Shareholder Puts SeaChange's Feet to the Fire
One of SeaChange International Inc. (Nasdaq: SEAC)'s largest investors is urging the board to separate the functions of chairman and CEO Bill Styslinger and to bring on a special, independent committee tasked with evaluating the financial and strategic objectives of the company.
Ramius Value and Opportunity Advisors LLC, which holds 8.9 percent of SeaChange's outstanding shares, is particularly upset about SeaChange's financial performance, its decision to retain its "non-core" servers and storage business, and, more generally, its "continued failure to follow through on commitments to shareholders."
Ramius expressed that view in a scathing letter to the SeaChange board today that calls on the board to re-evaluate its position on the server unit and to immediately hire a "nationally-recognized investment bank to explore all strategic options."
"The Board must act independently of management. To that end, we encourage the Board to immediately separate the Chairman and CEO responsibilities, an action that is in line with good corporate governance practices and one that we believe would ensure the true independence of the Board," Ramius managing director Peter Feld said in the letter.
SeaChange issued a statement late today acknowledging its receipt of the letter. “The Board of Directors welcomes open dialogue and feedback from our shareholders and will carefully consider the matters raised by Ramius," Styslinger said, in a statement.
Server business: No sale
SeaChange revealed earlier this month that it hired The Blackstone Group to help sell its server and storage business, but claimed the offers it did receive weren't sweet enough to pull the trigger.
SeaChange is instead moving ahead with a reorganization that will significantly reduce its investment in servers and streaming gear, a move that it believes will limit its hardware exposure with top-tier carriers.
SeaChange, in connection with its second-quarter results on Sept. 2, acknowledged it had been mulling several "strategic options for the server business, including the evaluation of a potential sale or merging of the business" over the past few quarters. It claims to have received "several offers," but found that none offered fair value.
SeaChange said its sees weakening demand for streaming systems in the coming periods and will "greatly reduce the operational investment in the server business unit." In the second quarter, the hardware segment pulled in $10.3 million revenues, down by $1.5 million versus the year-ago quarter due in part to lower VoD server shipments to North American and Latin America. That unit generated just $6.8 million of revenues in the previous quarter.
"Our conclusion... is to essentially resize it," Styslinger said of the company's near-term strategic plans for the server business during the second-quarter earnings call. "And then we might have some other ideas what we might do with it in the future that I think will be attractive to our investors."
SeaChange hasn't indicated how much it expects to trim its investment in hardware or how that move might affect its employment base, but it has already factored its restructuring into its revenue forecast for fiscal year 2011, which now stands in the range of $215 million to $220 million.
With SeaChange trimming its emphasis on video hardware, "we anticipate SeaChange to pursue an OEM agreement in an effort to further penetrate the tier 2 and 3 markets with turn-key VoD systems, while diminishing its hardware exposure to tier 1 service providers," Avondale Partners LLC speculated in a recent research note, adding that the vendor's recent server and storage business troubles has been largely highlighted by share loss to Cisco Systems Inc. (Nasdaq: CSCO) and Concurrent Computer Corp. (Nasdaq: CCUR). Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Virgin Media Inc. (Nasdaq: VMED) were SeaChange's largest customers in the quarter.
Under the new plan of attack, SeaChange plans to focus squarely on the software end of its business, which includes the Axiom VoD back-office platform and set-top software, a portfolio that's been bolstered recently by acquisition of eventIS Group and VividLogic. SeaChange's ad insertion business is also part of the software group. (See SeaChange Snags VividLogic for $12M and SeaChange Goes Dutch for VoD Smarts.)
SeaChange has been signaling its transition into software for several quarters, marked recently by its decision to sell off its stake in edge QAM and cable modem termination system (CMTS) startup Casa Systems Inc. . That strategy resulted in some layoffs earlier this year. (See SeaChange Sheds Stake in Casa Systems and SeaChange Softens Up, Cuts Staff.)
Even if SeaChange were to completely exit the server business, there isn't a shortage of suppliers who can step in to fill the void with cable operators, or offer SeaChange an OEM server path. Arris Group Inc. (Nasdaq: ARRS), a SeaChange rival, has already hooked up with Verivue Inc. , but some other possible candidates include Concurrent, Harmonic Inc. (Nasdaq: HLIT), Cisco, Edgeware AB , and Motorola Inc. (NYSE: MOT).
Cox Communications Inc. , by the way, is already standardizing its VoD platform on SeaChange's back-office and Concurrent servers. (See Cox VOD Effort Matches Vendor Rivals .)
— Jeff Baumgartner, Site Editor, Light Reading Cable