SEACHANGE INTERNATIONAL INC SEAC
November 06, 2019 - 12:40pm EST by
pap1
2019 2020
Price: 2.99 EPS -0.03 0.225
Shares Out. (in M): 37 P/E 0 13
Market Cap (in $M): 108 P/FCF 0 0
Net Debt (in $M): -17 EBIT 0 0
TEV ($): 92 TEV/EBIT 7.6 6.5

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Description

DOUBLE
- Seachange is a leading supplier of Video Delivery Software Solutions which powers 200+
cloud and on-premise video delivery platforms.
 
- Following years of mismanagement and a misguided sales approach which created a bevy of
earnings disappointments, after successfully streamlining its product set into one software
offering (Framework Solution), Seachange’s new management team has quickly energized and
transformed the company’s culture to a winning and a profitable one.
 
- With its Framework Solution’s 70-75% gross margins, as these new software revenues become
a bigger part of the overall revenue mix and its lower margin services revenues get phased out,
Seachange’s operating margins are poised to inflect materially. Importantly, with the company
continuing to take costs out of its business, Seachange’s underlying profitability inflection is
poised to manifest itself when Q3 results are released.
 
- After doubling the past six weeks, Seachange’s shares are poised to double again over the next
9-12 months. I see ten reasons for this thesis taking root; let’s examine now.
 
 
REASON #1 - SEACHANGE’S CEO IS A WINNER:
 
 
Seachange’s CEO, Yossi Aloni, is a winner, replacing a CEO who destroyed shareholder value
since he took the helm as COO/CEO in 2015 and 2016. During that time, SEAC’s stock lost
north of 60% of its value. Enter Yossi Aloni.
 
During his role as Chief of Corporate Operations at Ateme, a leader in video delivery
infrastructure, the company grew revenues at a 25% CAGR.
 
At first, Aloni stepped into Seachange as its Chief Commercial Officer earlier this year. He
immediately spearheaded positive change and was formative in developing the company’s new
Framework solution and its go-to-market strategy. Here is some additional 411 on the
Framework solution:
 
“The Framework is a complete video delivery platform enabling service and content providers to
deliver personalized live and VOD services. The cloud-based business intelligence and
behavioral analytics results in highly relevant advertisements increasing operator revenues. The
expansion of our product capability and our enhanced go-to-market strategy together are
strengthening our presence in the market," said Mark Bonney, Executive Chairman of the Board.
"Our customers are recognizing the effectiveness of SeaChange's product framework in driving
viewer engagement while lowering their costs and enhancing their profitability."
 
We had the opportunity to speak with Aloni recently. We came away impressed with Aloni’s
depth of technical knowledge and his ability to not only get new customers onboarded with the
Framework solution, but to also bring back old customers and to re-engage with the company’s
impressive base of entrenched customers. In this regard, note the impressive array of Tier 1
carriers/service providers that Aloni can upsell to in the coming months/quarters:
 
 
 
In our conversation with him, it became clear that the previous CEO’s strategy of casting
Seachange as a professional services organization providing customized solutions to MSO’s was
not only an inconsistently unprofitable model, it was also the wrong go-to-market strategy. Aloni
explained that this is no longer the case with the Framework solution, which is a much easier
end-to-end solution to sell, and one that carries with it much higher software margins and, very
importantly, long-term recurring revenue as well. I found the following excerpts from the
company’s most recent earnings call very informative:
 
”We closed six Framework deals in the quarter, bringing the total for the year to seven. It's
important to note that these transactions were achieved in a remarkably short time considering
we launched the Framework solution in April, and our sales force wasn't fully in place until
May. Our backlog ended the quarter at over $16 million, an increase of $5 million or 45% from
the end of our first quarter.
 
 
We believe these wins as well as the additional customer agreements we are finalizing these
days, along with our ability to deliver an end-to-end solution within 90 days validate our
strategy. Earlier this year, in April, we launched the SeaChange Framework solution, which
encompass all our previously standalone products. The goal of the Framework is to allow us to
execute on our corporate strategy by enabling our customers to increase the revenues on their
customers, to increase their customer base, to improve their customer retention, and to achieve
OpEx savings.
 
During Q2, we completed and validated the pipeline needed to enable us to meet our yearly
targets in terms of revenue and number of wins. In addition to the reported wins in Q2, we are
finalizing a decent number of customer engagements for both Q3 and Q4. This provides us a
solid confidence in meeting our revenues and customer win goals for this year.
 
Given the Framework engagements will be contributing revenue for multiple products over
multiple years, we expect our backlog will continue to grow as we close additional Framework
arrangements in the second half of this fiscal year. And our recurring revenue from backlog
will become more predictable.”
 
