Q1 2020 Earnings Call
The issue to our earnings released earlier this afternoon, and we have prepared a slide presentation never will refer to on this call. The press release and presentation are currently available on our website at I.R. dot avid dot com and a replay of this call's there'll be available on our website is very limited time.
During today's call.
Managed simple reference certain non gaps.
Financial metrics.
And operational metrics in accordance with Red regulation G., both the appendix <unk> earnings released today, and our Investor website contain and reconciliation at the most closely associated gap financial information to the non get measures and also definitions for the operational measures used on this call in in the presentation.
Unless otherwise noted all figures noted by management during the call or non gap figures.
In addition, certain statements made during today's presentation contained forward looking statements within the meaning of the private Securities litigation reform after 1995.
Our 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 are outcome actual future results are occurrences made different materially from these forward looking statements for more information, including a discussion at some of the T. Rex.
And uncertainties associated with the forward looking statements. Please see our press release issue today or 10, choosing a three month bending March 31st 2020, and our 10 K. for the year ending Mark December 31st 2019 on file with the S.C.C.
With that let me turn the called over to our C. on President Jessica for his remarks.
Thank you with and thanks to everyone has to join US to review the soul details of average Q1 2020 results that we released today and which follows a business update we shoot on April 7th.
I was hard at work to help our customers succeed during this extraordinary time <unk> 19 global endemic we've been learning a lot from our communities capacity for rapid change to ensure business continuity and their ability to 16 to deliver the high quality contact the consumers are demanding.
Today, along with avid C.S.L. can go wrong reviewer Q1 results you're section of the global pandemic on our industry.
Performance and what we expect going forward.
Also review the action plan and significant cost savings measures that we immediately put into motion.
Negate the business impacts of the global pandemic.
In addition, we'll discuss the continued strings advantage of our long term strategy to grow recurring revenue streams and increase our fish unseen effectiveness in the way, we work and serve our customers.
Oh sure how we're preparing to emerged from this challenge challenging time and even stronger position.
Customers across meetings entertainment are ready to return to full capacity, let's get started with the important checker ways for Q1.
Increasingly during the first quarter I haven't felt the effects of coven 19 on our business and and our day to day customer engagements, especially with enterprises and productions urgently asking for our help to keep their people working and their operation was running.
Intensified during March as a curve in 19 situation unfolded quite rapidly on a global scale.
Our industry is being impacted and when you return from your sex Coven, 19, and especially from stay at home mortars, and social distancing efforts around the globe.
Example, many types of film and T.V. productions of had the temporarily halt. So some are funny unique ways to keep producing content many of which rely on abbott the.
The most extreme examples are sports life events like music festivals and tours and Seattle shows the gym AD the hulk or schedules across all walks of media customers and had to change the way they work and we think they're over all times this year.
Meanwhile, consumption of traditional T.V. and screaming media has.
Dramatically as a world shelters at home.
I'm studios in production companies are working to maintain you content production. Many other words have had to pause there productions. So we do anticipated potential surging productions, once workplace and travel restrictions or east as content creators do need to refill their production pipelines.
The business headwinds that we experienced and Q1 and expect to see continuing you're near term are related to the non recurring revenue parts of our business, which includes product sales and professional services for customer projects.
Part of our business generally depends disproportionately on sales that closed during the last few weeks of each quarter, which were severely impacted in March student delays purchasing decisions and customer projects because of the unfolding coven 19 global pandemic.
The positive side of our first quarter performance came from the continued recurring revenue growth, reflecting our strategy over the past few years to build a strong recurring revenue business from subscriptions maintenance and long term agreements.
Growing in stable foundation for US now representing nearly two thirds of our revenue.
And as a global pandemic unfolded haven't quickly and decisively enacted a comprehensive crisis response management plan to mitigate the financial impact Avenue to protect our employees workplaces to offer protect proactive help for our customers and partners and prepare us to capitalize on the opportunities as the eventual recovery weekends.
I have is successful long term strategy to grow sources of recurring revenue performed well continued it's positive trajectory in the first quarter with the benefit of also helping to buffer against some impacts of covert 19 [noise] overall during the first quarter L.T.M. recurring revenue reached 66% of total revenue, which was up to 57%.
A year ago.
Subscription revenue continued to grow rapidly increasing approximately 50 per cent year over year. We also added in record number of roughly 30000, net new pay subscriptions and a quarter continuing the acceleration we've seen in recent quarters by comparison back and Q1, 2019th we added about 12000 subscriptions in the quarter.
At the end of Q1 haven't had approximately 218000 paid subscription as far as creative tools me composer pro tools and the civilians products.
Description growth includes the addition of several enterprise subscription customers into one hour enterprise customers have initially responded well to the advantage of software subscription and we expect more of them to adopt subscription in the second half of this year as we launch are complete enterprise subscription offers.
Additionally, as part of our Cobin 19 response to support our clients. We have loaned approximately 125090 days free of charge licenses for our creative tools to many of our enterprise education customers, helping support their business continuity efforts and enabling their employees or faculty and students to work remotely.
Many organizations appear to want to retaining these new found remote working capabilities, which we expect will create additional business for avid as we can <unk> convert many of these initial free of charge licenses to one of several paid commercial options, including an enterprise wide subscription plan.
And last month, but also now reached over 2 million cumulative downloads of our first created tools for aspiring out users downloads at least premium for each have more than doubled since 2018, enabling new users to enjoy producing music and videos with industry, leading tools for free and to have the option to upgrade.
Do a full featured version with a paid subscription.
Version rates were seen show. This is just part of our strategy is really important contributor to help drive subscription growth.
Maintenance revenue was also continued to stabilize as the headwinds from and do the sale of service contracts on certain legacy storage systems at the end of 2018 has significantly diminished and the underlying the strength of maintenance renewals plus benefits from new product sales have three emerged in the first quarter overall subscription and maintenance revenue.
Was up 11% year over year.
Revenue from long term agreements was also up year over year contribute to an 11% you're over your growth in our annual contract value.
Average secure numerous or noodles and a multi your customer agreements in Q1, including a new strategic purchasing agreement with one of our largest resellers and an enterprise license agreement within new major sports customer.
Are cloud incest business on upsurge in customer interest late and Q1 with the onset of curve in 19, which is driving for us accelerated demand for our offerings, including avid ended on demand, which includes full meeting composer, adding functionality and nexis intelligent storage hosted on Microsoft's as your Clap Clap eyes one.
We also secured a new agreement with enough or does it on the world's largest media companies that owns and operates T.V. networks and film Studios globally.
You have initially <unk> brought some of their broadcast news and T.V. production work flows into the cloud. So teams on several continents can continue collaborating to create and deliver their content. During the pandemic, we hope to announce the details is very soon.
Additionally, avid has already consulted with over 100 and of Christ customers within just a matter of weeks to help and explore outclassed solutions to solve their issues arising from the coven 19 situation.
We've already helps several rapidly low out clout based work flow solutions to address their immediate needs.
And our responsiveness has resulted in <unk> you pipeline of over several million dollars for our cloud and staff solutions.
Earlier this week avid announced a new five years strategic Alliance agreement with Microsoft that builds on her way success moving to film and T.V. content creation once loves into the cloud on Microsoft's does your.
Close working relationship with Microsoft allowed just move rapidly to eight numerous avid clients that needs a transition their production personnel to working remotely.
Think of our partnership with Microsoft really shine through during this time and were quite excited about our continued close partnership with them.
During Q1, the intensification of the Cobin 19 global pandemic did negatively impact the <unk> nonrecurring portions of our business, mainly project based and Runrate sales of our innovative solutions perpetual software licenses and professional services.
Suspension of sporting events cancellation of music festivals in concert tours and the shuttering of television and film production during March immediately impact as some of our customers purchasing decisions.
Significantly impacted or Q., when <unk> I've seen, particularly the downturn in the burden rate activity.
Of our customers to lay projects and purchasing decisions and those are channel partners overall were a little more careful which we stocking orders that are typical a quarter and and as they moved to more tightly manage their own Detroit levels.
Impacts were strongest during the last month of the quarter. When we typically generate the largest portion of our non recurring product sales each quarter.
Additionally, travel restrictions and workplace closure is hampered our ability to complete the delivery of certain projects and to deliver some professional services during Q1.
That said, we are able to deliver many professional services and learning services remotely, which does help us keep a portion of services revenues in taxes during covered 19.
