SeaChange International, Inc.

Good afternoon, and welcome to C-Change's fiscal first quarter 2022 conference call for the period ended April 30, 2021. My name is Diego, and I will be your operator this afternoon. Joining us from the company is Executive Chairman Robert Pons, Chief Financial Officer Michael Prynne, and Senior Vice President of Global Sales and Marketing Chris Klimmer. After the market closed today, C-Change issued its financial results for the fiscal first quarter in a press release, a copy of which is available in the Investors section of the company's website at www.cchange.com. Before we begin today's call, I would 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 10Q. Any forward-looking statements 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, C-Change has provided a reconciliation of these non-GAAP financial measures to the most directly comparable gap measures in the company's earnings release issued today. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of C-Change's website. Now, I would like to turn the call over to C-Change's Executive Chairman, Robert Pons. Sir, please proceed.

Thanks, Operator, and good afternoon, everyone. Thank you for joining us today. On our last call in April, I left you with three words, streaming, streaming, and streaming. Today, I will begin my comments with three words, streaming, streaming, and streaming. According to a recently published research report, following the worldwide streaming trends, the streaming industry will surpass $140 billion in annual revenues, and the advertising-based video-on-demand industry will surpass $60 billion in annual revenues by 2026. SeaChange has repositioned its strategy and technology to capture the explosive growth in all things streaming. Our turnkey streaming enablement platform for content owners and cable operators worldwide and our advertising insertion technology give us a distinct advantage over our competitors. The mission we are on is to reach out to all stakeholders in streaming. This includes but is not limited to cable operators or content owners looking to launch their own streaming services. And as you might expect, it also includes the greater Hollywood and all of the world's film and television producers. A big part of our future success will come from strategic partners who recognize the value of partnering with a full-stack streaming enablement platform company like SeaChange. And by full-stack, I simply mean we have all the technology and expertise to help efficiently and quickly launch a new streaming service. Your company is part of two exploding industries, streaming and ad tech. If you shadowed me and our other executives for a week, you would see and listen in on the many strategic meetings we have with stakeholders where streaming is their top priority. On a weekly basis, we are on conference calls, reaching out to the film and television industries to educate them on our combined streaming and ad tech enablement platform. After Mike walks you through our numbers for Q1, Chris will discuss in more detail the positioning of our new go-to market strategy and the unique position we are in to capitalize on the exploding growth of streaming and ad tech. Mike?

Thanks, Bob, and good afternoon, everyone. Now, turning to our financial results for the first quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021. Total revenue for fiscal Q1 2022 was $5.1 million compared to $5.1 million in the prior quarter. Revenue was driven by an increase in product revenue offset by a decrease in legacy maintenance revenue. Product revenue for fiscal Q1 2022 increased 16%, to 1.6 million or 32% of total revenue compared to 1.4 million or 27% of total revenue in the prior quarter. Service revenue for fiscal Q1 2022 decreased 8% to 3.4 million or 68% of total revenue compared to 3.7 million or 73% of total revenue in the prior quarter. The decrease in service revenue was primarily due to a decline in legacy maintenance. Revenue from our international markets in fiscal Q1 2022 was 2.9 million or 56% of total revenue, which compares to 3.7 million or 73% of total revenue in the prior quarter. Revenue in our U.S. market for fiscal Q1 2022 was 2.2 million or 44% of total revenue, which compares to 1.4 million or 27 percent of total revenue in the prior quarter. Looking at our margins, gross profit for fiscal Q1 2022 was 2.8 million or 56 percent of total revenue compared to 2.8 million or 55 percent of total revenue in the prior quarter. Product gross margin for fiscal first quarter of 2022 was 75 percent compared to 46 percent from the prior quarter. Service gross margin was 47% compared to 59% from the prior quarter. Now looking at our expenses, non-GAAP operating expenses for the fiscal first quarter of 2022 decreased 12% to $5.6 million from $6.4 million in the prior quarter. GAAP loss from operations for fiscal Q1 2022 totaled $3.8 million, an improvement of $635,000 compared to 4.4 million in the prior quarter. As a percentage of total revenue, GAAP loss from operations for the first quarter of fiscal 2022 was negative 75%, which compares to negative 87% in the prior quarter. Non-GAAP loss from operations for fiscal Q1 2022 totaled 2.8 million, or a loss of 7 cents per basic share, an improvement compared to 3.5 million or a loss of 9 cents per basic share in the prior quarter. As a percentage of total revenue, non-GAAP loss from operations was negative 55% compared to negative 69% in the prior quarter. GAAP net loss for fiscal Q1 2022 totaled 4.1 million or a loss of 10 cents per basic share. This was an improvement compared to a net loss of 4.4 million or a loss of 12 cents per basic share in the prior quarter. Non-GAAP net loss for fiscal key one, 2022, totaled 3.1 million, or a loss of seven cents per basic share, compared to a non-GAAP net loss of 3.5 million, or a loss of nine cents per basic share in the prior quarter. Turning to the balance sheet, at quarter end, we had 21.3 million in cash, cash equivalents, and marketable securities, which compares to $6.1 million at the end of the prior quarter. 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 10Q, which we plan to file by the end of the week. Chris?

