Q3 2019 Earnings Call

Good day and welcome to the avid technology third quarter earnings call. Today's call is being recorded at this time I would like to turn the call over <unk>.

Please go ahead Sir.

Thank you Brad good afternoon, everyone and thank you for joining us today for other technologies third quarter 2019 earnings call.

My name is what Ralph elaborate vice President for corporate development and Investor Relations.

With me this afternoon or Jeff rather Garcia, our Chief Executive Officer, and President and can gave on our Chief Financial Officer NDP.

And their prepared remarks, Jeff will provide an overview of our business and then general provided a detailed review of our financial and operating results followed by time for your question.

We issued our earnings release earlier this afternoon, and we're prepared a slide presentation.

We will refer to on this call.

Press release and presentation are currently available on our website at <unk> Dot com and a replay of this call will be available on our website for a limited time.

During today's call management, where we reference certain non-GAAP financial metrics and operational metrics in accordance with regulation G.

And next to our earnings release today, and our Investor website contain a reconciliation.

Most closely associated GAAP financial information to these non-GAAP measures and also done and also definitions for the operational measures used on this call and in the presentation.

Unless otherwise noted figures noted by management during the call our non-GAAP figures.

In addition, certain statements made during today's presentation contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward looking and that pertain to future results or outcomes actual future results or crunches may differ materially from these forward looking statements for more information, including a discussion if some of the key risks and uncertainties uncertainties associated with these forward looking statements.

Please see our press release issued today and our 10-K for the year ending December 31st 2018 on file with the FCC.

With that let me turn the call over to our Chief CEO and President Jeff Rosica for his remarks, thanks, and thanks, everyone for joining us today.

As I highlighted in our <unk> generate earnings announcement last week during the third quarter, we saw the clear strengths of Atms recurring revenue subscription and maintenance business as well significant execution challenges related to our supply chain transition.

Well, we are disappointed in our Q3 results would show that we encountered stronger than anticipated headwinds within the quarter. We remain enthusiastic in the long term trajectory and the opportunity for improving growth and profitability.

You see performance impacted our outlook for full year 2019 performance and is reflected in our guidance by his last week.

Hey, along with our CFO can get Ron will discuss the two primary factors in or underperforming in Q3 as well as the several strong indications that underscore execute executive teams confidence in average strategic plans and business execution.

Walter you progress, our major operational initiatives and momentum with customers and partners.

Well, we get underway I'd like to note that average was pleased last week to walk him Christian as far as a new director on our board of Directors Christian is managing partner one of the average new and larger shareholders impact in capital. This is a positive step further diversifying the expertise and the ability of our board to help guide the company forward and to continue to our goal.

Strong shareholder representation on our board of directors.

Now I'll begin my Q3 observations.

Two primary factors being too are underperforming our supply chain transition and weaker than expected product sales to our smaller enterprise clients.

We had been discussing throughout 2019, we're in the midst of a major supply chain transition.

Ladies unexpected challenges during Q3 resulted in approximately 8.1 million of hardware orders that were unfilled at the end of third quarter bar progress was slower than expected during the quarter, we're making progress and remain confident that the transition to the new outsourced manufacturing partner will deliver the cost structure improvements and reductions in words freed up you previously just.

I'll discuss this in more detail in a moment.

After the Q3 revenue shortfall was due to product sales to enterprise clients that show fell short of our expectations due to softer demand from our smaller enterprise customers and that mainly impacted revenue into storage and media management product categories.

Well the both factors were significant headwinds in our business. During Q3, we also delivered positive results in certain strategic areas of our business. These include software subscriptions reached 170000 unique subscribers to date, which was up 43% year over year and subscription billings grew 49% year over year.

Maintenance revenue was down year over year was up sequentially, resulting from the dissipation of headwinds experienced earlier this year.

Nice increases improving renewal rates and the reemergence of the underlying trend from generally stronger product sales in the past year and Uh huh.

I'll just because both of these points in more detail awesome.

As discussed last quarter, we've achieved 13 million Opex savings for smart savings initiatives, we expect to fully realize remain separately from our supply chain transition.

Due to the factors impacting Q3 performance these benefits are still to come.

During Q3, Walt Disney Studios, an avid strategic cloud partner, Microsoft made news when they began to discuss publicly there collaboration to create produce and distribute content in the cloud utilizing many of the average cloud solutions I haven't it was very pleased to host both of these companies at our annual press event during the RBC trade show a couple of months ago.

Where they describe their initiatives, we believe having secured one of the world's largest media companies with the most demanding workflows establishes an early proof point in our cloud strategy and signals to the entire emoney industry readiness of the club in fact as stated earlier. This year. We are engaged with other large media companies that are preparing to him.

Raise cloud technologies for their own constant operations.

As of September Thirtyth, I haven't had 50 long or 50 active long term agreements. During Q3, we added two new strategic purchasing agreements with channel partners and we also renewed or extended several other active ingredients.

Irrespective of the headwinds in Q3, we feel confident in the long term trajectory of the business to deliver more profitable recurring revenue.

Turning over to Q3 business performance, we believe AVOD continues to demonstrate that our improved plans and and strategic changes or making a meaningful impact on or profitability and cash flow.

Revenue was down year over year in the third quarter, although it benefited from continued growth in our creative software subscription business and stabilization in our maintenance business. However, as discussed earlier product revenue was negatively impacted by our temporary supply chain constraints and there was an expected sales to enterprise customers during the quarter.

Gross margin improved to 62.1% from higher gross margin or software products and maintenance and favorable impacts the product mix in the quarter.

Adjusted EBITDA was down 12% year over year, primarily due to lower revenue in the quarter, but EBITDA benefited by the improved gross margin as well as lower operating expenses due to our smart savings initiative.

Finally free cash flow negative in the quarter was 1.8 million better year over year, due primarily to lower operating expenses.

Provides additional detail on the quarter in his discussion.

Given the magnitude of the effects of the complex supply chain transition on our Q3 results you Wanna fried provide you with further detail what happened in Q3, how we're making progress to deliver on our planned in Q4 and to remind you of the operating and financial benefits that will ultimately expect received from the transition of the supply chain.

I want to know that Q3 was the first quarter of shipping the affected products, including the new score audio consoles exclusively from our new manufacturing partner.

During the quarter, there were several greater than expected difficulties that impacted the quarter.

First we underestimated time and resources required to ensure that the product process and test documentation with sufficient to enable to new manufacturing partner was able to qualify and start producing in volume impacting the timing of qualifying production at the new partner.

Second given the lower or slower than expected qualification of products to the new partner our ability to move to volume ramp was impacted affecting our ability to meet desired volumes at the end of the quarter.

Third the introduction of the new S. Four audio console during the third quarter exasperated the challenges at the new partner why we did shipped the first several best for cancels for revenue during Q3, we do not ship as many as we had planned.

Finally, we had planned for a range of product mix during the quarter of course, but we experienced unexpected higher demand for certain products that we were transferring to the new manufacturing partner exceeding our production capacity for those products.

Well all these factors contributed to the approximately 8.1 million of hardware orders that were unfilled at the end of third quarter, we're continuing to bring the new partner online and we have shipped 3.9 million of the Q3 backlog as of November six.

We are optimistic that we're now under conditions at the new manufacturing partner to meet our plan for the fourth quarter. We've completed all the major product qualifications and the remaining smaller products needed are scheduled to be qualified during Q4.

We've learned from Q3 in a rapidly it after the production lines in order to support expected demand in Q4 and going forward.

Finally, our new S. One audio console is on target for Q4 volume production in order to meet the strong preorder demand we've already seen from our channel partners globally and higher expected demand in time for the holiday season.

Now, while our supply chain transition has been painful for the company in the short term, we're starting to see improved manufacturing performance, we fully anticipate realize into financial benefits over the coming quarters. After we complete the full transition by the end of 19.

Expect these benefits to be significant both from a comp Cogs perspective, as well as reduced inventory and working capital, resulting from a lean manufacturing slow.

Turning to a consistent strong performer avid software subscription business delivered solid results in Q3.

I stated obviously, a previously creative software subscriptions were 46% up year over year in Q3, two over 170000 subscriptions for our creative products, including pro tools, meaning Bowser and pro tools are familiar with.

We instituted a series of price increases on July one and despite those increases Q3 saw avid largest ever subscriptions agrees with over 22500, new subscriptions. This demonstrates the significant value our customers place in our subscription products as well as our ability to monetize that value overtime.

We saw subscriptions growth across all of our creative software products, we suppose remains particularly strong contribution which was driven by the June release of the completely re imagined media composer 2019, which has been well received by individuals and enterprises like.

Pro tools also showed strong growth and surpassed 100000 subscriptions in the quarter.

Our subscription billings were up overall by 94 or 46 years excuse me, 49% year over year in Q3. This growth in billions continues to track subscriptions. Billings result, also reflects the price increases we implemented at the start of Q3.

Well it is a significantly ahead of our revenue growth over the long term subscription revenue should track with billings growth.

We also want to provide you with more insight into our maintenance revenue, which is average largest revenue line and which generates revenue related to both are hardware and software product sales.

Well maintenance revenue was down year over year in Q3 was sequentially as several fat up the factors that have negatively impacted it during 2019 are starting to dissipate and the benefits of generally stronger product revenue in the recent quarters and the health of our large installed base of hardware and software products begin to re emerge.

Maintenance revenue from partner products, such as storage audio console to graphics products represented about 45% of total maintenance in Q3, the primary negative impact on overall maintenance revenue in 2019 was due to our ending sales of maintenance contracts on certain legacy storage systems at the end of 2018.

Aside from this issue we are seeing positive underlying trends in maintenance from improving renewal rates and selective price increases and from generally stronger product sales recently.

Maintenance revenue from software products, such as media central for our creative tools and our creative tools represented about 55% of total maintenance revenue in Q3.

We have a healthy maintenance revenue stream from our customers for all of our software products, including Mediacentral media composer Pro tools.

In the quarter, there was a negative impact from the ongoing transition of a portion of creative to customers to a subscription model.

Looking beyond our Q3 performance I would say that we've isolated the primary factors to the supply chain and sales to enterprise clients.

As we've discussed the supply chain challenges.

Great were greater than expected they are temporary and we're optimistic that we have made changes so that will meet our Q4 production goals and achieved the expected financial benefits on the weaker sales to enterprise customers. During the third quarter, we have a strong pipeline of potential business and expect to improve performance in Q4.

Overall, we remain confident in arpus in our positioning for the opportunities ahead of us as well as our ability to meet future expectations.

Making rapid progress and fully expect that in Q4, we will achieve a number of milestone in products delivered from our new supplier, including our new audio products they've generated significant market excitement.

We're pleased that are software subscription business continues to trend upward and increase its contribution was significant year over year growth total subscription billings and revenue driven in particular by our creative tools me composer pro tools.

This year, we've been consistent announcing in delivering new product innovations across our video and audio tools and solutions portfolios that contribute contribute to our growth.

Okay and all these indications combine avids executive management team remains confident in our trajectory toward delivering consistently profitable and predictable financial model built on more and more growing recurring revenue.

So thank you and I'll, let me turn over to Ken.

Thank you, Jeff and good afternoon, everyone.

As noted above Jeff and I are referring to non-GAAP figures unless noted.

As Jeff outlined earlier, the shortfall in our third quarter revenue was related to 8.1 million of hardware orders that did not ship in the quarter, but the remaining portion of the variance related to softness in sales to our smaller enterprise customers.

Beyond our third quarter results remain optimistic in our model, giving our improved software subscriptions recovery in our maintenance revenue in improving gross margin.

Continued mix shift to higher margin software subscriptions and maintenance resulted in improvement in our gross margin to 62.1% in the third quarter up 190 basis points year over year. Despite the significant headwind from lower hardware margins in the quarter due to the supply chain.

We also continue to see benefits in our operating expenses from our $20 million Smart savings plan as we have already achieved most of the expected operating expense savings in the plan through Q3.

Looking forward, we anticipate improvement in revenue adjusted EBITDA and free cash flow in the fourth quarter.

With our continued year over year progress in our forward looking metrics consisting of annual contract value in recurring revenue.

It's now get into the details.

GAAP revenue of 93.5 million during the quarter was in line with our preliminary results.

The positive news today is that 3.9 million healthy on ship backlog at the beginning of the quarter has shipped as of November six.

And the remainder is expected to ship by November 15th.

Also our new manufacturing partner has qualified all major production lines and as a much better rate of production in the beginning of the third quarter.