As I mentioned earlier since the onset of cover 90, we have rapidly move to develop a comprehensive crisis response management plan. The fundamentals plan include an internal crisis response program <unk> policies procedures and communications that keep our team operate smoothly with most employees unable to work.
<unk>.
<unk> also ensure operational continuity to prevent disruptions to our supply chain and customer support.
Programs to help our customers and partners deal with disruptions from the crisis, such as our temporary creative tools license offer and our unique solutions for remote collaboration.
Also a strategic focus on maximizing your term business and revenue, including or opportune used a new club business ongoing subscription gross and more long term agreements.
And finally significant targeted cost reductions implemented beginning in April that we expect will reduce our operating expenses during q. too and throughout 2020, which can we'll get some details <unk>.
We expect this overall plan will remain in place as required during 2020 and it will evolve depending upon the pace of improvements in the global situation and of course, our business environments.
Well, we have positive expectations for the business ASCII immersion coven 19 avid isn't navigating the current situation within the buttons of caution.
Manually team and board are confident that Avenue is doing right work and isn't the best possible positioned to deliver on a consistently profitable and predictable financial model on growing recurring revenue streams.
We remain enthusiastic about the accelerating long term prospects from enterprise customers moving their media production operations to cloud and Sass. We believe we can continue to capitalize on there early market leading position, we've established and expect modest near trim growth in this part of our business.
As it continues to build underlying strings, some execution of our long term strategic plans are heavy focus on quickly reducing costs and our continue playing of delivering you product and innovation, which should help to offset some of the challenges the non recurring revenue parts of our business. So long as a pandemic <unk> the current level and medium.
Term.
We believe it or high quality recurring revenue streams and clean our subscription business will continue to show strong growth in 2020 or maintenance business will continue to be relatively stable and long term agreements with enterprise customers and partners will continue to expand this year.
We anticipate that the extraordinary faxes it affected our Q1 will continue to the next couple of quarters, but likely dissipate as a <unk> a pandemic eases. We're encouraged to see more nations are easy restrictions. So many people can return to work soon.
Although we can't forecast when we industry will get fully back in motion. We remain highly confident that habit is quite effectively engaged help our community enter and then <unk> rebound well improving our ability to capture the resulting opportunities.
So what's that all now hand to call over the can get around to offer more details behind our Q1 2020 performance over to you can.
Thank you, Jeff and good afternoon, everyone.
As noted above Jeff and I are referring to non gap figures unless noted in our comments.
Overall, our business and financial results for the first quarter of 2024 in line with the revised guidance provided in the business update we issued on April 7th.
While recurring revenue sources, including subscription and maintenance were strong.
The non recording portion of our business space major Headwins late in the corridor do the unfolding global pandemic.
Our focus in the second quarter and beyond will be do react quickly to the current market conditions.
That's part of this effort, we have been revising our operating plants to adjust forecast and spending targets.
Instituted significant cost saving efforts that began in April.
We are confident that with these efforts, we can whether they're coming months and emerged on the other side as a stronger company well prepared to deliver value to our customers and shareholders.
With that let's now get into the details of our fourth quarter financial results.
Gap revenue was 86.5 million during the first quarter down 16.3% euro per year.
Recurring revenue with strong with growth in subscription in stable maintenance well non recurring revenue from hardware in perpetual licenses was down sharply do the impact on sales of the corporate 19 pandemic.
Combined subscriptions and maintenance revenue was 45.8 million up 10.8% Europe a year.
The 50.4% growth in subscription revenue.
Exceeded the 0.7% decline in maintenance revenue.
Excluding the decline in maintenance revenue from the Sun setting legacy storage systems at the end up 2018 maintenance revenue would have been up 2.1% year over year.
During the first quarter revenue from the Americas, what's 48% of the total and down 10.4% your every year.
Revenue from India was 38% of the total in down 10.8% year over year.
And revenue from Asia Pacific with 13% of total in down 41% year over year.
The impacts from cope in 19 were seen in Asia Pacific before other geography.
Please also recall that our first quarter 2019 revenue included a multimillion dollar storage order in Asia Pacific that did not re occur in the first quarter of 2020.
At constant currency, our first quarter 2020 revenue was down 14.3% your per year.
Relatively stronger U.S. dollars compared to the euro negatively impacted revenue by approximately 2%.