Thanks, Mike. Good afternoon, everyone. Today, I would like to give you an overview of our strategic and product initiatives that we have implemented over the last several months mainly to achieve two key goals. First, to better address the needs of our existing customer base. And second, to create a product and value proposition to target the extensive growth opportunities in the streaming and ad tech markets. As many of you know, the pandemic has dramatically accelerated the paradigm shift towards streaming. Streaming business models today dominate the content value chain from production to consumption and monetization. At the same time, traditional linear TV continues to be a highly relevant service for cable and broadband companies to acquire and retain subscribers. Both traditional linear TV and streaming have one thing in common, the increasing need for technology that supports intelligent monetization and business models to increase advertising revenues. In response to these market trends and to simplify our go-to-market strategy and offering for both current and prospective customers, we have established three product platforms. Cable video delivery platform, OTT streaming platform, and advanced advertising platform. At a high level, we have four primary objectives for our new product marketing strategy. First, establish dedicated product lines for all three current and future revenue drivers. Second, introduce growth vehicles for recurring revenue streams. Third, increase asset value with clear value propositions, respective target verticals and reference cases. And fourth, drive targeted and relevant product innovation with our exceptional team of video software engineers. The first product is our cable video delivery platform. a robust on-prem video management system to provide long-term value to cable companies around the world. For more than a decade, this technology has enabled major broadband service providers and cable companies to orchestrate the delivery of content to all screens and devices globally. Today, more than 80 customers rely on C-Change's software solutions and professional services to deliver compelling content to households. these same customers will be incredibly important to us going forward. As we work to ensure long-term stability of their deployments by providing continuous software upgrades, feature and security enhancements, and value-add services such as advanced analytics. In terms of the platform's business model, it will continue to be a combination of software licenses, professional services, and support and maintenance. Success with our cable video delivery platform will translate to even greater customer retention, new high margin customer expansions, and a unified software platform that allows us to streamline our support efforts. Our OTT streaming platform is our newest product, which provides a complete cloud-native online video platform to enable premium and profitable streaming services. both for operators and content owners. As an enabling technology, C-Change effectively serves as a conduit to facilitate the delivery of video content to end users globally. This favorable positioning between the provider of the streaming service and their consumers helps our customers situate themselves successfully in the multi-billion dollar video streaming market. Our OTT streaming platform also helps our customers fully maximize the return of investment of their content and user acquisition costs, as they can now address their consumers directly with relevant content offerings, targeted campaigns, or upsell services. In that sense, our OTT streaming platform democratizes video by allowing content owners to bypass intermediate platforms and deliver content directly to consumers on all device platforms. By cutting out the middleman, so to speak, content owners can lower customer acquisition costs while driving higher ROI through targeted monetization strategies across all video business models, such as AVOD, SVOD, or TWOD. Key to our ability to enable successful and profitable streaming services is our proprietary analytics engine that is embedded in the platform. With machine learning algorithms that help to segment and cohort relevant consumption and business intelligence data, we generate meaningful and actionable insights for our customers to optimize the promotion or packaging of content, to increase traffic and engagement on the services, and to reduce churn. Our OTT streaming platform also increases our customers' brand value due to the premium level of service. For sea change, this product line provides us with a true software-as-a-service offering structured on a pay-as-you-grow model that includes six minimum fees with upside based on usage level. As a software-enabled platform, we can leverage the same product code base across multiple customers to achieve a scalability effect. With the platform's recent launch, our sales team is keenly focused on marketing the product to customers and securing logos. Our success in this area will establish a new stream of high margin recurring revenue for our company. Third, our advanced advertising platform is a unified ad tech solution for broadcast and OTG to increase ad revenues for carriers, broadcasters, or content owners. The platform enables the insertion of advertisements into inventory on linear broadcast feeds as well as IP-delivered streaming content. Together with the analytics engine I previously mentioned, content owners are provided with greater insights into their audiences and can generate higher advertising revenues right away. In addition to term licenses, fee change benefits financially through recurring variable fees tied to certain metrics, such as ad impressions. Our team is laser-focused on securing logos for this platform and capturing a meaningful share of the fast-growing and massive ad tech market. I look forward to sharing our success and progress in all three of those product categories in the coming month. That concludes my prepared remarks. I'll now turn the call back over to Bob for his closing remarks. Bob?

Thanks, Chris. The traction we've established on the strategic roadmap has made C-Change a much more capable, focused, and scalable organization. As you've heard us talk about, we have deepened and expanded customer engagements, including most notably the multi-year, multi-million dollar contract with one of the largest broadband service providers in the U.S. that we announced at the end of March. From a financial perspective, the roadmap has produced many tangible benefits as well, including a stabilized top line, an optimized cost structure, and a bolstered balance sheet. These favorable dynamics have allowed us to accelerate our plan to capture the explosive growth in streaming services and be in an even stronger position to drive growth in fiscal 2022 and the years ahead. I'm encouraged to report that our pipeline is building and our sales opportunities have never been more abundant. We hope to share some of these developments and progress with you in the near future. Taken together, we remain highly confident that the successful execution of our plan will translate to growth and enable us to drive scale, capture market share, and create even greater value for both our customers and shareholders over the long term. And three final words before we go to questions. Streaming, streaming, and streaming. That concludes our prepared remarks. We are now ready to open the call for questions. Operator?

Thank you. And ladies and gentlemen, at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Steven Frankel with Colliers. Please state your question.

Good afternoon. Thanks for the opportunity. I'd like to drill down a little bit on this go-to-market approach, Bob. Where are you in the spilling out the Salesforce? How many bodies do you have today? How did that compare to a year ago? And how many open RECs do you have? Let's start with that.

Yeah. Chris, do you want to comment on our Salesforce, please?

Sure. Thanks, Steve. Good afternoon. Well, you know, I fully understand that you need to ask this question, and I hope you also understand that I will not disclose a specific number in my response. What I can say, though, is we are represented in all markets that we believe generate the highest ROI for us. On top of that, we have invested in partnerships and reseller programs to build a network of local support in regions where we believe this will grant us a fast time to revenue. I can also say that we haven't reduced our sales force. On the contrary, we're trying to build it up intelligently with the criterion to achieve a fast time-to-revenue and ROI of understand.

Okay. And then in terms of the large contract you won in March, have we seen that revenue? Is that part of the product revenue that was seen in the quarter? And kind of related to that, backlog seems pretty stable. How much of that backlog is maintenance? Kind of give us a feel for what that backlog represents.

