Avid Technology, Inc.

Avid Technology, Inc.

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Electronic Gaming & Multimedia

Avid Technology, Inc. (AVID) Q2 2010 Earnings Call Transcript

Published at 2010-07-22 21:30:35
Executives
Tom Fitzsimmons - Director, IR Gary Greenfield - CEO and President Ken Sexton - EVP, CFO and CAO
Analysts
Paul Coster - JPMorgan Michael Olson - Piper Jaffray Steven Frankel - Brigantine
Operator
Good day and welcome every one to Avid Technology Second Quarter 2010 Earnings Results Conference Call. Today's call is been recorded. For opening remarks and introduction I would like to turn the call over to the Director of Investor Relation, Mr. Tom Fitzsimmons. Please go ahead sir.
Tom Fitzsimmons
Good afternoon everyone. I am Tom Fitzsimmons, Director Investor Relations for Avid. I would like to welcome you to today's call. With me today are Gary Greenfield, Avid's Chairman and CEO and Ken Sexton, Executive Vice President, Chief Financial and Administrative Officer. Before we begin, please note that this call includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about our performance. There are a number of factors that could cause actual events or results to different materials from those indicated by these statements; such as competitive changes, our ability to execute our strategic plan, or adverse changes and general economic conditions, other important events and factors appearing on our filings with the US Securities and Exchange Commission. In addition, our forward-looking statements represent only our estimates as of today July 22, 2010 and should not be relied upon as representing our views on any subsequent date. We undertake no obligation to review or update these forward-looking statements. During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. They may not be comparable to similar non-GAAP measures used or reported by other companies. The non-GAAP measures do not reflect all the costs associated with the company's operations and are determined in accordance with GAAP. The most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of GAAP to non-GAAP measures are contained in the press release announcing this quarter's results and are available in the investor relation section of our website at www.avid.com. For the purpose of understanding our future business model, we will also provide some forward-looking analysis on this call, on a non-GAAP and GAAP basis. Some of our GAAP financial measures are not assessable on a forward-looking basis and the differences between our future GAAP and non-GAAP financial measures could be substantial. And now I would like to turn the call over to Gary.
Gary Greenfield
Thank you Tom, and welcome to our conference call for the second quarter of 2010. Avid delivered a solid top line for Q2, with revenue growth for the quarter on a year-to-date basis. Revenues for both audio and video grew for the quarter for the first time since 2007. We reduced our loss compared to the same period last year and moved closer to profitability however the strengthening dollar particularly against European currencies created a significant head win for both revenue and earnings in the second quarter as over 50% of our businesses is transacted outside the United States. I want to discuss more about the business in a moment but will turn over the call over to Ken so he can discuss our financial results in more detail.
Ken Sexton
Thank you, Gary. Revenue for the second quarter was $162.2 million as compared to a $150.5 million for the same period in 2009. The GAAP net loss for the second quarter was $12.9 million or $0.34 per share. This compares to a GAAP net loss in the second quarter of last year of $15.9 million or $0.43 per share. Our non-GAAP net loss which excludes amortization of intangible assets, stock based compensation, restructuring and other charges, acquisition costs and related tax adjustments was $2 million for the second quarter for $0.05 per share. This compares to a non-GAAP net loss of $0.15 per share for the second quarter of 2009 and now I would like to provide a bit of color on the results for the second quarter. Overall, revenue for the second quarter was up 8% year-on-year which is the highest growth rate we reported since 2007. Revenue from acquisitions contributed about 3 percentage points of growth while change in currency exchange rates adversely impacted revenue by about 1.5 percentage points compared to last year's second quarter. Our video revenues were $93.5 million, up about 5% compared to the second quarter 2009. This is the first quarter of