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SEAC > SEC Filings for SEAC > Form 10-Q on 6-Dec-2013All Recent SEC Filings

Show all filings for SEACHANGE INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SEACHANGE INTERNATIONAL INC


6-Dec-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Form 10-Q. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. "Risk Factors" in our Form 10-K for our fiscal year ended January 31, 2013 and elsewhere in this Form 10-Q. These factors may cause our actual results to differ materially from any forward-looking statement. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, and management's beliefs and assumptions. We undertake no obligation to update or revise the statements in light of future developments. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expect," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "project," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict.

Business Overview

We are a global leader in the development and delivery of multi-screen video and we are headquartered in Acton, Massachusetts. Our products and services facilitate the management and distribution of video, television programming, and advertising content for cable system operators, telecommunications companies and mobile operators. We currently operate under one reporting segment.

We continue to work towards growing our revenues with new and existing customers as we roll out our new next generation product offerings to offset some of the decline in some of our legacy business. We also continue to control our overall cost structure. Our focus for the remainder of fiscal 2014 continues to be:

seeking out new customer opportunities for our product and service offerings while upgrading our existing installed customer base to our next generation product offerings;

expanding to new and adjacent markets such as mobile and internet protocol television ("IPTV") operators;

increasing our selling efforts into new geographical areas;

reviewing our cost structure and making adjustments as needed;

seeking new technologies through acquisition or direct investment;

driving incremental revenues through channel partnerships; and

expanding our systems integration capabilities and increasing our deal size.

We have experienced fluctuations in our revenues from quarter to quarter due to:

the budgetary approvals from the customer for capital purchases;

the ability to process the purchase order within the customer's organization in a timely manner;

the availability of the product;

the time required to deliver and install the product; and

the customer's acceptance of the products and services.

In addition, many customers may delay or reduce capital expenditures. This, together with other factors, could result in reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable, excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies and increased price competition.

Our operating results are significantly influenced by a number of factors, including the mix of products sold and services provided, pricing, costs of materials used in our products, and the expansion of our operations during the fiscal year. We price our products and services based upon our costs and consideration of the prices of competitive products and services in the marketplace. We expect our financial results to vary from quarter to quarter and our historical financial results are not necessarily indicative of future performance. In light of the higher proportion of our international business, we expect movements in foreign exchange rates to have a greater impact on our financial condition and results of operations in the future.


Table of Contents

Results of Operations

The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.

Revenues

The following table summarizes information about our revenues for the three and
nine months ended October 31, 2013 and 2012:



                                       Three Months Ended          Increase/        Increase/           Nine Months Ended           Increase/        Increase/
                                           October 31,            (Decrease)       (Decrease)              October 31,             (Decrease)       (Decrease)
                                       2013           2012         $ Amount         % Change           2013           2012          $ Amount         % Change
                                                                         (Amounts in thousands, except for percentage data)
Software Revenues:
Products                             $  13,822      $ 15,213      $    (1,391 )           (9.1 %)    $  44,809      $  40,681      $     4,128             10.1 %
Services                                23,949        24,036              (87 )           (0.4 %)       65,894         71,932           (6,038 )           (8.4 %)

Total revenues                          37,771        39,249           (1,478 )           (3.8 %)      110,703        112,613           (1,910 )           (1.7 %)

Cost of product revenues                 3,591         5,974           (2,383 )          (39.9 %)        8,792         15,157           (6,365 )          (42.0 %)
Cost of service revenues                13,292        13,472             (180 )           (1.3 %)       40,577         38,659            1,918              5.0 %
Inventory write down                        -             -                -               N/A              -           1,752           (1,752 )         (100.0 %)

Total cost of revenues                  16,883        19,446           (2,563 )          (13.2 %)       49,369         55,568           (6,199 )          (11.2 %)

Gross profit                         $  20,888      $ 19,803      $     1,085              5.5 %     $  61,334      $  57,045      $     4,289              7.5 %

Gross product profit margin               74.0 %        60.7 %                            13.3 %          80.4 %         62.7 %                            17.7 %
Gross service profit margin               44.5 %        44.0 %                             0.5 %          38.4 %         46.3 %                            (7.9 %)
Gross profit margin                       55.3 %        50.5 %                             4.8 %          55.4 %         50.7 %                             4.7 %

Product Revenue. Product revenue decreased $1.4 million, or 9%, for the three month period and increased $4.1 million, or 10%, for the nine months period ended October 31, 2013.