Hey, Steve. It's Mike. So, first part of your question, I think I'll just kind of regurgitate what we went over last quarter. It was, you know, multi-year, multi-million. dollar deal that we announced and there was probably about a third of it that accounted for, that was in the kind of the product revenue for this quarter. And then the remaining two thirds is spread out fairly evenly over the next kind of couple of years. So it was a chunk, but it wasn't, you know, kind of 60, 70% like you've seen in some of our other deals in the last couple of years. And then the second part was, The $20 million backlog, I would say probably 70% of it will come in radically quarter to quarter. So we've got probably around $1 million right now minimum for kind of the recurring piece for the framework deals that we sold in the last two years. And then there's always some kind of odds and ends in there that might be a little lumpy, but that's only a small piece of that backlog. Okay.

Okay, and you did a good job disclosing the number of traditional cable customers. Could you give us a feel for the number of streaming customers you have either live today or under contract today that would launch in the coming quarters?

Not yet, Steve. You know, we do have them, and it is, you know, the – newer area of our business going, you know, thrust going forward. Um, we are winning new ones. Um, we hope to announce, you know, some of those in the very near future and, and, you know, to everyone. Um, but yeah, we're not announcing, you know, the numbers of them yet at this point.

Okay. And then same question on ad tech. Cause I know Previous administration had talked about a couple large ad tech deals. Did those come to fruition? Kind of where are we in ad tech?

Yeah, so I'll go first on that one.

Yeah, I'm sorry. Go ahead. Sorry. No, you go ahead, Bob. Sorry.

No, just, you know, Steve, we have, you know, we're working with some of our customers. You know, there's a lot to it in terms of the infrastructure itself and And in regards, you know, we're taking a fresher look, you know, at where we can perhaps sell it as more of a software as a service model. We're doing a lot of things and having those discussions with the current customers that have the system installed.

Chris? Yeah, maybe just, you know, to start with a general remark, I really believe we bring immense value to our customers through this ad tech solution because, you know, there's various business models that we support that I believe are pretty unique. For example, the fact that we support ad insertion through a unified platform for both broadcast and OTT, which is really something special. What we have changed now, Steve, is the way how we go to market with our product, where we went to market with a business model based on revenue sharing, which put us in a position that is challenging for a company like us because we need to venture into new parts of the value chain, such as, for example, you know, get buyers into the system. While we used to do that, we're now really focusing on our capabilities around enabling ad insertion and are, you know, basically going back to a more conventional business model based on, as Bob said, you know, licenses, software licenses, and variables such as, you know, ad impressions. So there's a direct correlation between the value that we bring to our customers and the business model that we support for our customers.

Okay. And then the last question for Mike, what was the customer concentration in the quarter?

Nobody kind of above that 10% mark that we disclosed. Okay.

All right. Thank you.

Thanks, Steve. Thanks, Steve. And a reminder to queue up for a question, please press star one on your telephone keypad. To remove your question from the queue, press star two. Our next question comes from Rommel Dionisio with Aegis Capital. Please state your question.

Yeah, good afternoon. Thanks for taking my question. You know, the last few quarters, I think you talked about how, you know, with the pandemic, some of the customers held off on making new technology decisions and deployments and maybe We're a little slow to migrate to a framework from some of the older legacy software. I wonder if you could just characterize the current environment. Are you still seeing that hesitation, or is that starting to open up in terms of the discussions you guys are having? Thanks.

Yeah, so I'll just answer the first part of that, or the last part of that. It's opened up quite a bit. Our sales team is much busier, and they're getting a much warmer response and reception than anything before. we experienced much greater than anything we experienced during what I'd call the peak of the COVID months.