During the third quarter, we also experienced lower revenue in our storage and media management products, which contribute to our lower than expected revenue.

Our enterprise business, including storage did well in the first half of the year, but it was softer in the third quarter.

We continue to focus on entering into more long term agreements with both enterprise customers and channel partners to lock in more predictable revenue streams for this portion of the business.

During the quarter, we continued to make strong progress in our high margin software and subscription business.

We had a record number of new subscriptions for our rate of software solutions with our total subscription count now exceeding 170000 total subscriptions.

We saw exceptional growth of over 50% year over year in a number of subscriptions for both pro tools and media composer.

In addition, we increased prices on many of our subscription products by an average of about 15% during the third quarter.

Importantly, we have seen no reduction in the growth rate of our subscriptions. Following these price increases.

Demonstrating avon's value to our customers in embedded pricing power.

We're also pleased with the recovery in the maintenance revenue during the third quarter.

Due to the decreasing headwinds from the legacy storage and of service issue that Jeff discussed as well as improved pricing and renewal rates on maintenance contracts.

We expect maintenance revenue to stabilize as these headwinds continue to dissipate coupled with improving renewal rates and an increasing installed base of products Reemerges.

Gross margin was 62.1% for the quarter up 190 basis points year over year.

The increase was due to 160 basis points improvement and software license and maintenance gross margin that benefited from increased subscription and maintenance pricing and an improvement in professional services gross margin.

Coupled with a more favorable revenue mix.

The improvement in software maintenance and professional services gross margin more than offset the decline in hardware gross margin, resulting from lower production volumes.

Operating expenses for the quarter were 47.3 million an improvement of 3.5 million from Q3 2018.

The improvement in operating expenses resulted primarily from the realization of our smart savings as well as a $3 million bonus accrual reversal in the quarter.

Year to date through September our operating expenses are down 9.3 million year over year, as we have largely realized our smart saving targets.

Operating expenses in the year.

Adjusted EBITDA of 12.8 million for the quarter was in line with our preliminary results the impact on adjusted EBITDA from lower revenues for the quarter was offset in part by year over year improvements in gross margin in operating expenses.

Our year to date adjusted EBITDA through September 2019 of 34.8 million is up 33% over the same carried into 2018, showing the favorable progress. The team has made improving profitability during 2019.

non-GAAP net income per share was 10 cents for the third quarter down three cents year over year due to the impact of lower revenue offset by the improvement in gross margin and operating expenses.

Free cash flow is negative 4.6 million in the third quarter of 2019 compared to negative 6.4 million in the third quarter 2018, an improvement of 1.8 million.

Now moving to the composition of our revenues.

In the third quarter of 2019 revenue from software subscriptions was 10.3 million up 17% year over year.

Revenue growth in software subscriptions on a year over year basis has been impacted by higher reserves taken against certain subscription revenues starting at the end of 2018.

Overtime subscription revenue growth should more closely track the growth in a number of subscriptions moving forward.

From a cash perspective billings for subscriptions increased 49% year over year and the third quarter.

Above the growth in subscriptions due in part to the price increases in the third quarter and the increase in customers, who are selecting annual paid upfront contracts.

The pricing increases in the third quarter, what design in part to influence customers to select annual paid upfront contracts, which we believe our higher quality revenue stream for Abbott when compared to monthly paid subscriptions.

Well subscription revenues continues to grow perpetual license revenue was down 1.1 million year over year and flat sequentially.

Due to the challenges with sales to smaller enterprise customers into a portion of customers selecting subscriptions rather in perpetual licenses for our creative software products.

With that said, we expect high margin perpetual software licenses and the associated maintenance to be a relatively stable piece of avids revenue stream with growth in our overall software business centered on subscription revenue moving forward.

Maintenance revenue was 33.4 million during the third quarter.

4.7% year over year, but up 5.6% sequentially.

While we continue to see the impact of the end of support for Legg legacy storage solutions as discussed earlier and the slowly declining non cash revenue that comes through the maintenance line. We're starting to see the reemergence of underlying trends have increased installed base of hardware and software products as well as selective price.

Increases that took effect in July to build our maintenance revenue.

Excluding non cash revenue in the legacy storage maintenance revenue discussed above maintenance revenue grew 2% year over year in the third quarter.