And when you further adjusted for the large multi million dollar storage deal that occurred in the first quarter of 2019, our first quarter 2020 normalize revenue on a constant currency basis would be down about 10%.
Gross margin was 61.7% for the first quarter <unk>.
<unk> 40 basis points you every year.
The increase was due to a more favorable revenue mixed up higher margins subscription and maintenance revenue.
Offset in part by the impact of lower volumes in our products in a professional services gross margin.
Operating expenses for the quarter or 51.3 million 1.8 million dollar decrease year over year in a 3.1 million dollar decreased from the fourth quarter of 2019.
Decrease in operating expenses was due to the benefits from our <unk> savings initiatives as well as lower bonus a cruel and savings and discretionary spending which are offset in part by 600000 dollar bad debt right off.
And exchanged charges of $500000 in one time costs related to the cancelled N.A.B. trade show up 200000.
Adjusted EBITDA, what's 4.2 million in the fourth first quarter, reflecting a margin of 4.8% for the quarter.
Non gap net loss per share it with eight cents for the first quarter down 19 cents year over year, reflecting the decline and non gap operating income.
[noise] free cash flow with $7.1 million negative in the quarter down 11.7 million year over year impacted by the decline and income as well as a decline in billings and collections plus an increase in inventory due to lower than expected product sales.
No I'm moving to recurring revenue in annual contract value.
The percentage of our revenue those recurring continues to steadily increase.
The 12 month, ending Mark 31, 2020, 66 per cent of total revenue was recurring up from 57% and the 12 months ending March 31st 2019.
Recurring revenue percentage increase due to increased subscription revenue in revenue under a long term agreements.
Maintenance revenue generally flat and lower nonrecurring product and professional services revenue.
We expect recurring revenue percentage to continue increasing overtime given the growth we are seeing it subscriptions and our focus on adding new longterm agreements.
Annual contract value was 264 million at the end of the quarter up 11% year over year benefiting from our strategy to focus on higher margin software descriptions in long term agreements. The A.C.D. from long term agreements was 9.3 million or 13% year over year on can.
She knew growth in both enterprise agreements in strategic purchasing agreements.
During the first quarter, we added to new strategic purchasing agreements.
Partners that are under strategic purchasing agreements exceeded in aggregate their total minimum purchase commitments and the first quarter of 2020.
As we look at the detail of our revenue seat streams. We continue to be encouraged by the continued resilience and grow at the bus subscription base.
And the first quarter, we added a record number of new subscriptions with nearly 30000 net new subscriptions for a creative software solutions in our total subscription counts reached nearly 218000 at quarter end.
Subscription growth was particularly strong and pro tools up 68% year over year immediate composer up 59 per cent year over year.
Additionally, we continue to see a shift towards annual paid up front contracts, which we believe are higher quality revenue stream for avid when compared to a monthly paid subscriptions.
Annual paid up front subscriptions group, 254% you every year in the first quarter and now represent 18% of the total subscriptions.
From 8% a year ago.
A month to month subscriptions, where basically flat year over year and now account for 12% of the total subscriptions down from 19% a year ago.
We believe that month to month subscriptions will remain important to enable certain customers to temporarily increase their capacity specific specific projects.
However, we believe that the sheriff annual paid up front subscriptions will continue to grow as more of a enterprise customers adopt subscription.
Will help augment our cash flow in the short term and reduce churn in the long term.
From a cast perspective billings for subscriptions increase 83 per cent you over a year in the first quarter above the growth rate in total subscriptions.
Do in parts of the increasing customers for selecting annual paid upfront contracts, coupled with price increases that one's effect in the third quarter up 2019.
No I'm moving to the composition of our revenues.
Maintenance revenue was 38 1.8 million during the first quarter down 0.7 per cent year over year.
We continue to see the impact of the end up support for a legacy stored solutions and slowly declining noncash revenue that flows through maintenance revenue, excluding noncash revenue and luggage see storage maintenance revenue maintenance revenue would have been up 2.1 per cent year over year on a growing making maintenance.
Will base in the contributions from generally stronger product sales and 2019.
Offset in part by maintenance declines and legacy media management solutions.
And on media composer in pro tools as a portion of those users transition to subscription.
While subscription revenue continues to grow perpetual license revenue was down 33.9 per cent year over year.
Due to weakness in Mediacentral perpetual sales, particularly late in the quarter due to cope in 19 into a portion of our customers selecting subscriptions rather than perpetual licenses for our creative software products.
Gross margin on software licenses and maintenance was 82.5% and the quarter up 40 basis points you over a year.
The company's hardware and integrated software revenue was 29.3 million in the first quarter down 36.6 per cent year over year do the impact of coping 19 on customer operations in purchasing decisions.
This revenue line was impacted by declines in sales up stored solutions and video service do the impact of coping 19 on studio in broadcast customers as well as substantial decline in life sound audio sales on lower demand do they impact of covert 19 on music concerts and festivals.
As companies in economies reopened except to see improvement in hardware integrated software in future corridors.
We believe that will be a strong resurgence in content creation that require our solutions.
Gross margin from hardware products and integrated sophomores 32.2 per cent in the first quarter.
Down 1100, and 60 basis points year over year, as lower production volumes and not absorb as much manufacturing overhead in the quarter.
Plus the mixed shift it within hardware towards more audio products and less storage.
The balance of our revenue comes from our professional services business.
Sessional service revenue was 6 million in the first quarter down 21.4 per cent you over a year a certain projects were pushed out and further delays caused by the limited availability professional services personnel to the on site to the global pandemic.
Gross margin of professional services was 5.7% and the quarter down 880 basis points year over year due to lower utilization during the quarter.
In response vehicle evolving cope in 19 situation rapidly implemented a significant cost savings effort starting in April 2020.
To ensure that we are well positioned to survive the global primitive pandemic, we expect the actions to reduce non gap operating expenses by at least 30 million year over year for 2020.
Cost savings actions include.
Furloughs of three weeks per quarter for most employees or an equivalent temporary wage reduction during the second and third quarters.
The company has structure to furloughs, so that our customers will experience little to no impact during this period.
Oh executive officers in board of Directors will also be taking similar temporary salary reductions in line with the non executive employees.
A hiring freeze in elimination of merit increase and four one k. matching.
Reductions in marketing spend related to cancel trade shows in other activities.
Reduce usage of contractors consultants and outside services.
Reduce travel costs in a reduction in other discretionary spending.
These efforts or expect to have an immediate cash benefits starting in April 2020, with at least 9 million and you over a year operating expense savings and the second quarter of 2020.
The cost saving actions are also expected to yield $10 million you over a year reduction in nonmaterial cost of goods sold during 2020.
Which we expect will protect art gross margin.
At the expected lower product and professional services volumes.
We have also reduced or 2020 capital expenditure plans.
Now expected our capital expenditures for all of 2020 will be approximately 40% below the level, we indicated and the guidance provided in November 2019.
And we also deferring the enterprise improvements spending that we'd planned for 2020.
We're actively monitoring this situation I prepare to take further costs actions as necessary to enhance liquidity preserve free cash flow and best positioned the company for longer term grow.
Now turning to the balance sheet as of March 31, 2020, we a cash balance of 81.2 million up from 69.1 million at December 31 2019.
Cash balance increased on 22 million dollar draw under our existing revolving credit facility offset by negative free cash flow of 7.1 million during the first quarter of 2020.
We ended the quarter, which 60 million of accounts receivable down 13.8 million from December 31st 2019, due primarily to reduce buildings and the quarter.
Inventory was 32.6 million at the end of the quarter up 3.4 million from December 31st 2019 in down 1.7 million from March 31st 2019 <unk>.
Inventory levels were up to to the lower than expected sales at the end of the quarter.
We can seem to be pleased with the performance of our new contract manufacturing partner in Mexico.
In the news supply chain partners fully supported our first quarter production needs.
Based on current information.
Avid doesn't expect any production issues that we didn't pack it second quarter production.
In early April in response to cope in 19 pandemic Mexican government place restrictions on businesses, including our contract manufacturers that limited their ability to produce non essential items such as products for the month of April.
However in early May our contract manufacturing partners informed us that are under revise guidelines they have resume needed production of our products.
We believe we have sufficient finished goods inventory at our logistics facilities in the U.S. to support our expected production needs during the second quarter.
We will continue to monitor our supply chain providers globally as that global pandemic situation continues to a ball.
