SeaChange Reports Mixed Q4 - Broadcasting & Cable

SeaChange Reports Mixed Q4

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Video-on-demand vendor SeaChange International achieved record revenues for its fiscal fourth quarter ended January 31, 2007, but still posted a net loss, raising questions over its strategic shift from selling hardware systems to software-based products.

The Acton, Ma.-based company had Q4 revenues of $40.1 million, a 21% increase compared to total revenues of $33.2 million for the fourth quarter of fiscal 2006, but posted a net loss of $3.7 million, or $0.13 per share, compared with a net loss of $3.1 million, or $0.11 per share, for the same period last year. In explaining the loss, SeaChange said that $2 million of VOD-related revenue was deferred as of January 31, 2007, to reflect the bundling of 12-month software subscription services with five system orders.

For the fiscal year 2007 ended January 31, 2007, SeaChange also reported record revenues of $161.3 million, a 28% increase from total revenues of $126.3 million in the prior fiscal year. The net loss for fiscal 2007 was $8.2 million, or $0.28 per share, compared with a net loss of $12.3 million, or $0.44 per share, for fiscal 2006. SeaChange said it ended the fourth quarter of fiscal 2007 with cash, cash equivalents and marketable securities of $55.3 million and no debt, compared to $55.0 million and no debt at the end of the third quarter.

Analyst Brian Coyne of investment bank Friedman Billings Ramsey expressed concerns over a decrease in SeaChange's gross margin, and said the deferred VOD revenue could be a sign of future volatility in SeaChange's earnings as it changes its business model from selling hardware-based VOD and ad insertion systems to more software-based products, such as the VOD software it is developing for Comcast, its largest customer.

"We view the revenue deferral as part of the business risk associated with SeaChange's move toward a software-oriented focus, and away from an integrated hardware/software model that usually allows revenue recognition upon physical installation of the platform," said Coyne in a research note. While Coyne said such a revenue deferral might not happen in the first quarter and that new deployments should grow for SeaChange, he expects to see "more revenue and margin pressure on core VOD as the company splits hardware and software sales from each other, and as it amortizes higher-margin software sales over multiple future quarters."

Nonetheless, Coyne didn't change his "Market Perform" rating and $8 target for SeaChange stock, which closed at $9.60 on Tuesday before SeaChange released its earnings. After Wednesday morning trading, SeaChange stock was down some 17% to $7.90.

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