SEACHANGE INTERNATIONAL INC SEAC
September 09, 2016 - 5:31pm EST by
coalone
2016 2017
Price: 2.81 EPS 0 0
Shares Out. (in M): 34 P/E 0 0
Market Cap (in $M): 96 P/FCF 0 0
Net Debt (in $M): -50 EBIT 0 0
TEV (in $M): 46 TEV/EBIT 0 0

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Description

 
Sea Change: a big and sudden change: a marked change
 
Microcap idea read no further if you are not interested in a $50 mill EV name…
 
If you are interested…
 
Expectations for SEAC are exceedingly low and if management can achieve profitability a strategic buyer
or the market will revalue the equity to the tune of 1.5x EV/Revenue multiple equating to a $5.75 to $6.00
equity price. The patents, the maintenance revenue stream, customer base and the strategy to develop
additional products and drive revenue has value above and beyond the current $46 MM EV.
 
SeaChange International, Inc. (SEAC) has been a struggling, yet asset rich industry leader in the delivery of
multiscreen video. SEAC was founded in 1993 as a hardware and software business but recently divested
their hardware business in 2012 to solely focus on software and services. Their products and services
facilitate the aggregation, licensing and management and distribution of video (primarily movies and
television programming) and television advertising content to cable system operators,
telecommunications and media companies. SEAC also has a “Who’s Who” customer list, albeit very lumpy
and at the current juncture unprofitable.
 
SEAC’s stated Mission and Focus is: “Deliver innovative software solutions that empower video service
providers to monetize video assets through multiple delivery platforms via multiple business models (linear
broadcast, VOD, OTT) and multiple revenue models (subscription, transactional and advertising).
 
In 2016, SEAC began implementing organizational and operational improvements to execute its strategy
and return to profitability. This restructuring began with the promotion of COO and software veteran Ed
Terino as CEO in April 2016. Mr. Terino has been on the board of directors of SEAC since 2010 and began
as COO in June of 2015. “Since joining the team as COO, Ed’s performed a crucial role in driving SEAC’s
operations to far greater efficiency, quality and strategic orientation toward profitability and growth,”
said Steve Craddock, Board Chairman. Prior to joining SEAC, Terino was SVP and CFO of Art Technology
Group (ARTG) which was acquired by ORCL in January 2011.
 
Also, the management musical-chairs included the hiring of digital media veteran Peter Faubert as CFO.
Faubert most recently served as CFO for This Technology Inc., a video advertising solutions provider to
cable, telco and broadcast television operators, which was acquired by Comcast in 2015 and prior to that
he was CFO and Treasurer with Turbine Inc., the largest privately held video game developer in North
America that was acquired by Warner Brothers in 2010. CEO Terino highlighted Faubert’s “accounting as
well as buy-and-sell side M&A” experience upon Faubert’s hiring which is an integral part of our thesis
that SEAC is acquired at a substantial premium and/or returns to positive operating cash flow.
 
It is important to highlight that Terino is fourth CEO since 2011 and Faubert is the fourth CFO since 2014.
 
Insider optimism
 
We recognize that management and a solid turnaround plan cannot save a sinking ship, but the macro for
SEAC is definitely on their side. It is no secret that the consumption of high quality video across vertical
markets and mobile devices continues a massive upward trajectory. It is encouraging and anecdotal to
see insiders participate somewhat meaningful in the open market and take advantage of (in our opinion)
of value dislocation.
 
  • 6/10/16: Director Mary Palermo Cotton bought 25,000 shares at $3.36 and now owns a total of 181, 584 shares
  • 4/15/16: Director and CEO Ed Terino bought 40,000 shares at prices that ranged from $3.79 to $3.87 boosting his holdings to 230,475; please note Terino also bought 10,000 shares at $6.73 on 4/15/15
  • 4/15/16: Chairman of the Board Steven Craddock bought 25,000 shares at prices from $3.80 to $3.98 per share bringing his holdings to 84,233
 
 
Onward and upward
 
SEAC’s equity value is currently -56% YTD and the history of delivering shareholder value is shameful, but
rather than relive the past it paramount to focus on the future from this point forward. In Terino’s “letter
from the CEO” in the annual report he acknowledges the sins of the past. “As a member of the
management team for the past year and CEO since April 2016, I share your frustration with the
performance of SEAC. As I to you this year, I want to assure you that the Board and leadership team are
fully committed to improving the Company’s financial performance and stock price.” This promise at this
point has fallen on deaf ears, but we believe SEAC is now at an inflection point as of Q2 and offers a great
risk/reward with a current EV of $54MM for the following reasons:
 
  • SEAC is in the 5th or 6thinning of the turnaround to return to profitability; cost reductions YTD have generated $15MM in annualized expense savings with additional cost reduction actions planned for 2H FY2017; coupled with a “robust” pipeline for 2H 2017 according to management as of September 2016
  • Strong balance sheet with cash and equivalents of $51MM and no debt
  • Dedicated OTT sales team building out inside sales to increase lead generation and help drive revenue growth
  • Recurring revenue accounted for 46% of total revenue (maintenance, support and SaaS for TTM ended July 31, 2016)
  • Asset rich with 31 patents and several pending; SEAC has spent $120MM in R&D since 2013 which did not bode for previous shareholders but has value to a strategic
  • Q2 revenue shortfall was primarily due to an increase in estimated time to complete active statements of work ($4MM shortfall and Liberty Global related) and some transactions that were expected to close in Q2 were delayed due to shifts in customers schedules ($1MM shortfall)…this is timing issue and not demand driven
  • Goal of returning SEAC to profitability and positive cash flow by the end of fiscal year end; the new cost structure will reduce SEAC’s annual non-GAAP operating EPS breakeven point to the range of $90MM to $95MM in revenue
  • For the full year, SEAC is expecting revenue in the range of $83MM to $88MM and non-GAAP operating loss to be in the range of $0.05 to $0.06
  • Intermediate SEAC goals: double digit revenue growth, gross margin 63%-65%, R&D 20%-22%, sales and marketing 20%-22%, G&A 10%-11% and operating margin 10%-13% 
 
 
SEAC’s Business Strategy (with a NEW focus on profitability):
Innovative products: to help customers fully monetize their video assets
Broaden customer base: on the strength of core competency in video platform, advertising anduser experience
Leverage existing products: by offering them to customers in a cloud environment
Expand business: with “Rave” cloud based OTT (over-the top) product offering
Increase penetration into existing customers: with complementary products and new releases of core products
Expand the use of partners: to enhance market opportunities both geographically and vertically
Optimize operating expenses: to drive profitability
 
 
 
 
 
 
 
 
 
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Turn Around

Industry Winds at back

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