Moving the contracts assets, which increase 2.71 million during the quarter to 22.2 million from enterprise agreements in the increase in annual paid monthly subscriptions.
Deferred revenue was 95.4 million at March 31st 2020, M. 2.5 million from December 31st 2019 from the recognition of I.T.C.S. noncash revenue of 1.2 million seasonal decline and maintenance deferred revenue.
At the end of the quarter Longterm debt was 220.4 million 21.4 million from December 31st do the previously mentioned 22 million dollar draw on the existing revolving credit facility.
Now turning to our capitalization in credit metrics.
As of March 31st are leverage per our credit agreement was 4.6 times, we were in in compliance with a six times leverage covenant given our liquidity level.
Starting in June the leverage covenant will start to gradually stepped down.
We are monitoring our leverage covenant, we expect our leverage multiple to gradually improve and the second half of 2020, as we fully realize the plan and cost savings.
Haven't has also been evaluating stimulus in tax incentive programs both in the U.S. in overseas shell companies, whether the pandemic.
Earlier today habits signed and unsecured promissory note under the Paycheck protection program, which would we expect to result in Avenue receiving alone the amount of 7.8 million that would accrue <unk>.
Interests at a rate of 1%.
If avid meet certain conditions, some or all of the 7.8 million dollar loan maybe per forgiving at a later date.
Finally, our current plan is to repair convertible notes to June 15, 2020 with cash in our balance sheet at maturity.
Let's now turned to our outlook.
Evolving hope it 19 global pandemic and its potential impact on our our business and market demand for our product is still uncertain.
Given the level of uncertainty, we're not providing guidance for full year 2020, we provide limited outlook for the second quarter.
Our current expectations for the second quarter is for a weakness that we saw at the end of the first quarter in hardware and integrated solutions.
Perpetual lights and professional service to continue during the second quarter, resulting in a year over year decline in total revenue.
We expect that growth in subscriptions will continue and maintenance revenue will be stable. So combine subscription plus maintenance revenue will continue to grow you every year.
We expect that the cost savings efforts implemented starting in April 2020, reduce operating expenses by at least 9 million year over year and help protect our gross margin.
We expect sequentially higher adjusted EBITDA for the second quarter.
Center outlook for lower year over year revenue in the corridor in a significantly improved cost structure in the quarter.
As we look to the remainder up 2020, we have been evaluating various scenarios for how the cobin 19 situation could play out in our business.
We expect that the demand for our many of our solutions that support new film and television production lives sports and live music to remain week into the fall.
With pent up demand building that will resurface when the restrictions on production in performance disease.
We believe that demand for us subscription offering should remain healthy as content creators individually and then within studios stretch it continued delivering new content for their audiences.
With all these expected challenges for our business, we have taken what we believe to be appropriate cost saving measures deliver a stable adjusted EBITDA margin in positive free cash flow for 2020.
Finally, I want you repeat that we have quickly mobilize as the cobin 19 pandemic emerged to support our customers and employees through the crisis.
We were revised our operating and spending plans to control costs and preserve cash during the downturn.
We expect these costs savings to have immediate impact during the second corner.
We are aggressively building out our club practice to support our customers business continuity remote workflows during the pandemic and beyond.
With that I like to turn the call back to Whip raffle.
Thank you can thank you get that concludes our prepared remarks, and we are now happy to take your questions <unk>. Please go ahead.
Thank you.
I'd like to ask a question. Please signals by pressing style one on your telephone keypad.
If you are using a speaker phone. Please make sure your mute function is turned off by your signal to return equipment.
Again, it is star Wonder if he would like to ask a question and <unk> just a moment to allow everyone an opportunity to signal for questions.
And we will take our first question from Josh Nipples.
Financial.
Yeah. Thanks for taking time to to answer a couple my questions here, one I I didn't want to ask obviously some headwinds facing the hardware that that's not unexpected here, but phenomenal growth in the subscription business or you've seen that flow through now that we're like you know month in a week in to the.
Quarter anything you could talk about the K. didn't say, you've seen <unk> subscription business as far as sustainability into cute too [noise].
Well I I'd say this is Jeff <unk> <unk>, our expectations for the graphic descriptions have not a baby. They continue to be quite you know strong we haven't seen all court yet, but so far trends are continuing as we expect.
<unk>.
And then on the.
