What's Wrong With This Digital Video Expert Today?

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SeaChange International (Nasdaq: SEAC  ) charged into Wednesday night's earnings report on a full head of steam. Share prices had soared 15% over the last eight days as the company made a solid showing at the IBC conference and announced strong interest in SeaChange's ad insertion products.

But the anecdotal successes didn't immediately translate into great results. $0.04 of non-GAAP earnings in the second quarter was just half of what Wall Street analysts had expected, though the $36.7 million top line edged out analyst targets. What's worse, earnings guidance for the third quarter and full year came in far below the current consensus.

Moreover, it's not clear how SeaChange plans to reach even these disappointing targets. If the digital video management specialist hits the $0.05 midpoint of its third-quarter guidance, we'd still need to see a $0.18 haul per share in the fourth quarter to reach the full-year guidance midpoint. In other words, the bulk of SeaChange's profits would have to fall in the fourth quarter -- and that's not the typical seasonal pattern for this company.

Against this backdrop, it's not hard to see why the stock plunged as much as 9.3% on the news.

CEO Raghu Rau said that the quarter was largely spent on cost-cutting efforts. That trend is punctuated by system sales and license agreements with cable and telecom operators around the world. In the second quarter, SeaChange landed back-office contracts for video management and ad insertion systems with four European and two American cable systems.

The company's ad solutions were also selected by two of America's largest telecoms, including what SeaChange calls "a planned deployment for the largest video advertising insertion operation in the world." SeaChange doesn't like to drop names, and ad insertion systems are rarely discussed by giant telecom operators, so we're left guessing the identities of these cable and telecom giants. SeaChange counts both Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) among its largest American customers, so it's safe to say that SeaChange would be involved in back-end video upgrades for both the FiOS and U-Verse digital cable services.

SeaChange doesn't give us shareholders a ton of visibility into its operations, which paves the way for sudden jumps or plunges like Thursday's market action. But from a bird's-eye view, the long-term story remains intact: Video services are moving onto digital platforms faster than ever, and SeaChange is a leader in the niche that makes it all work on the service provider's end of the bargain.

For a more consumer-oriented play on digital video, you should consider online movie rental maven Netflix (Nasdaq: NFLX  ) . I own both stocks, and this premium report on Netflix will explain the appeal of the larger company. The report also includes a full year's worth of updated analysis, so you'll never be caught flat-footed by the next huge twist in the digital video industry.

Fool contributor Anders Bylund owns shares in Netflix and SeaChange, and has also created a bull call spread atop his Netflix shares. He holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple and Netflix. Motley Fool newsletter services have recommended buying shares of Netflix and Apple. Motley Fool newsletter services have recommended creating a bear put ladder position in Netflix and a bull call spread position in Apple. The Motley Fool has a disclosure policy.
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  • Report this Comment On September 07, 2012, at 3:01 PM, MrEnricoPalazzo wrote:

    SeaChange is an arbitrage play. Someone like Google or Apple want to get into the TV world. Tiny market cap and no debt. Bill, the old CEO gone and Starboard in there now. Sure the stock dropped 9%+ on earnings but it also ran up much more than that leading up to earnings. Volume has also been increasing. SEAC is getting noticed. I think you're missing the point.

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