year-on-year growth for video, since the fourth quarter of 2007. We continue to see strengthening in the broadcast market, demand for our shared storage products and most of our broadcast news related products increased in the second quarter compared to a year ago. In addition, the recent release of Media Composer 5.0 provided a nice boost to our professional editor product line during the quarter. In audio, we had another solid quarter. Second quarter revenue was $68.6 million which represents 11% year-on-year increase. We continue to see strong demand for our live systems line of products with our year-to-date revenue up 50% compared to the first six months of 2009. Our professional audio products also continue to have good growth compared to a year ago. Sales of our recently acquired Euphonix products contributed nicely to the quarter and accounted for approximately 6 percentage points of our year-on-year revenue growth in audio. Now I would discuss the operating results on both the GAAP and non-GAAP basis. The items excluded from our non-GAAP results for the second quarter totaled $10.9 million and include amortization of intangibles of $3.4 million, stock based compensation of $3.7 million, restructuring and other cost of $4 million. The majority of this charge was related to the restoration cost of the (inaudible) campus which we recently vacated, acquisition related cost of $83,000 and a favorable tax adjustment of a $171,000. The GAAP operating loss for the quarter was $12.8 million, an improvement of $2.5 million year-on-year. Our non-GAAP operating loss for quarter was $1.7 million which represents a $2.6 million improvement compared to the second quarter of 2009. On a GAAP basis we reported gross margins as a percentage of revenue 50.7%, down 0.8 percentage point year-on-year but up almost 1 percentage point sequentially. Our non-GAAP gross margin was 51.6% down about a 0.5% point year-on-year and up almost 1 percentage point sequentially. The year-on-year decline was largely attributable to the unfavorable impact of the strengthening of the US dollar and our loyalty credit which we had in the second quarter of 2009. The sequential increase was driven by higher revenue and a relatively fixed overhead and improved mix of product sales offset to a large degree by the adverse effect of changes in currency exchange rates. Our GAAP operating expense was $95 million for the second quarter up $2.2 million year-on-year and up $4.3 million sequentially. Our non-GAAP operating expense for the second quarter was $85.4 million. This was up about $2.5 million on a year-on-year and a sequential basis. The year-on-year increase in operating expense was driven by incremental expenses from acquisitions. Absent this our spending would have been down year-on-year. In addition in 2010, we reinstated certain compensation practices that were suspended in 2009 including annual (rate) increases, pension contributions and no forced furlough. The cost of reinstating these programs was more than offset by operational improvements implemented near the end of last year. On a sequential basis operating costs relating to acquisitions was the major reason for the increase. In addition, marketing programs including NAB increased on a sequential basis. At the end of the quarter we had approximately 2042 employees and 482 contractors. Now turning to the balance sheet. We ended the quarter with $46.8 million of cash which is down $27.4 million from the beginning of the quarter. The primary reasons for the decrease in cash were $10.9 million of net cash used to purchase Euphonix, $3.1 million of payments related to restructuring and $12.5 million of capital expenditures driven by our headquarters moved to Burlington, Mass. This move resulted in higher than normal capital expenditures for the first step half of 2010 but we expect capital spending to return to more normal levels in the second half of this year. Our net inventory at quarter end was $79 million which is up $7 million from March 31. About $3 million of the increase is related to Euphonix inventory. The inventory levels were probably increased in the second half of 2010 as we rebuilt stocking levels to better meet current demand. The annualized inventory turns for the second quarter were 3.9 turns. Our accounts receivable balance of a $100 million represents 56 days' sales outstanding which is up somewhat from the beginning of the quarter. However, our ageing of receivables is consistent with prior periods and now I would like to turn things back over to Gary who will provide an update on the business. Gary?
Gary Greenfield
Thanks Ken. As mentioned earlier we continue to see positive momentum in our year-on-year revenue with an 8% increase in Q2 2010 revenue over last year. Our markets continue to stabilize and there have been some positive signs particularly in our broadcast live sound and musical instruments or MI sectors. There are a number of external market factors that we see attributing to the growth in specific segments of our customer base. In the broadcast sector the growth of HD continues according to the May 2010 study. The (inaudible) which reported at 66% of new stations in the top 50 US markets are now producing their news in HD and fewer than 25% of stations and smaller markets have converted to HD. Additionally a recent Goldman Sachs report predicted that the UK TV ad market will be at more than 20% year-on-year for the second quarter of 2010 as a result of the UK election, World Cup and an upswing in the automotive and financial sectors. Avid continues to see growing interest from our broadcast customers worldwide as they invest in our shared storage media asset management and newsroom productivity solutions. For instance, MediaCityUK, the largest purpose built media community in Europe deployed a full end to end Avid customer flow and (KDBS), a local Louisiana broadcaster in the States implemented the Avid interplay production solutions as part of their move to HD news production. We've also seen a very positive response to our integrated media enterprise framework as broadcasters increasingly look for ways to evolve their business models and become more collaborative, maintain in increased profitability and gain more visibility into their assets. We saw a modest growth in our media controllers in the second quarter and the latest sales track numbers indicate that the MI market continues to grow at a steady rate. Earlier this month we introduced a refresh of our axiom keyboard controllers making it more flexible for editors, producers, and musicians to work with a variety of digital audio workstations to create music either in the studio or on stage. This line of products is also attractive in our education channel. Full sale University in Florida recently invested a number of our MIDI keyboard controllers and Sibelius software to use as part of the curriculum for students taking online courses. Our government and commercial segment showed a great deal of strength this past quarter in both audio and video. The Department of Defense spending on video operations were strong in the quarter and we are happy to report that Avid's solutions are being deployed as part of workflows and military broadcast and training applications. This is a growing sector of our business and we continue to work closely with a variety of government system integrators to broaden these relationships and workflows for customers. Live systems also continue to do well. According to ticket sale numbers from pollster.com, Avid venue systems are being used on nine of the top 10 US stores this summer and five of the top European stores. These stores include acts such as Paul McCartney, Taylor Swift JZ, Tom Petty and James Taylor and Carol King. Venue was also used extensively throughout the live performance at the World Cup in South Africa and has been recently installed at a variety of concerts and sporting sites such as the Tribidor Club in Los Angeles and the new giant stadium in New York. Most of our post production facility and studio customers have told us that they have seen a slight up tick in their businesses this year. HD and 3D continue to be significant drivers for these organizations to invest in storage and asset management systems and upgrade the file based workflows. A story in the Wall Street journal earlier this month stated that Hollywood has already committed to a total of 32 3D films for 2011 compared to 15 last year and there are now four times as many 3D projectors and screens in the US as they were last year. We continue to see a number of our customers upgrade to HD. Director Robert Rodriguez, who directed Predator and Sin City recently upgraded his entire facility, Troublemaker Studios to HD outfitting it with a variety of new audio and video systems including Media Composer, Nitris DX, dual operated decontrol with video satellite and Pro Tools software and unit shared storage system. When we spoke to you last we were fresh off the heels of annual NAB show in Las Vegas where we introduced Media Composer 5 and announced the acquisition of Euphonix. We've made quite a bit of progress on both fronts since then. Media Composer 5 started shipping in mid-June and we've had more than 5000 trial downloads in the first month. The market has expressed great excitement about you capabilities like native mile based work flows with formats like red, new usability features and support for third party hardware. We are excited about how we are delivering our commitment to be more open and have had a number of customers indicate to me that they are upgrading or switching to Media Composer from File Cut Pro or other competing solutions. A number of industry leaders have told us that they believe this is the most open Avid has ever been. A 2009 survey of Ace Editors, found that the majority of editors, producers, and directors are still choosing Media Composer as a creative solution for film and TV projects. Our customers ranging from independent professionals to enterprise level broadcasters continue to be excited about the possibilities the products acquisition brings. We are committed to keeping these control services open involving the Ucon control protocol to expand the ecosystem of audio and video workflows to include Media Composer and Pro Tools. Since closing the acquisition we've engaged and signed a number of partners like Apple, Apigee and Steinburg and look forward to further expanding the current roster of partners in the months to come. Looking forward we will return to IBC in Amsterdam this September to meet with our European customers to demonstrate and discuss our latest audio and video workflows and solutions. This show always provide us with the great opportunities to get closer to our European customers and learn more about the market dynamics and how we can help them solve their specific business and technology problems. Overall, the progress we've made in this past quarter is promising and we are hopeful about the remainder of the year may bring. Now I will turn it back over to Ken to provide some context for the remainder of 2010.