Chris? No, I can only second that. The COVID effect is over. The market has opened up. The dynamics in the market are vast. There's an abundance of opportunity, especially in the D2C, direct-to-consumer sector, where content owners are pushing to the market with their brands that they want to positioned directly in front of the consumer without having to go through platforms such as YouTube or content aggregators to publish their content. So there's a lot of dynamics on the market. We see new players emerging, new and creative business models emerging. We also see that the traditional linear TV and also streaming space is picking up again. We also see that, let's say, the more institutional players in the industry such as cable companies and operators are back to, you know, to thinking about what they want to do with a TV proposition. So I can only, you know, second what Bob has said. There is a lot of movement on the market. And I think we, you know, with a new product strategy and positioning, we have a clear message and a clear value proposition that we can benefit from in this very dynamic environment. Okay, that's great, Kala. Thanks very much. Thank you.

Thanks, Ramon.

Our next question comes from Aria Call with Call Capital. Please go ahead with your question.

Good afternoon, and thank you very much for hosting this call, and best of luck with your efforts going forward.

Thank you.

Question number one about your products. Have you been able to obtain any third-party reviews by companies that have – consulting or other sorts of practices in the industry that would compare and contrast your streaming and ad insertion solutions versus others? I mean, you know, obviously the big daddy of all of them is Gartner, but you're more of a niche, so I'd assume there'd be some people specific to what you do, and I would love to read those reviews if they're available.

That's a great question. Thank you. I don't think anyone's ever asked us that. We are not quite as specific as you meant, you know, like a Gartner or a smaller version of them. But I would say almost on a, you know, couple of times a month, we are in on calls and testing out, you know, what we built. Sometimes it's, you know, someone who knows the technology extremely well from a company that we're not even selling to today. We also have recently been in discussions with a research firm based out of Europe to get our own proprietary research here in our hand that will better direct us, particularly in streaming, where we should be laser focusing our sales organization and better understanding where the future streaming opportunities might be. It's a good question, and I kind of feel like we do it, maybe not as formalized as hiring a Gartner at this time. We are actually speaking, I can't tell you the name of it, but it's almost as big as Gartner. We're about to do our first interview with them, I think, in a week or so. Chris Clemmer and I will be on part of that interview.

Okay. Thank you for the question.

Yes, please. Sure.

And then for prospects who kind of come to your website, I can see you've made some enhancements and changes to your website in the past two months, but my question is oftentimes companies like to present success stories, case studies for customers who have purchased your products and what they've achieved that would show return on investment and other sorts of things. I don't see that right now. How far away do you think you are from being able to more clearly publicized success stories?

You will see it. I don't want to say give you like say 30 days, but within a month or two, maybe a little bit, you know, how redesigned websites go and writing a content and things. But we are hard at work. We've engaged in an outside firm who's been at it for a while. And I think you'll see some success things very, very soon, you know, at the site. So please stay tuned. It should be, you know, before it's certainly the next quarter earnings. And you'll even see some things relating to a presentation of our capabilities that this company has never done before. So pretty exciting stuff, a la Hollywood, if I may say. So stay tuned.

And just one last thing. In terms of your average deal sizes, can you kind of give me a sense for when you're looking at your pipeline, what sort of average deal sizes of successful you'd be hoping to achieve kind of, you know, the median sort of number. The reason I ask is my impression is, is that your customers will be paying you a mix of software and service revenue upfront, but you have kind of a contracts are kind of performance based so that as they hopefully, are successful going forward and are able to sell advertising, you've set up gain-sharing arrangements where a percentage of the advertising might be earned by sea change as it takes place. So what I'm trying to get a sense for is up front when companies are installing or beginning to use the product that they purchase, what's the deal size as they'd be in hundreds of thousands of dollars, and what's the potential, I guess, for revenue in year one, two, and three, as the ad insertion revenue starts coming in.

Sorry, Mike, you go ahead.

Yeah, Chris, my part might be shorter, and then you can kind of add on what I missed. So, you know, we typically don't disclose kind of dollar value of pipeline. You know, we like to do it when deals are won. But I will say that there's, you know, you hit the nail right in the head that I think the deals will be a combination of, you know, types of product and services that will have a fixed component. And then in addition, there will be no variable type component, whether it's kind of users, you know, subscription or, or, you know, a revenue share in some case. So, um, I think we'll give some more kind of concrete numbers when deals are one, not necessarily in pipeline, but, um, you know, they will have that, that different mix of, um, of fixed and a variable piece.