 
 
REASON #2 - SEACHANGE’S SALES TEAM HAS BEEN TURNED OVER WITH
INDUSTRY VETERANS, ALL OF WHOM WORKED FOR ALONI AT ATEME, HIS
PREDECESSOR COMPANY:
#2: Seachange’s sales team has been completely turned over with winning salesmen with deep
industry contacts, each of whom worked with Aloni at Ateme, his predecessor company,
together. Using LinkedIn, I found five of these sales guys.
 
While there is no guarantee of success, we find it extremely encouraging that most of the big
sales guys from Ateme jumped ship to join Aloni at Seachange. Nonetheless, this should not be
too surprising, as there is a very big opportunity to double the size of Seachange the next 3-4
years, from $75M in revenues to $150M, which would equate to a 30% market share for the
company.
 
Considering how the company can now integrate and deliver an end-to-end Framework solution
from agreement to production in less than 90 days, the velocity of wins for Seachange is poised
to accelerate in the coming quarters as the new sales team executes on its entrenched customer
base.
 
Throughout my call with Aloni, there was one consistent message: the company’s visibility is
improving weekly due to these new sales adds, with a # of “significantly higher ASP deals”
either on the goal-line or already having been closed.
 
This echoes the confidence exhibited when Aloni presented earlier September at the Liolios
Gateway Conference.
Among the more notable quotes from his presentation, the following stood out:
“We believe we are going to do well because we address the three pain points are customers are
facing.” (More on this in the next section).
“Today when we go to market, we are in a position today, when we go and compete for business,
we have the best solution in the market, because the investment in the product was like nothing
nobody invested. Having the best solution in the market today will allow us to meet our revenue
targets for the year.”
“We will continue to reduce our OPEX. We have taken some actions to date. We will take more
actions and plan on exceeding our OPEX costs.”
“We have communicated that we would win 20-25 significant deals ($2.5M-$3M) this fiscal
year. We may do a bit more.”
“We are in process of finalizing a decent # of new agreements. This a very decent # and will
take us closer to our target for this fiscal year.”
 
 
To me, when I hear a CEO confidently state these words only one week after taking the reins as
CEO, it seems very likely that not only is the current quarter going to be another strong quarter
of bookings, it could very well be a blow out quarter of bookings, one which dwarfs what the
company did last quarter.
If I am right, a pre-announcement in early November could be in the cards and become an
unexpected catalyst for the stock.
 
REASON #3 - SEACHANGE HAS THE BEST SOLUTION ON THE MARKET:
Because the Framework solution is the only solution in the market that is an end-to-end solution
capable of running both on the cloud and on-premises, Seachange has developed the best
solution on the market.
 
This should not be too surprising when you review the entrenched customer base (note again the
Tier 1 customer base highlighted), note how industry sales veterans quickly flocked to
Seachange once Aloni came on-board, and how the company has invested $250M-$300M of
R&D into its technology stack the past ten years.
 
As for the three pain points customers are facing and how Seachange addresses them, note
highlights in below slide:
 
 
 
 REASON #4 - AS THE COMPANY’S BACKLOG GROWS, RESULTS WILL BECOME
MORE CONSISTENT & PREDICTABLE, LEADING TO A HIGHER SOFTWARE
MULTIPLE FOR THE STOCK IN THE COMING QUARTERS:
Whenever the company executes a Framework deal, ~65% of the attached revenues are
immediately recognized, with the remaining amounts placed into the company’s backlog and
ratably recognized over the next 3-5 years. As more Framework deals get closed, the company’s
backlog will grow considerably, providing both the company and investors a predictable revenue
stream easy to model out. Note how strongly backlog has already grown the past two quarters
and is up 100% y-o-y after Q2:
 
 
 
While I do not expect this growing backlog and more predictable, recurring software mix to
translate into a 10X SAAS Price-to-Sales multiple, eventually, it should allow SEAC’s Price-to-
Sale multiple to expand strongly.
 
 
A re-rating to 2x-3x on forward #’s seems highly likely.
Using the mid-point, or a 2.5X multiple on $92M in Fiscal 2021 sales, gets us to a $230M
market cap. Add in the $20M in cash and we get to a $250M cap, or $6.25.
 
 
REASON #5 - SEACHANGE IS POISED TO DELIVER NOTABLE OPERATING
LEVERAGE IN ITS MODEL:
With software revenues carrying 70%-75% gross margins (much higher-than-average corporate
gross margins) becoming a bigger part of the mix, as Seachange’s new management team
continues to take additional costs out of the business, the company is poised to demonstrate its
inherent leverage in its operating model. First, regarding costs, note how the company’s
operating expenses were 21% lower last quarter, even as revenues jumped dramatically higher y-
o-y.
Because the company is still servicing lower margin revenue commitments, it will take another
quarter or so before we see its break-out quarter manifest itself. The key point is this: as these
software revenues become a bigger part of the mix, a $.12-$.14 quarter is forthcoming and can
be easily modeled at $22.5$23.5M in quarterly revenues. In this regard, note Dougherty’s model
for next year and how the company could earn $.35 on $80M in revenues: