There's a Sea Change Going On at SeaChange

Looking over the latest earnings release from SeaChange International (NAS: SEAC) , it's easy to believe that the end is near. The maker of software and systems that help cable companies manage their video content has been profitable and almost always growing for years, but not this time.

But then you're overlooking the fact that SeaChange is in the middle of changing its business model. Management wants out of the low-margin hardware business to become "a pure-play software provider, lowering our overall cost structure, delivering industry leading, next generation solutions and achieving superior financial results." And to that end, the company recently unloaded its broadcast server and storage systems to a group of private equity firms.

When you take that strategy shift into account, full-year earnings from continuing operations jumped 4.1% year over year to $0.51 per share despite 2% lower sales. SeaChange also met Street expectations in the fourth quarter.

Looking ahead, management expects more pressure on the revenue stream while adjusted earnings should improve significantly. That's not a bad trade-off in my eyes.

I've had my eye on SeaChange for years as a potential high-growth play on the evolving cable industry. The company's largest customers are Comcast (NAS: CMCSA) and Virgin Media, giving SeaChange high-profile exposure on both sides of the Atlantic. In the last period, Comcast generated a whopping 22% of SeaChange's revenue.

In particular, SeaChange will do well if the cable guys start paying attention to the as-yet nearly unexploited opportunity of digital video on-demand services, where this company's software casts a large shadow. SeaChange had plenty of competition in the hardware market, but the list of rivals on the software side is much shorter. Cisco Systems (NAS: CSCO) has been buying its way into that segment in recent years, but otherwise the biggest pushback comes from the internal software efforts of individual cable broadcasters.

I smell a ton of opportunity in the very specific market that SeaChange has chosen to chase, which is why I own the stock myself. You could even see this stock as a hedge against your Netflix (NAS: NFLX) holdings, as a rise in VOD services would be great for SeaChange but a threat to Netflix. Food for thought.

Add SeaChange to your Foolish watchlist to keep your finger on the company's pulse. While waiting for the new strategy to gain traction, you should take a look at the Fool's top stock pick for 2012. It's a totally free special report, yours for the asking.

At the time thisarticle was published Fool contributorAnders Bylundowns shares of SeaChange and Netflix but holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Netflix. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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