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 $233.7 million; its shares were traded at around $7.59 with a P/E ratio of 30.4 and P/S ratio of 1.2.
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 decreased from $7.3 million, or 14% of total revenues, in the three months ended July 31, 2008, to $6.3 million, or 13% of total revenues, in the three months ended July 31, 2009. This decrease is primarily due to lower travel expenses of $300,000, lower marketing-related expenses of $200,000 and lower third party commissions of $300,000.
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 July 31, 2009, general and administrative expenses increased to $5.2 million, or 11% of total revenues, from $4.8 million, or 9% of total revenues, in the three months ended July 31, 2008. The increase was primarily due to $500,000 of transaction expenses related to the acquisition of eventIS Group B.V. As a result of the adoption of SFAS 141(R), the Company is now required to expense acquisition-related costs in its general and administrative expenses whereas prior to the adoption of SFAS 141(R), such costs were capitalized as part of the purchase price allocated to assets and liabilities acquired.
Amortization of Intangible Assets. Amortization expense consists of the amortization of acquired intangible assets which are operating expenses and not considered costs of revenues. In the three months ended July 31, 2009 and 2008, amortization expense was $794,000 and $397,000, respectively. The increase was due to the amortization of the intangible assets in connection with the acquisition of Mobix Interactive on November 18, 2008. An additional $30,000 and $47,000 of amortization expense related to acquired technology was charged to cost of sales for the three months ended July 31, 2009 and 2008, respectively. In the future, SeaChange expects to have a higher amortization expense as a result of the recent acquisitions of Mobix on November 19, 2008 and eventIS on September 1, 2009. The Company expects to complete valuations for Mobix and eventIS during the second half of fiscal 2010.
Interest and Other Income, net. Interest and other income, net was $149,000 in the three months ended July 31, 2009, compared to $678,000 in the three months ended July 31, 2008. The decrease in interest and other income, net is primarily due to a $400,000 decrease in interest income resulting from lower investment yields and $159,000 of 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 in Earnings of Affiliates. Equity loss in earnings of affiliates was $47,000 in the three months ended July 31, 2009 in comparison to equity loss in earnings of affiliates of $114,000 in the three months ended July 31, 2008. For the three months ended July 31, 2009 and 2008, $192,000 and $776,000, respectively, of equity loss was recognized from On Demand Deutschland, net of $155,000 and $662,000, respectively, in accreted gains related to customer contracts and content licensing agreements and a capital distribution related to reimbursement of previously incurred costs.
Income Tax Provision and Benefit. For the three months ended July 31, 2009, we recorded an income tax benefit of $12,000 on a loss before tax of $341,000 resulting in an effective tax rate of (3%). The income tax provision was attributable to the reduction of our deferred tax liabilities related to the Mobix intangibles, offset by our tax expense on foreign source income which are taxed at lower rates than in the U.S.. For the three months ended July 31, 2008, we recorded an income tax provision of $208,000 on income before taxes of $1.8 million, resulting in an effective tax rate of 12%.
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