The total software licenses and maintenance revenue in the third quarter was 52.3 million.

Down 2.4% year over year and up 4.7% sequentially. This revenue stream represents 56% of revenue in the quarter up 500 basis points year over year due to lower mix of hardware product revenue during the third quarter.

If we exclude maintenance on hardware products total software licenses and software maintenance was flat year over year.

During a period of transition from perpetual to subscription, which we believe demonstrates the strength of average software business.

Typically many companies see a revenue declined during the transition to subscription and we believe the stability seen to date in our software business demonstrates that we on expanding category, taking new users and growing our share in the market.

Gross margin from software licenses and maintenance was 86.7% during Q3 up 160 basis points from Q3 2018.

Due in part to price increases.

The revenue challenges during the third quarter can be seen in the company's hardware and integrated software revenue, which was 34.2 million in the quarter down 8.2 million year on year or 19%. This revenue line was directly impacted by the challenges discussed earlier and ramping up the new manufacturing.

Partner and by soccer sales to smaller enterprise clients.

We expect strong sequential improvement in hardware and integrated software revenue in our seasonally strong fourth quarter and expect to see continued improvement in hardware margin in hardware maintenance.

Gross margin from hardware products and integrated software was 34.2% in the third quarter.

Down 610 basis points due to the impact of lower production volumes in the higher costs during the transition to the new manufacturing partner.

Hardware margins are expected to recover in the fourth quarter as production volume increases.

The balance of our revenue comes from professional services business, which is a small portion of our revenue professional services revenue was 6.9 million a third quarter down 15% year over year as we are being more strategic and selective in PS business moving forward gross margin on professional services. However.

It was 14.5% in the quarter, a strong improvement from breakeven in the year over year period.

Now moving to recurring revenue and annual contract value.

The percentage of our recurring revenue that has steadily increased over the periods for the 12 months ending September Thirtyth 2019.

59% of our total revenue was recurring up from 54% in the 12 months ending September Thirtyth 2018.

We expect recurring revenue as a percent of sales to continue increasing over time, given the growth we're seeing in subscriptions and are focused on adding new long term agreements.

Annual contract value was 258 million at the end of the third quarter.

Up 4% year over year benefiting from our strategy to focus on higher margin software subscriptions in long term agreements and from stabilizing maintenance revenue.

Now moving to the balance sheet at September 30, 2019, we had a healthy cash balance of 52.3 million up from 50.5 million at the end of Q3 2018.

We ended the third quarter was 53.7 million of accounts receivable up 2.7 million from September Thirtyth 2018.

Inventory was 32.2 million at the end of the third quarter down 1.9 million over at June Thirtyth, 2019, and flat with the prior year.

Inventory levels are expected to move down over the next few quarters as our new manufacturing partner reaches volume production and we take advantage of the new lean supply chain.

Deferred revenue was 85 million at September 32019 down 3.2 million from September 32018.

Due to a decrease of 4.9 million in.

And I P. C S noncash deferred revenue and 4.3 million in professional services deferred revenue.

Offset in part by an increase of 3.8 million in maintenance deferred revenue.

1.1 million and subscription deferred revenue and 900000 products deferred revenue.

Total revenue backlog, which includes deferred revenue in contractually committed backlog was 443.6 million at September 32019.

Down 1.2 million from June 32019, the decline was primarily due to lower deferred revenue and the timing of certain long term agreements. We're confident we should see revenue backlog increase in Q4 2019, given our expectations for signing new long term agreements in a seasonally stronger.

Maintenance billings that occurred during the fourth quarter that will increase deferred revenue.

At the end of the third quarter long term debt was 199.6 million down 30 million from September Thirtyth 2018, do the reclassification of 28 million remaining convertible notes to current liabilities.

We plan to retire the remaining convertible notes.

Our prior to June 15, 2020 maturity from cash on hand, our borrowings under the senior credit facility.

We are confident that we will have sufficient liquidity with our existing cash balance plus 22, and a half million dollars, an undrawn revolver as well as our expected free cash flow generation to meet this obligation.

We're compliance with our leverage ratio ended the third quarter and have significant question with our covenants.

Now looking at the business over the last 12 months.

Our main non-GAAP properly <unk> profitability metrics in Threeq basketball are all showing improvement from a year ago.