The $1.4 million decrease for the three month period was primarily due to:

a $3.0 million decrease in advertising license revenues as the third quarter of last fiscal year included a large order from a North American customer and a $1.3 million decrease due to lower video-on-demand ("VOD") server shipments; offset by

$1.2 million in higher legacy middleware product revenues resulting from the signing of an amendment with a European customer during the third quarter of fiscal 2013 which allows revenue to be recognized over the term of the amendment, and a $1.4 million increase in back office license revenue due primarily to significant deployment of Adrenalin to a large North American customer.

The $4.1 million increase for the nine month period was primarily due to:

$9.4 million in higher legacy middleware product revenues resulting from the signing of an amendment with a European customer during the third quarter of fiscal 2013, which resulted in a higher portion of revenue recognized as product revenue in the first nine months of fiscal 2014 as compared to the same period of fiscal 2013, and a $4.9 million increase in back office license revenue, primarily in North America; offset by

a $5.8 million decrease in advertising license revenue by North American customers and a $4.9 million decrease in VOD server revenues as compared to the same period of prior fiscal year, as we had higher VOD server shipments to North American customers during the first nine months of the prior fiscal year.

Service Revenue. Service revenue for the three and nine months ended October 31, 2013 decreased $0.1 million and $6.0 million, respectively, as compared to the same periods of fiscal 2013.

The $6.0 million decrease during the nine month period was primarily due to:

a $5.2 million decrease in the first three quarters of fiscal 2014 in our in-home service revenues, primarily our legacy middleware service revenues, as a result of a recent amendment with a European customer, as mentioned above and a $0.9 million decrease in professional service revenue resulting from lower advertising shipments.


Table of Contents

For the third quarter of fiscal 2014 and fiscal 2013, four customers accounted for 45% and 52% of our total revenues, respectively. For the first nine months of fiscal 2014 and fiscal 2013 these same four customers accounted for 53% and 50% of our total revenues, respectively. We believe that a significant amount of our revenues will continue to be derived from a limited number of customers.

International sales accounted for 51% and 43% of total revenues in the third quarter of fiscal 2014 and fiscal 2013, respectively. For the nine months ended October 31, 2013 and 2012, international sales accounted for 51% and 40%, respectively. We believe that international product and service revenues will continue to be a significant portion of our business in the future.

Gross Profit and Margin. Cost of product revenues consists primarily of the cost of purchased material components and subassemblies, labor and overhead relating to the final assembly and testing of complete systems and related expenses, and labor and overhead costs related to software development contracts. Our gross profit margin increased approximately five percentage points for the three months ended October 31, 2013 and approximately three percentage points for the nine months ended October 31, 2013, net of the inventory write-down recorded during the second quarter of fiscal 2013, as compared to the same periods of the prior year. These increases in gross profit margin were primarily due to the following:

A 13 percentage point increase in gross product profit margin to 74% for the three months ended October 31, 2013 and a 18 percentage point increase in gross product profit margin to 80% for the first nine months of fiscal 2014, primarily due to a mix of higher software licensing revenues from our back office product line, and higher legacy middleware license revenue from a European customer, which ended during the third quarter of fiscal 2014; and

A half of a percentage point increase in gross service profit margin to 45% for the third quarter of fiscal 2014 and a 8 percentage point decrease in gross service profit margin to 38% for the first three quarters of fiscal 2014, compared to the same periods of fiscal 2013, primarily due to the mix of higher customized development revenues which typically carry lower margins due to higher costs of research and development personnel.

Operating Expenses

Research and Development

The following table provides information regarding the change in research and
development expenses during the periods presented:



                                        Three Months Ended          Increase/       Increase/         Nine Months Ended          Increase/       Increase/
                                            October 31,            (Decrease)      (Decrease)            October 31,            (Decrease)      (Decrease)
                                         2013          2012         $ Amount        % Change          2013          2012         $ Amount        % Change
                                                                       (Amounts in thousands, except for percentage data)
Research and development expenses     $   10,212      $ 9,202      $     1,010            11.0 %    $ 30,007      $ 28,449      $     1,558             5.5 %
% of total revenue                          27.0 %       23.4 %                                         27.1 %        25.3 %

Research and development expenses consist primarily of employee costs, which include salaries, benefits and related payroll taxes, depreciation of development and test equipment and an allocation of related facility expenses. During the three and nine months ended October 31, 2013, our total research and development expenses increased $1.0 million, or 11%, for the three month period and $1.6 million, or 6%, for the nine month period ended October 31, 2013, as compared to the same prior fiscal year periods, due primarily to an increase in outside contract labor costs. We will continue to focus our investment in research and development on our next generation product offerings which will continue to be introduced until late next fiscal year.