Ken Sexton
Thank you Gary. While we are not prepared to provide specific guidance for 2010, we did want to reiterate our comments from the last two earnings calls. We expect full year 2010 revenue to be higher than 2009. The second half of 2010 should be stronger than the first half due to normal seasonality, the timing of certain revenue transactions and getting the benefit of product releases and acquisitions. We also initiated selective pricing increases effective July 1, which should mitigate some of the adverse impact to revenue and gross margins caused by currency exchange movements. We continue to expect to have a positive non-GAAP operating income for the full year of 2010. Our breakeven point for non-GAAP operating income in 2010 remains at the annual revenue level of $645 to $655 million. Revenue in excess of this threshold should generate 50% or higher contribution to our non-GAAP operating profit. We expect our non-GAAP net interest and income taxes to be about $10 million which would result in a non-GAAP net loss of $10 million or approximately $0.26 per share loss if you assume the same revenue range. The non-GAAP breakeven excludes the following GAAP adjustments. Restructuring and other charges, stock based compensation, amortization of intangibles, acquisition related costs and loss or gain on sale of assets. Based on what we know today we would expect that these costs to be about $31 million for 2010. The non-GAAP net loss excludes the items I just outlined and a favorable tax adjustment of about $2 million. This would result in a GAAP net loss of approximately $39 million assuming the same revenue levels. Before we move to Q&A I would like to announce that our 2010 Investor Day will be held on Friday, November 12 here at our new Burlington location. More information and registration is available on the IR page of our website. I hope you will be able to join us. This concludes our remarks and we would now be happy to take your questions.
Operator
Thank you sir. (Operator Instructions) And we will take our first question from Paul Coster with JPMorgan. Paul Coster - JPMorgan: So I just wanted to know that there's been any change in the competitive landscape especially with the Harmonic acquisition of Omneon.
Gary Greenfield
There really hasn't been, obviously, we are keeping a close eye on the evolution of Harmonic and Omneon. Omneon has always been one of the big players in the play out serve area and competes with our product. We have not seen them to be more aggressive or less aggressive since the announcement of that acquisition. And we were haven't, really, since NAB we really haven't seen anything of consequence, I mean Sony with the media (inaudible) they talked about it. They obviously talked about at NAB the Harmonic acquisition of Omneon but I think that we've continued to move forward with Media Composer with our Integrated Media Enterprise strategy which we rolled out and there's been a lot of conversations in the press about the Euphonix acquisition. If anything I think there should have been more movement in Avid competitively than from others. Paul Coster - JPMorgan: Okay and then you touched on this briefly and I apologize I am repeating here but can you just talk about how Avid could benefit from the 3D editing and post production.
Gary Greenfield
Yeah there's really, the 3D really can help Avid, and most people of course associated primarily with our editors and clearly for all the major 3D movies that have appeared this spring and last year Media Composer is the editor's choice for doing the offline editing for 3D. Indeed, when you do the 3D production the number of editors increases for example is Avatar there were 13 Avid editors. Typically on 2D production you would see 5. The reason for that is they are more complex. Everyone who does a 3D movie also does a 2D version of it. That's not a simple conversion process or even if do it in 2D and convert to 3D, the story still has to be edited. I think more importantly and where the broader opportunities are is in the area of asset management because again when you do 3D it generates additional storylines, you don't just do, you do traditional 3D, you probably do an Imax version which is specifically differently. You do a 2D version; you distribute it in many more different forms. So enterprise media, our strategy for Integrated Media Enterprise as well as increased storage requirements, those are all benefiting factors to Avid. And that's just on the films side. Certainly on the TV side, on the broadcast side. There's different standards out there for broadcasting it but you might. What might take one channel to broadcast a traditional 2D film, excuse shows 2D shows, sport show, would take two channels and we sell stuff, us and our competitors sell stuff by the channel. So it increases demand as people add new channels in there. Paul Coster - JPMorgan: Got it, okay. And then Ken, I got the FX impact on revenue but did you give an impact on operating income.