Our trailing LTM revenue of 408 million through September 30, 2019 is flat to the prior LTM period, reflecting the challenges faced during the third quarter.

However, our trailing LTM EBITDA of 56 million through September 32019 is up 36% from the LTM period ended September 32018.

Flexing the improvements in gross margin and lower operating expenses during the past year.

LTM free cash flow of 13.2 million through June through September 32019 is up 23.9 million from the 12 months ended September 32018, reflecting our improved adjusted EBITDA and reduced cash restructuring costs plus improvements in working capital.

Let's now turn to guidance. We believe we are well positioned to have a strong fourth quarter given the progress we're making in ramping up production without news manufacturing partner, coupled with the initial hardware orders totaling $8 million that will ship in Q4.

At this time, we are reaffirming our 2019th annual guidance that we provided with our preliminary results last week.

2019 revenue guidance remains 405 to 415 million our 2019, adjusted EBITDA guidance remain 55 million to 60 million.

Our 2019 free cash flow guidance remains 12 to 17 million.

And finally, our 2019 non-GAAP net income per share got its 50 cents to 60 cents per share assuming 43.7 million shares outstanding.

Lastly, I wanted to invite you to attend our 2019 Investor day that is scheduled for Tuesday November 19 at the NASDAQ headquarters in New York.

Jeff myself and other leaders from avid we'll be doing a deep dive into our business strategy our products and go to market initiatives, who also have a product demonstration finally, we'll be providing our 2020 guidance and high level expectations for our long term operating model.

We believe all this information will provide you a better transparency into our business and show you how avid as a compelling investment in today's market.

If you'd like to attend please RSVP to our VP of Investor Relations with Apple, whose contact information is included in the press release.

Look for it hopefully seeing all of you in the next two weeks with that I'd like to turn the call over to Whit.

Alright.

Thank you Jeff again that concludes our prepared remarks, we're now happy to take your questions. Operator. Please go ahead.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you were using a speaker phone. Please make sure. Your mute function is turned off to a lot of your signal to reach our equipment and again press star one to ask a question.

We'll pause for just a moment to allow everyone and opportunity to signal for questions.

And our first question comes from Niehoff, Choksi with Maxim Group.

Oh, yeah. Thank you.

So I just wanted to drill into the enterprise softness.

That was.

Smaller part of the Threeq, United Miss 19, Miss but.

I wanted to make sure what gives me confidence that the interplay softness is not competition related.

Oh, Hi, now this is Jeff I'll answer that well competence is really because a majority of our business in enterprise is tracked by us in you know in our in our CRM system. So we know what we've won or lost and or whats deferred or what's changed over the period. So we can we can track that pretty closely and we see.

No change in trends in the quarters are different me any prior quarter. So there was nothing that gave any indication that.

I would say, there's one thing to remember is that.

We had always planned free store.

Gross or an improvement in enterprise in the second half and it did improve in the second half versus the prior year.

We just saw a bit of softness from what our expectations were for the quarter, but it's important to note that they did improve from our from our prior year.

So how do you then it will track down what was the driver of that softness then.

Well, yeah, I, just I think they've what we what we saw anyhow is that the we had a bid a bit of.

Greater softness in the small to medium sized enterprises that we experienced this quarter with lot of that comes through our channel partners, but we saw a little soft isn't there and that offset what we saw was it relative strength in our larger media enterprise customers in the quarter.

So I think it's you know eight at this 0.1 quarter in I wouldn't say that we would talk about even specific trend I could point too, but there wasn't a bit more softness on the for the smaller to medium sized businesses this quarter.

And what do you not there was got confidence into somebody asked me a sector.

Well I think I, you know a little bit I think there was a bit of bifurcation in the market going on I think some of the business from the tier two week, we cards here too we're kind of the middle segment middle Middle sector. Some of those smaller to medium businesses. Some of that businesses is starting to bifurcate up into tier one as we'd be able to see some of that business start to show.

Up in the in the tier one space, but larger mean enterprises and we are seeing a little bit of it you know go down into tier three where those customer types are really becoming more and more capable.

But you know it's only one quarter. We've seen this so I wouldn't want to speculate beyond that trend I would say in general again, the business was up for us.