Okay, and your sense is the mix of fixed and variable dollars by customer, you know, over three years, what might be the mix you think of fixed dollars earned versus variable dollars?

I don't think we can give a number yet, Chris. Yeah, go ahead.

Yeah, no, I was going to give a number, but, you know, I really hope that the variable part will be, you know, at a very high percentage because that would mean that the service is successful. And that would mean therefore that basically the traffic that we support through our platform is very high and therefore the revenues will be higher. So to answer your question, this is in a SaaS model, on a consumption-driven SaaS model, it's difficult to foresee the exact percentages, but the higher the variable part will be, the better for us. And for our customers, of course.

Great, thank you again.

Thank you. Just a reminder to ask a question, press star 1 on your phone and you can press star 2 to remove yourself from queue. Our next question comes from Anthony Ducicero. Please go ahead with your question. Thank you.

Hi. Yes. Thank you for taking my question. I guess I just have a general question. Just like touching base with your large multimillion dollar contract, visiting your site, I noticed that You're also looking to increase your workforce when it comes to project managers and whatnot. How many additional employees are you looking to add, and is this due to the multimillion-dollar contract that you won? And with that being said, too, on your earnings, it looks like you have an unbillable of three-quarters worth. Is that in conjunction with the contract that you guys secured earlier? That's my question. Thank you very much. Yeah, sure. I'll do the part.

Go ahead, Bob. I was just going to say, you know, we don't typically disclose, you know, our hiring needs and requirements, so we really can't comment on that. Mike, you want to take the other part?

Yeah, the other part, I'll take the unbilled. There was probably a component that relates to the large contract, but if you look at kind of the buildup of unbilled over the last year or two, you can see – it's just a way the timing between kind of revenue recognition and, uh, cash collections. And some of them had, um, uh, some deals had revenue that was maybe pushed more towards the first couple of years and then collections spread out over, you know, maybe three years or four years. So, um, I think we've got some details in our footnote, but there isn't a significant piece of that that's related to just one customer. It's more of a mix of all the arrangements of the last couple of years.

Thank you. And then one other thing, too, I think last time you guys had no customer with more than 10% of your business. Does that still remain true with the new contract?

For this quarter, yes. And then we'll do each quarter, and I think on a cumulative year-to-date basis, you know, we'll put that disclosure in the 10Q. And we expect to file our 10Q tomorrow, and so there will be any additional kind of customer concentration information in there.

I appreciate it. Thank you.

Thanks.

Thank you. And once again, to ask a question, press star 1 on your phone. We'll pause for a couple moments while we pull for questions. Thank you. Thank you. And at this time, this concludes our question and answer session. If your question was not taken, please contact SeaChange's IR team at SCAC at gatewayir.com. I would now like to turn the call back over to Mr. Pons for his closing remarks.

Thank you, and thank you, everyone. And, you know, we always get a healthy number of participants in the call, and this call was no different. And we appreciate the interest. The team, the culture, and the company has dramatically improved over the last four or five months. We've initiated some programs that keep all of our employees engaged, our sales force highly motivated, and we're spending a lot of time out there with potential strategic partners. Those are companies from media companies, content owners that Anyone that streaming is in their roadmap for the future are companies that we want to sit down with and talk to them about our capabilities and our great technology assets. So stay tuned. We couldn't be more excited about our future. It's great to be selling into, you know, one of the more explosive industries that The broadcast industry probably hasn't been this disrupted in many, many years, and streaming is causing it. As someone said to me, we were on a strategic call earlier in the week with some folks in Los Angeles, the Hollywood groups and things like that. Everyone in all the big studios, it's all they talk about is streaming. So we're confident with our great technology that will be a big part of the growing sector. Thank you very much, and be well.

Thank you for joining us today for SeaChange's fiscal quarter 2022 conference call. You may disconnect your lines. Thank you.