SeaChange International (SEAC) Maintains Buy Rating

Analyst Todd Mitchell at Kaufman Bros. has released an update on SeaChange International (NASDAQ: SEAC). The company reported its fourth-quarter results on Thursday.

SeaChange reported a decline of 2% in revenue to $53 million in its fourth-quarter, which was about $1 million below expectations. Software revenue, which constitutes over 60% of the total, was up 9%. The company’s media service segment saw strong growth and a surge in profitability as it bought certain outsourced operations in-house. However, this was not enough to offset a 31% drop in Servers and sub-par gross margins. Gross margins dropped by 50 basis points in fourth-quarter to 50.9%. This, combined with higher operating expenses, resulted in non-GAAP EPS of $0.07, down from $0.18, a year earlier. Kaufman had forecast EPS of $0.12.

For fiscal 2010, SeaChange reported revenue of $202 million, which remained flat for the year. The company reported EPS of $0.25 in its fiscal year, down from $0.44. Kaufman had forecast EPS of $0.30 for fiscal 2010.

SeaChange’s top-line guidance for fiscal 2011 remains unchanged at $225-$235 million. The company expects revenue of $54-$55 million in its first-quarter of fiscal 2011. The company forecasts non-GAAP EPS of $0.06-$0.08 for the first-quarter. Results are expected to be stronger in the second half of fiscal 2011. The management at SeaChnage has scaled back its headcount, and is targeting improved operating leverage. Kaufman expects this to result in $6 million in annualized lower operating expenses beginning in second-quarter.

Kaufman has also updated its forecast for SeaChange. It now expects revenues of $228 million in fiscal 2011, down from previous forecast of $231 million. The non-GAAP EPS for fiscal 2011 has been lowered from $0.65 to $0.60.

According to Kaufman, SeaChange has a strategic position in an area where capital expenditure growth will far outpace overall spending. Kaufman expects the company’s hybrid software/services model to generate strong operating leverage.

Shares of SeaChange are likely to trade off after lower-than-expected results and a weak outlook for fiscal 2011, according to Kaufman. However, at below $8 per share, the company will be trading at a multiple of less than 1x revenues. Kaufman believes that below $8 per share, a large part of the company’s intrinsic value is not accounted for, and hence it has maintained Buy rating for the company.

Kaufman has set a price target of $8 for SeaChange stock, which is based on a multiple of 8.5x 2014 free cash flows, discounted to present value at 16.8%.