revenue compared to $15.5 million or 57% of revenue in fiscal year 2022. Looking at our margin. Gross profit for fiscal Q4 2023 was $7.4 million or 73% of total revenue compared to $5.2 million or 62% total revenue in the prior quarter.

Gross profit for fiscal year 2023 was $20.5 million or 63% of total revenue, which compared to $16.4 million or 60% of total revenue in fiscal 2022. Product gross margin for fiscal fourth quarter of 2023 was 85% compared to 26% from the prior quarter. For 2023, fiscal year product gross margin was 65% compared to 70% in the prior year, a significant growth in product margin sequentially as well as the full year decrease in product margin for fiscal year 2023 can be explained by a substantial increase in the amount of third-party goods sold for several customers in the third quarter that carried a lower margin, resulting in a big jump in product gross margin sequentially and a lower average project margin for 2023 fiscal year when compared to the prior year.

Service gross margins for fiscal fourth quarter 2023 was 53% compared to 75% for the prior quarter. For the 2023 fiscal year, service gross margin was 62% compared to 50% in 2022 fiscal year. Looking at our expenses. Non-GAAP operating expenses for fiscal fourth quarter of 2023 were $5.8 million, an increase from $5 million the prior quarter. While fiscal year 2023, non-GAAP operating expenses were $20.3 million, down slightly from the $20.7 million in fiscal 2022. GAAP income from operations for fiscal Q4 2023 totaled $1.2 million compared to $3.7 million loss from operations in the prior quarter. GAAP loss from operations for the prior year 2023 totaled $11.7 million compared to a loss of $9.4 million in fiscal 2022. Note, during the year that we recorded a non-cash impairment loss on goodwill during the second and third quarters of $5.8 million and $3.3 million, respectively.

And at quarter end, we no longer had any goodwill recorded on the balance sheet. As a percent of total revenue, GAAP income from operations for fourth quarter of fiscal 2023 was 12%, which compares to a negative 44% in the prior quarter. For 2023 fiscal year, as a percentage of total revenue, GAAP loss from operations was a negative 36% compared to a negative 34% in the year prior. Non-GAAP income from operations for fiscal Q4 2023 totaled $1.6 million or $0.03 per fully diluted share, which is an improvement compared to the $0.1 million or breakeven per fully diluted share in the prior quarter. This represents our third consecutive quarter of positive non-GAAP income. Non-GAAP income from operations for fiscal 2023 totaled $0.3 million or $0.01 per fully diluted share, which was an improvement compared to the $4.3 million loss or a loss of $0.09 per fully diluted share in fiscal 2022.

As a percentage of total revenue, non-GAAP income from operations was 16% compared to 2% in the prior quarter. While non-GAAP income from operations for 2023 fiscal year as a percentage of revenue was 1% compared to a negative 16% in the prior year. GAAP net income for fiscal Q4 of 2023 totaled $1.7 million or $0.03 per basic share. This was an improvement compared to a net loss of $3.7 million or a loss of $0.07 per basic share in the prior quarter. GAAP net loss for the fiscal year 2023 was $11.4 million, inclusive of the aforementioned goodwill impairment loss or a loss of $0.23 per fully diluted share compared to a net loss of $7.4 million or a loss of $0.16 per fully diluted share in fiscal 2022. Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA for fiscal Q4 2023 totaled $1.7 million or $0.03 per fully diluted share.

For the 2023 fiscal year, the adjusted EBITDA totaled $0.5 million or $0.01 per fully diluted share compared to an adjusted EBITDA net loss of $4.1 million or a loss of $0.09 per fully diluted share in fiscal 2022. Turning to our balance sheet. As of January 31, 2023, we had $13.4 million in cash and cash equivalents and $1.2 million in marketable securities. We continue to have no debt on our balance sheet. This completes my financial summary. For a more detailed analysis of our financial results, please refer to today's earnings release as well as our annual 10-K, which we plan to file by April '17. I will now turn over the call to Cameron Williams from Gateway Investor Relations to moderate the question-and-answer session for pre-submitted questions before taking your questions.

Cameron?

A - Cameron Williams: Thank you, Mark. This is Cameron Williams of Gateway Group, SeaChange's Investor Relations Advisers. I will now read the top questions submitted by investors and analysts ahead of the call. First question is for Chris. With the fourth quarter jump, would you consider the connected TV deal transformational, that is what percent of the company's focus is on doing more with VIDDA or landing another partner?

See also 10 Most Profitable Small Businesses in 2023 and 10 Best April Dividend Stocks To Buy.

To continue reading the Q&A session, please click here.