Selling and Marketing

The following table provides information regarding the change in selling and
marketing expenses during the periods presented:



                                      Three Months Ended           Increase/        Increase/           Nine Months Ended           Increase/         Increase/
                                         October 31,              (Decrease)       (Decrease)              October 31,             (Decrease)        (Decrease)
                                     2013            2012          $ Amount         % Change           2013           2012          $ Amount          % Change
                                                                        (Amounts in thousands, except for percentage data)
Selling and marketing expenses     $   3,948        $ 3,859       $        89              2.3 %     $ 11,283       $ 11,860       $      (577 )            (4.9 %)
% of total revenue                      10.5 %          9.8 %                                            10.2 %         10.5 %


Table of Contents

Selling and marketing expenses consist primarily of payroll costs, which include salaries and related payroll taxes, benefits and commissions, travel expenses and certain promotional expenses. Selling and marketing expenses decreased $0.6 million, or 5%, in the first nine months of fiscal 2014, when compared to the same period of fiscal 2013 due to a reduction in headcount that occurred during the second half of fiscal 2013 with a corresponding reduction in travel and commissions expenses relating to these former employees.

General and Administrative

The following table provides information regarding the change in general and
administrative expenses during the periods presented:



                                          Three Months Ended           Increase/         Increase/            Nine Months Ended           Increase/         Increase/
                                             October 31,              (Decrease)        (Decrease)               October 31,             (Decrease)        (Decrease)
                                         2013            2012          $ Amount          % Change            2013           2012          $ Amount          % Change
                                                                             (Amounts in thousands, except for percentage data)
General and administrative expenses    $   4,184        $ 4,295       $      (111 )            (2.6 %)     $ 13,664       $ 13,745       $       (81 )            (0.6 %)
% of total revenue                          11.1 %         10.9 %                                              12.3 %         12.2 %

General and administrative expenses consist primarily of employee costs, which include salaries and related payroll taxes and benefit-related costs, legal and accounting services and an allocation of related facilities expenses. General and administrative expenses remained relatively stable during the three and nine months ended October 31, 2013, as compared to the same periods of fiscal 2013.

Amortization of Intangible Assets

The following table provides information regarding the change in amortization of
intangible assets expenses during the periods presented:



                                        Three Months Ended           Increase/         Increase/            Nine Months Ended           Increase/         Increase/
                                           October 31,              (Decrease)        (Decrease)               October 31,             (Decrease)        (Decrease)
                                       2013            2012          $ Amount          % Change            2013           2012          $ Amount          % Change
                                                                           (Amounts in thousands, except for percentage data)
Amortization of intangible assets    $   1,162        $ 1,489       $      (327 )           (22.0 %)     $   3,459       $ 4,439       $      (980 )           (22.1 %)
% of total revenue                         3.1 %          3.8 %                                                3.1 %         3.9 %

Amortization expense is primarily related to the costs of acquired intangible assets. Amortization is also based on the future economic value of the related intangible assets which is generally higher in the earlier years of the assets' lives. During the three and nine months ended October 31, 2013, we incurred amortization expenses of $0.3 million and $0.9 million, respectively, which were charged to cost of sales. This is compared to $0.5 million and $1.5 million for the same prior periods. Additionally, for these same periods of fiscal 2014, we recorded amortization expense of $0.8 million and $2.5 million, respectively, in operating expenses, compared to $1.0 million and $2.9 million for the same periods of fiscal 2013. The decreased amortization costs are primarily due to intangible assets which were fully amortized during fiscal 2013 and to a decrease in estimated cash flow which resulted in a lower amortization calculation for certain intangible assets in fiscal 2014.

Stock-based Compensation Expense

The following table provides information regarding the change in stock-based
compensation expense during the periods presented:



                                       Three Months Ended           Increase/         Increase/            Nine Months Ended           Increase/         Increase/
                                           October 31,             (Decrease)        (Decrease)               October 31,             (Decrease)        (Decrease)
                                       2013           2012          $ Amount          % Change            2013           2012          $ Amount          % Change
                                                                           (Amounts in thousands, except for percentage data)
Stock-based compensation expense     $    655        $ 1,432       $      (777 )           (54.3 %)     $   2,425       $ 4,464       $    (2,039 )           (45.7 %)
% of total revenue                        1.7 %          3.6 %                                                2.2 %         4.0 %


Table of Contents

Stock-based compensation expense is related to the issuance of stock grants to our employees, executives and members of our Board of Directors. Stock-based compensation expense decreased $0.8 million during the three months and $2.0 million during the nine months ended October 31, 2013, as compared to the same periods of fiscal 2013 primarily due to the change in the derived service period related to the 875,000 stock options awarded to our CEO was accelerated in the prior fiscal year, as discussed in Note 1, "Nature of Business and Basis of Presentation - Basis of Presentation," to these consolidated financial statements.

