One of SeaChange International's largest shareholders, investment advisory firm Ramius, sent a letter to the company's board of directors expressing "disappointment and concern regarding the poor margin performance" in the core software business and called on the board to re-evaluate the decision to not sell the Servers and Storage business.
Ramius owns approximately 8.9% of SeaChange's outstanding shares.
"For too long senior management has failed to achieve its stated financial targets," Ramius managing director Peter Feld said in a statement. "It is [the board's] responsibility to ensure that senior management either makes good on its commitments to shareholders or is held accountable for its failures."
In a statement issued Tuesday after market close, SeaChange chairman and CEO Bill Styslinger said, "The board of directors welcomes open dialogue and feedback from our shareholders and will carefully consider the matters raised by Ramius. The board and management team are committed to undertaking actions with the shared goal of enhancing value for our shareholders, customers and employees."
In announcing second-quarter results on Sept. 3, SeaChange disclosed that it "has received several offers" for the Servers and Storage group but said "none are consistent with external analysis of the value of the business." The company did not identify who the potential buyers were.
SeaChange said it planned to restructure the declining Servers and Storage unit, citing "weakening demand for streaming systems in the coming quarters... As a result, SeaChange has decided to greatly reduce the operational investment in the server business unit."
Ramius recommended that the board re-evaluate that decision, estimating that the Servers and Storage business posted a pre-tax loss of $12 million over the last 12-month period.
"The proper choice is clear. The company should seek to sell this non-core, money-losing business as soon as possible and at the best possible price to a third party who can operate the business profitably and appropriately service SeaChange's existing customer base," Feld wrote in the letter sent to the board. "The sooner the Servers and Storage segment is sold, the sooner the Company can stem losses from this business and highlight the significantly higher value of the core Software business."
Meanwhile, SeaChange's Software segment operating margins were approximately 3% in the first quarter this year and less than 2% in the second quarter, whereas company management had been targeting 10% operating margin for the full year fiscal 2011. "Without substantial and immediate cost reductions, it appears the company will fall short of achieving its publicly-stated margin targets for the full year fiscal 2011," Feld said in the letter.
In the Sept. 3 earnings announcement, SeaChange said it "will work to partially offset the margin shortfall with lower than planned R&D expenses in order to optimize the operating margin this year."
Ramius also called on the board to "immediately separate the chairman and CEO responsibilities, an action that is in line with good corporate governance practices and one that we believe would ensure the true independence of the board."
In June, SeaChange reached an agreement with Ramius under which SeaChange increased the size of its board from six to eight members and appointed two new directors: Edward Terino, president of GET Advisory Services, a strategic and financial management consulting firm; and Raghu Rau, a strategic advisor specializing in global marketing and business strategy and venture capital and market development for high-technology companies.