Ken Sexton
The impact on operating income would have been far less so, for the quarter it would have been closer to the $1 million in operating expenses but where it impacts us a lot would be in savings in other words year-on-year. But where it impacts us a lot is on the gross margin because as you may remember, most of our cost of goods are US dollar driven because they are either tied to the US dollar or they are tied to the currency in China which of course tracks the US dollar. So when the European currencies changed a lot, we need to react accordingly. Otherwise a lot of it dropped straight down in the gross margin line.
Operator
And we will take our next question from Mike Olson with Piper Jaffray. Michael Olson - Piper Jaffray: Do you think the improvement in broadcasting especially newsroom specifically is being driven by rising tide of improving industry wide broadcast ad spender? Is there something going on more specific to Avid?
Gary Greenfield
It's always hard to separate out because we don't see the statistics. We do think that the integrated work flows that we have introduced along with Media Composer 5.0 example we introduced in integrated workflow for (ABCI) which is the Panasonic format. And we've introduced for XD Cam which is Sony format last year. So we do think there's something that is improving our market share for Media Composer, for interplay and also storage. We do think that is unique to Avid and in fact we saw a very strong growth in those areas in the quarter as well as you know we track our broadcast segment. We saw a strong growth in the quarter and we've seen strong growth year-to-date. Now I think I have shared with you although even last year I felt that Avid was taking share, even though down market and in up market I would like to think that we are taking more than our, we are growing it more rapidly in broadcast than other companies are and knowing what our internal rates are compared to market rates are being forecast for broadcast I believe that to be the case but unfortunately you never know until you see that information retroactively. So I think its combination right now. There's no doubt the broadcast thing was growing this year for the marketplace. Michael Olson - Piper Jaffray: Got you and then year-over-year growth in audio has been outpacing video growth for a few quarters in a row here, do you expect that will be a continued trend, basically as the audio is going to continue to creep higher as a percent of overall revenue?
Gary Greenfield
Yeah, first of all we had the Euphonix acquisition which accounted for some of the growth, Ken, what was the percentage of the growth for audio, just audio.
Ken Sexton
It was pretty close to half of the contribution for this past quarter.
Gary Greenfield
Yeah, so I think you saw a bunch of the audio growth being driven by Euphonix in the quarter and I was asked that question last quarter as well about why didn't we see video growth. Remember because the way we book our broadcast business, you actually see that trailing the growth for video trailing because we book large transactions and we don't recognize that revenue to (inaudible) we have seen solid bookings in our video business so I can't tell you if the next quarter audio won't, might not also outpace the growth there but I think you will see that, I think you will see that differential retreat as we move into future quarters. Michael Olson - Piper Jaffray: And then one last one, you mentioned at the end there some price increases, can you talk about, if I go through every product which is generally which products are you raising prices on and what kinds of general percentage increases are we talking about?
Gary Greenfield
Yeah I think the average increase if you are doing it in US dollars, the average increase was a couple of percentage points and it really was a bit here and a bit there. I mean if you say what kinds, there was some of our video products. There were some of our upgrades. There were some of our audio products etc. Overseas it was all of our products, it was driven by FX exchange, I would say overseas in the European markets it was driven primarily by FX and that was across all of our product lines.
Operator
And we will take our next question from Steven Frankel with Brigantine. Steven Frankel - Brigantine: Gary, I wonder if you might give us some insight into visibility for the back half. You do have these large deals although I don't see them showing up in deferred revenues so much this quarter but maybe you are burning off as much as are putting on. What's given you confidence in a stronger back half especially on the broadcast side?