Year on year, just wasn't as much as we'd expected in our plans and you know again, that's probably the best as we leave it.

Okay, and Ah I want to get an understanding as to why it but the guidance goes down sort of full year, but not free cash flow guidance.

Yes, I would say.

First you know we feel good about the guidance shrink range and we feel it's appropriate to at this time.

With respect to our free cash flow guidance.

We had a very strong fourth quarter last year, and where we started the year and the LTM at $13 million, we expect.

Similar position in free cash flow in Q4, so we feel like it will hit the $12 million to $17 million guidance, if not higher end.

That said, we did take down revenue and EBITDA.

Given the comments with respect to the.

Challenges, we had in the supply chain.

I would say that you know on the free cash flow, we have a good visibility in terms of moving that forward.

And we believe will come into the guidance range I would say, we were probably a little more conservative and free cash flow when we set the original guidance earlier in the year as well.

Because of the supply chain transition. So now that that's you know kind of where moving forward on that point.

We believe we'll be able to come in and the original guidance up to $12 million to $17 million.

Got it understood. My last question is on the subscriptions, which was you know very impressive, especially you know the strong net adds in subscription users yet you noted a 15% average pricing increase.

That's incredibly impressive and you did note that you know that that's attached to the value that you're providing but it's still surprising that you saw such strength. Despite the.

The increase in a price so.

And any further color as far as why you're seeing such.

Strong.

These are adds here.

Well I say any I'll just jump again, I would say that.

I mean, one is yes, because it before is that obviously the market sees value what we're doing it and as we've been adding features and functionality into the products performance that has helped US I think the media composer 2019 announcements and that new product, which if you remember that started delivery literally the last few days of June so most of the.

Benefit of that product rolled into Q3 and that was very well received by the market and you know that obviously price increases also do help from a firm or billings and eventually revenue standpoint, but I'd say the machine. Our go to market machine performed very very well during the quarter and like we were pleased we're going to look we're going to continue to.

Lenient aggressively in this area the business and continuing to push hard drives as hard.

Is there some sort of.

Change into competitive environment that has enabled this increase rate as a user ads.

I would say my belief right now is that I would say that it was really largely in response to the you know the product improvements we've been making in that and the fact that or you know our marketing teams and and sales engines and our channel and web store have been performing very well over the summer.

Okay, great. Thank you very much.

Evolve we indicated we're putting a little more effort on the marketing spend for direct digital and I think those are some of the things that you're seeing from that return on that spend yes. Good point.

Right right that's great. Thank you.

Yeah. Thank you. Our next question comes from Steve Frankel with Dougherty and company.

Good afternoon, I'd like to go back to that enterprise storage weakness a little bit and.

Maybe ask how the tier one traditional big broadcast regional.

Station groups or how that performed in Q3 and what your expectations are for Q4.

Hi, Steve as Jeff.

Yes that was saying I think what I would I was saying any all before is exactly kind of what your your question is is we did see relative growth and decent growth in what we call and you know, we called tier one which of the large.

Media enterprises, the big broadcasters, the big networks, the studios and the large station groups. Some broadcasters lot of smaller broadcasters are in the country or two but a lot of the larger one performed well we saw growth year over year.

Wasn't quite the growth we had planned for but we are we're happy with the trend that we're seeing in the in the large media enterprises in Q3, and it was really under pressure more from the smaller side. So I'd say, we're happy with the progress we made in the quarter would have liked a little more but did do well.

And as the slower growth.

Make no question what is stored cycle looks like relative to what you thought it was going to be at the beginning or is this an economic pause why do you think that business is is not hitting your targets.

Well first of all one thing I want to make clear it wasn't the storage cycle. It we would have.

We are making in their prepared remarks, he was that.

In that enterprise segment.

When you look at the dollar as they buy.

It it more of the impact if there is a if there was a mission that from our expectations more of that would be in storage media, but in reality. It goes into storage media servers graphics editors to make goes in lot of those categories, but a bulk of the of the impact will show up in those in those storage and media man we call.

You management categories, which is the platform category I just want make sure I'm married cleared for clarify that point on the you know as far as a trend we know that there are a macroeconomic forces out there.