Earn-outs and Change in Fair Value of Earn-outs

The following table provides information regarding the change in earn-outs and
change in fair value of earn-outs during the periods presented:



                                       Three Months Ended           Increase/         Increase/            Nine Months Ended           Increase/         Increase/
                                          October 31,              (Decrease)        (Decrease)               October 31,             (Decrease)        (Decrease)
                                      2013             2012         $ Amount          % Change            2013           2012          $ Amount          % Change
                                                                          (Amounts in thousands, except for percentage data)
Earn-outs and change in fair

value of earn-outs $ (94 ) $ 64 $ (158 ) >(100 %) $ (60 ) $ 1,667 $ (1,727 ) >(100 %) % of total revenue (0.2 %) 0.2 % (0.1 %) 1.5 %

Earn-out costs include changes in the fair value of acquisition-related contingent consideration, and changes in contingent liabilities related to estimated earn-out payments. Earn-out costs decreased $0.2 million for the three month period and $1.7 million for the nine month period ended October 31, 2013, as compared to the same periods of prior fiscal year. During the third quarter of fiscal 2014 we paid the remaining earn-out to the former shareholders of eventIS Group B.V ("eventIS"). The decrease during the nine months was primarily due to the settlement of the earn-out payments to the former shareholders of VividLogic, Inc. ("VividLogic").

Professional Fees - Acquisitions, Divestitures, Litigation, and Strategic
Alternatives

The following table provides information regarding the change in professional
fees expenses associated with acquisitions, divestitures, litigation and
strategic alternatives during the periods presented:



                                         Three Months Ended           Increase/        Increase/           Nine Months Ended           Increase/        Increase/
                                             October 31,             (Decrease)       (Decrease)              October 31,             (Decrease)       (Decrease)
                                         2013            2012         $ Amount         % Change           2013           2012          $ Amount         % Change
                                                                           (Amounts in thousands, except for percentage data)
Professional fees: acquisitions,
divestitures, litigation and
strategic alternatives                 $    603         $   26       $       577             >100 %     $   1,524       $ 1,445       $        79              5.5 %
% of total revenue                          1.6 %          0.1 %                                              1.4 %         1.3 %

Professional fees in the third quarter increased $0.6 million when compared to the third quarter of fiscal 2013 as a result of an increase in fees related to the ARRIS litigation.

Severance and Other Restructuring Costs

The following table provides information regarding the change in severance and
other restructuring costs during the periods presented:



                                            Three Months Ended          Increase/        Increase/          Nine Months Ended          Increase/        Increase/
                                                October 31,            (Decrease)       (Decrease)             October 31,            (Decrease)       (Decrease)
                                            2013           2012         $ Amount         % Change          2013           2012         $ Amount         % Change
                                                                             (Amounts in thousands, except for percentage data)
Severance and other restructuring costs   $     76        $ 1,476      $    (1,400 )          (94.9 %)    $   922        $ 2,918      $    (1,996 )          (68.4 %)
% of total revenue                             0.2 %          3.8 %                                           0.8 %          2.6 %


Table of Contents

Severance and other restructuring costs decreased $1.4 million for the three months ended October 31, 2013 and $2.0 million for the nine months ended October 31, 2013, as compared to the same periods of 2012. During the third quarter of fiscal 2013, we incurred $1.3 million of severance charges related to the departure of nine employees, including two senior executives and a $0.2 million charge to reduce the value of our building in New Hampshire. This is compared to severance charges of $0.1 million in the third quarter of fiscal 2014 related to one former employee.

For the nine months ended October 31, 2013, we incurred severance charges of $0.9 million related to the separation of 20 employees during fiscal 2014. This is compared to $1.7 million in severance charges related to the reduction of 30 employees during fiscal 2013, including two senior executives. In addition, we recorded charges in fiscal 2013 for which there are no comparable amounts in fiscal 2014. These include a $0.9 million leasehold improvement charge recorded in July, 2012 for the reduction of space and certain fixed assets in our leased facility as we significantly reduced the size of the facility in the Philippines, a $0.2 million charge to reduce the value of our building in New Hampshire and a $0.2 million charge in the second quarter of fiscal 2013 for a sign-on bonus, relocation expenses and recruitment fees relating to the hiring and appointment of a permanent Chief Executive Officer on May 1, 2012.

Other (Expenses) Income, Net

The table below provides detail regarding our other (expenses) income, net:



                                       Three Months Ended           Increase/         Increase/            Nine Months Ended           Increase/         Increase/
                                           October 31,             (Decrease)        (Decrease)               October 31,             (Decrease)        (Decrease)
                                       2013            2012         $ Amount          % Change            2013            2012         $ Amount          % Change
. . .
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