Gary Greenfield
Well, as we take a look, well first of all we saw growth last quarter; we are seeing growth this quarter. So the fact is just where we are headed, I mean the proof points as we move forward to it. We do have Media Composer which we released at the end of Q2. That's created some momentum in our video business. We have some other new offerings that you will be hearing about, as you know around the time of IBC we have a tendency to announce things and so we are seeing, we see some up tick on those products refreshes as some of those offerings as we talk about some of those things. We do have visibility to some of these larger deals as well and some of them, the good news about the way we do our bookings is we don't have to post that into the quarter and get some discounting and we can sign them as we like. But we have been awarded some deals that we know we will be implementing prior to the end of the year. Steven Frankel - Brigantine: And what's the health of the rental suite like in Hollywood? And is that a potential source of Media Composer upgrades between now and the end of the year?
Gary Greenfield
Yeah the rental fleet looks separate. In upgrading the rental fleet there was a lot of issue about upgrading it from adrenaline into the DX series, from the DNA series to the DX series, and we actually have seen quite a few of those upgrades that people would buy new systems, upgrade it over the course of the last 18 months or so. Those rental organizations typically are on maintenance. So an upgrade for them from Media Composer 4.0 to Media Composer 5.0 as an example would be included as part of the annual subscription they are paying. So in those and again people that are using rental companies probably will upgrade as they move to the next project. Very few people will upgrade in the middle of a movie, for a whole variety of reasons. They are working; they know what they have when they started, etc. But I would not expect incremental software upgrade revenue from the rental companies and we've done a pretty good job in the last year again in the upgrade but we continue to refresh those fleets. They are one of the big buyers of storage from us. So they continue to be a nice source of revenue for us. Steven Frankel - Brigantine: And, do you think you have helped, I know you've gained share on the editing side. What about on the newsroom side? Do you think you have gained share in that segment as well over the last year?
Gary Greenfield
On the strict newsroom side, Steve I would say that it's, on the strict news system I think we've probably held our own and in those areas we compete with companies like (OTC:EMPS) or whatever it might be. I think on the infrastructure around the newsroom we find gain share. So by that I mean the editing within the newsroom, I mean the storage within the newsroom, some of the (inaudible) servers in the newsroom probably not on the playoff servers in the newsroom. So I think we've been gaining shares around some of the infrastructure that supports it. Steven Frankel - Brigantine: On the audio side, does the generic cover that the historic Pro Tools business, do you think you can grow that going forward or is that maturing and you are trying to grow things around it and leverage it that way?
Gary Greenfield
Well, I think the Pro Tools world even though we have a tendency to refer to it as Pro Tools as software, its really about the Pro Tools spam and the Pro Tools system which is the family of I/O products that works in conjunction with the Pro Tools software and (inaudible) with other digital audio work stations and certainly that's our goals. So one of the things that we ran very successfully in the first half of the year as an example was people that had bought Pro Tools LE products which are mid level I/O products upgraded to the Pro Tools HD systems which are high end I/O and we had quite a bit of success in the first quarter with that. We introduced 11 Rack a year ago which is officially considered Pro Tools LE product and which is an example of a part of that Pro Tool's ecosystem. So, I think both from new I/O, new category such as (inaudible) which we weren't in, new, other than new types of I/Our I think you can continue to see us slowly evolve the footprint of Pro Tools and I think you will see it grow and I think that's what you will see in the audio business as a matter of fact. While the acquisition accounted for part of the growth, we did have a natural growth even with currency as well.
Operator
:
Tom Fitzsimmons
The, yes, yes I am actually going to finish it up. I want to thank everyone for joining us. As we said, we are very; we think we had a strong top line growth for the quarter. We certainly continue to see an improvement in our profitability. We are looking forward to the second half. I want to thank all of you for joining us and should you have any follow-up questions all of us will be available for follow-up after today's call, thanks.
Operator
And that concludes today's conference. We thank you for your participation. You may now disconnect.