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Can SeaChange Mop Up Its Mess?

Jeff Baumgartner
4/19/2019
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SeaChange's business is still shrinking. The company has endured multiple reorganizations in recent years. Its CEO abruptly departed in February amid a dispute with a large SeaChange shareholder, adding to the turmoil that has consumed the multiscreen video software specialist.

But, against this backdrop of woe, the road ahead looks smooth, paved with an influx of new deals and customers, and a fresh product roadmap that will position SeaChange for a bright future, according to the people who are now in charge.

Before we look out on that horizon, here's a look at the rough patch just traveled.

CEO resigns over proposed deal with large shareholder
SeaChange CEO Edward Terino abruptly resigned on February 24, citing in a letter to SeaChange chairman William Markey "great frustration" and his lack of support for a then-proposed cooperation agreement with Karen Singer and TAR Holdings, which, as of early March, owned about 20% of SeaChange's outstanding shares. The agreement included an expansion of the board and representation by TAR Holdings.

The month before, TAR Holdings expressed disappointment with SeaChange's financial results and a stock price that had fallen by almost 50% in the past six months, arguing that the poor performance "may be a result of mismanagement." The filing also suggested that SeaChange should consider "strategic and operational alternatives" that could include a sale of assets. If SeaChange failed to act, TAR Holdings threatened to seek representation on the board.

Terino, named CEO of SeaChange in April 2016, argued that the cooperation agreement is not in the best interest of all shareholders, and that the proposed deal "has not been vetted with other major shareholders." Additionally, he claimed that the agreement with Singer and TAR Holdings did not fully take into consideration the board-related requests of another longer-term shareholder, Neuberger Berman, and that the SeaChange board had not interviewed any of Berman's nominees, yet multiple nominees recommended by Singer/TAR Holdings did get interviews.

"Based on my experience with other activist campaigns and personal involvement with several Cooperation Agreements, I do not support the number of Board seats being proposed to Karen Singer and TAR Holdings LLC," Terino wrote, adding that increasing board fees "is not a good use of company resources given the size of the current Board compared to its peers."

He also argued that the proposed deal didn't provide a plan from Singer and TAR Holdings to boost shareholder value, but is instead "designed to protect the current SeaChange Board from disparagement" and position Singer and TAR Holdings to gain more control of the SeaChange board in 2020.

SeaChange said its board said it "strongly rejects" Terino's assertions while also holding that it thoroughly vetted multiple qualified director candidates.

SeaChange entered into that agreement with Singer and TAR Holdings on February 28, agreeing to set the board size to eight members and appoint Robert Pons, president and CEO of Spartan Advisors, as a Class II director, and Jeffrey Tuder, a managing member of Tremson Capital Management, as a Class III director.

What's the path forward?
Though TAR Holdings has suggested that SeaChange ought to look at strategic alternatives for the company, SeaChange has not signaled any specific intentions to try to sell the company or its assets. However, the company has been kicking the tires on M&A in recent years, with TiVo among those that had given it a look long before TiVo began to pursue its own strategic alternatives.

Meanwhile, SeaChange is still struggling financially, posting fiscal Q4 revenues of $17 million and a GAAP loss of $19.9 million, or 56 cents per share, that included an impairment charge of $17 million. That compared to year-ago revenues of $22.9 million and GAAP income of $1.2 million, or 4 cents.

"Fiscal 2019 was an extremely challenging year for the company," SeaChange executive chairman Mark Bonney said, attributing it to a mélange of "sales pipeline deficiencies, an ineffective go-to-market strategy and a lengthening of the sales cycle."

Following cost and headcount reductions announced last fall, SeaChange is confident that it will return to revenue growth in fiscal 2020, and reach operating profitability and positive cash flow in the second half of that period, Peter Faubert, SeaChange's CFO, said on last week's earnings call.

SeaChange has also revised its product roadmap, having completed the cloud transition of its Adrenalin multiscreen video backoffice platform, and recently added client app support for the Android TV Operator Tier, noted Marek Kielczewski, SeaChange's CTO.

SeaChange is also in the process of integrating its recent $5.5 million acquisition of Xstream, a Poland-based provider of managed OTT video services that serves about 5 million subs globally and has been generating roughly $6 million in annual revenues.

Looking ahead, Bonney said SeaChange, which counts Liberty Global and Rogers Communications among its top customers, intends to close 20 to 25 "significant deals" during the new fiscal year, and to boost total annual revenues to $70 million to $80 million, anticipating stronger sales in the second half of the period.

Yossi Aloni, SeaChange's SVP and chief commercial officer, said the anticipated new deals are a "very doable number" as traditional operators look to change and improve their workflows alongside the expected influx of new direct-to-consumer video offerings coming on the scene not just in North America, but in Europe and Latin America as well.

"It's something that we have not seen in our domain probably ever since the launch of cable TV in America," Aloni said of the DTC opportunities emerging outside the North American region.

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— Jeff Baumgartner, Senior Editor, Light Reading

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