SeaChange International Inc. develops markets and supports products to manage store and distribute digital video for television operators broadcast and telecommunications companies. The company's products utilize its proprietary distributed application software and standard industry components to automate the management and distribution of short- andlong-form video streams including advertisements movies news updates and other video programming requiring precise accurate and continuous execution. SeaChange International Inc. has a market cap of $227.68 million; its shares were traded at around $6.79 with a P/E ratio of 31.13 and P/S ratio of 1.27.
Highlight of Business Operations:Selling and Marketing. Selling and marketing expenses consist primarily of compensation expenses, including sales commissions, travel expenses and certain promotional expenses. Selling and marketing expenses increased 24% from $5.5 million, or 11% of total revenues, in the three months ended October 31, 2007, to $6.8 million, or 13% of total revenues, in the three months ended October 31, 2008. This increase is due to increased staffing and related expense of $400,000, and higher commission expense of $600,000.
General and Administrative. General and administrative expenses consist primarily of the compensation of executive, finance, human resource and administrative personnel, legal and accounting services and an allocation of related facilities expenses. In the three months ended October 31, 2008, general and administrative expenses increased to $5.5 million, or 11% of total revenues, from $4.3 million, or 9% of total revenues, in the three months ended October 31, 2007. The increase was primarily due to higher legal fees of $400,000, higher bad debt expense of $200,000, and higher general and administrative expenses at ODG for $400,000 due to increased headcount.
Amortization of Intangible Assets. Amortization expense consists of the amortization of acquired intangible assets which are operating expenses and not considered costs of revenues. Amortization expense was $393,000 and $806,000 in the three months ended October 31, 2008 and 2007, respectively. The sale of the Companys equity investment in FilmFlex and the removal of the intangible assets related to FilmFlex contributed to the decrease in amortization expense. Amortization is also based on the future economic value of the related intangible assets which is generally higher in earlier years of the assets lives. An additional $47,000 and $122,000 of amortization expense related to acquired technology was charged to cost of sales for the three months ended October 31, 2008 and 2007, respectively.
Interest and Other Income, net. Interest and net other income, net was $45,000 in the three months ended October 31, 2008, compared to $440,000 in the three months ended October 31, 2007. The decrease in interest and other income, net includes a charge for currency losses of $434,000 due to translation losses at our various foreign subsidiaries (where the functional currency is the US Dollar) derived from fluctuations in exchange rates between the various currencies and the U.S dollar.
Equity (Loss) Income in Earnings of Affiliate, net of tax. Equity loss in earnings of affiliates was $179,000 and equity income of $293,000 in the three months ended October 31, 2008 and 2007, respectively. For the three months ended October 31, 2008, all of the equity loss of $179,000 was recognized from On Demand Deutschland. For the three months ended October 31, 2007, $431,000 of equity income was recognized from FilmFlex and $148,000 of equity loss was recognized from On Demand Deutschland.
Income Tax Provision. For the three months ended October 31, 2008, we recorded an income tax provision of $1.5 million on income before tax of $5.0 million resulting in an effective income tax provision rate of 29%. For the three months ended October 31, 2007, we recorded an income tax provision of $493,000 on a profit before taxes of $3.5 million resulting in an effective income tax provision rate of 14%. The income tax provision rate of 29% at October 31, 2008 was primarily attributable to revenue in our foreign subsidiaries which are at lower tax rates than in the U.S and U.S tax credits used to offset any U.S taxable income up to the Alternative Minimum Tax limit of 20%.
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