And we have to obviously navigate those the company, but I I think we're very well positioned to navigate those forces because of our platform story because of you know, we're really driving efficiencies in what we're doing we're helping enterprises drive efficiencies in their business, which is clearly what they're looking for from me enterprise I think our cloud strategy and what we're going after there is isn't it.

Wardens <unk> I mean, obviously there is a transition going on with some people between like on premise cloud, but you know we think the work we've been doing is proving to be very successful at Disney and Microsoft locked in studio and Microsoft announcement was a great and testament to that so I think you know it's a market that didn't transition that's got a lot of a lot of Ah.

Macro trends going on but again, I think where I think we're really well position to that and even if we may see differences quarter to quarter than were than we originally expected I like the trajectory that we're on a like you know what were what we're doing there.

Okay and.

What's the volume as long term agreements that are up for renewal.

The fourth quarter.

I don't have that data point in front of me Steve There are a lot of them are in Q4, and we're in the process of resigning extending or or even you know pretty new new.

Contracts in place.

Both maintenance agreements and long term agreements both our heavy in the Q4, but it's not it's not like half the businesses. There. It's just it's probably the heaviest quarter of those agreements, but it's not it's not a majority of the agreements.

Okay and as you.

Resign these long term agreements.

Do you would you expect the gross margin profile.

Of those agreements to be.

The same upon renewal higher or lower.

I would say Oh, yeah, yeah, Yeah, I would say as we've signed long term agreements.

You look at our model our gross margins have improved.

We think we get better wallet share.

That helps you know cover cover overheads, we think that.

General the margin profile would be would be the same if not improve as we expand the agreements.

And we're also you know positioning more software and the agreements and that provides a better margins than we protect ourselves in the agreements from a mix standpoint.

Don't want to have.

Partners, just buying all low margin products. So.

Project, we protect ourselves on the downside there.

Okay and.

Price increase is pretty impressive is it too soon to have any data on what that might do to churn on your month to month accounts.

In General you know, we're not we don't.

Talk publicly a five metrics on churn, but we're actually when I look at the user base that went up 100 and into 170000.

Over ads of 22000, and we'd look at where we're heading this quarter.

You know, we don't expect any.

Any dramatic changes in the churn number.

Additionally, we are moving more people too.

Annual paid annual given that strategy at the price increases and that's a much better churn for added so.

We think over time, because as you move people handle paid annual we get a higher quality recurrent revenue for the company.

And.

As we said that's really going to be benefiting our gross margins moving forward with the strength in this business and Steve I would also say you could you said monthly on the month to month the price increases during the month to month, our goal to is to try to move them over to anymore at least an annual monthly if not an annual paid annually.

Okay, Great Great and then I missed a couple items I was late to the call.

How large was that bonus accrual.

Reversal.

$3 million.

Okay and he is there anything.

Non traditional in the Q4 free cash flow guidance like any payments moving from one quarter to another that would impact out or or it should be apples to apples with last year.

No I mean, we you know where our LTM free.

Free cash was 13.2 million.

Through September you know the guidance is 12 to 17 and we have good visibility in our plan to.

You know in that cash flow guidance.

So there's nothing unusual at all.

Okay, great. Thank you.

Thanks, Steve.

Thank you. Our next question comes from Anyhow, Choksi with Maxim Group.

And you know.

And Mr. talk to your line is open.

Operator that may have been a mistake and yet he was already on for questions.

And at this time, we have no further questions I would now like to turn the conference back to management for any closing remarks.

Thank you operator, and thanks to all the participants for your questions in closing the call I wanted to score that while the factors, including our complex supply chain transition negatively impacted our Q3 results and have been a challenging for our investors as well that we expect to capture longer term cost efficiencies and working capital benefit from our commitment.

Expected improvement combined with the strong growth in subscription software fuels, our enthusiasm about average long term trajectory and potential for significantly improved profitability and growth.

Q4 Avenue sharply focused on closing the year strong, bringing new revenue generating products to market accelerating new product innovation that will contribute to growth in 2020 and beyond.

So thanks again, everyone for joining us today, we encourage you to register on our website for the live stream of averaged 2019 Investor day, which will take place on November 19th from 10 am Eastern time through three PM Eastern time until then I Hope you would enjoy the rest of your day or evening. Thanks, everyone.

Ladies and gentlemen, this concludes today's call. We thank you for your attendance in participation you may now disconnect.