<unk> the hardware front, if you could just provide a little bit more color one like some of the stuff that is selling versus there's and I know Ken mentioned above the call that like there's some margin compression and a lot of that may be due to just similar audio versus storage solutions like any any color you could provide on the hardware sales generally.
And what you're thinking as far as mugging going forward, probably would be helpful. I think.
Yeah.
Yeah. So so justices Kendall let me take that question. It's a good question in terms of our hardware margins during the quarter. They were impacted by next our storage business separate businesses was down.
Are storage business tends to have higher margins in our audio business.
With that said you know, we expect you know or or harbor margins [noise] with with this situation to be somewhat challenging, but as Jeff pointed out in in my prepared remarks, we expect there's pent up demand our storage business will recover.
And as a result, we expect you know hardware margins to to increase you on the back half a year.
You know when we look at our margins of typically Abbott is reported hardware margins in the low forties, you know we're down about a thousand basis points in the second quarter. You know, we expect our margins to kind of get back to more normalized levels as we move through the year.
Thanks again, that's that's helpful. And then just talking about cadence a little bit. Obviously, you don't expect any type of detailed guidance, but he didn't mention you do expect to be actually up quote over quarter. In Q2 does that kind of imply with the cost savings that you expect it'd be like the trial you need.
To be in Q1.
That's when we look at our our model the cost savings plan that we put in place has will result in the immediate you but improvement. These actions are already taken so the savings are already in the P.N.L. So we feel that we'll have a better performance and Q2, then keep one.
And that will results in better better keep it for the for the quarter and we should see the business and prove you know.
You know over time, but you know, we expect you know cute to to to be much better than than than than the first quarter.
Yeah. Thanks, and then you just kinda generally speaking on the revenue front like I would expect you know cute to revenue to be down quarter of a quarter based on some of the the commentary that you said, but as a law states are are still in the early stages of.
Opening I would expect you may start to see a little bit of a quarter recorder.
Upticking that revenue line in three Q. and then hopefully no if we get some professional sports back in in the fourth quarter, which is usually your strongest quarter that more meaningful out potential uptick you know based on what we're seeing now at least regarding coven 19, and and what states have for the for the reopening schedules that at a high level kind of what you.
There.
<unk> have planned out for your internal model.
Mm.
Yes, I would say that in general although you know, we're not providing or 2020 gotten the the themes you provided in terms of.
Some challenges through the fall, but then you know pent up demand and that having a better impacting our revenue lines and towards the second half of the air and then sports you know reopening that we're all benefit our our revenues as we think about the second half of the year.
Okay. Thanks, I, just want to <unk> actually I was thinking about things right way. It seems like I am and then I don't want to monopolize the color at the time. So I only have one more question that's really on the subscription front end the growth there. Jeff you mentioned that there was a number of enterprise customers that you've been game within historically, you've said that.
That the transition to enterprise subscription business was going to be like like a handful number of years type situation.
Based on what you're seeing currently do you expect that that that could be pulled forward and and we could see a significant increase in the company's subscription revenue over the next like 12 to 24 months from enterprise subscribers in the current environment.
Well I'd say I would say, we I would probably say what we said before which is you know if you remember we talked about the fact that we've been piling some of the enterprise and <unk>. The first task actually we did we stood it's late into that was 19 been continuing that are supposed to have some 2020, we still have the plan to launch the more the wider offerings description.
For the enterprise. This summer so we we do see as we said before that continuing to be a positive contributor yeah, even more so than the second half and really go through this couple of years.
<unk> I will save it yeah, I will say that the market. Obviously is is you know different today, but it's probably a good way it's been helping description.
Great. Thank saw how back in the cube.
We will take our next question track.
[noise], Hey, guys think sticking my question I've had a jump kinda back for it between calls as a lot of Vanos and then missing comments, but I want to revisit the the two q. outlook, specifically for product revenue I know, it's really tough to tell.
And I used in total revenue it'd be down Cooper Q.U. every year did you comment can you provide anything around to to Prague revenue, but even think it's gonna be down or up or flat relative to Q1 product revenue.
Yep, Hey, Hey check this is can they keep your question. So you know, we're not giving a bar or guidance specifically for for a cue to in terms of revenue elements I think.
You know what what we can what we believe is that you know our subscription and maintenance business, which has performed well in Q1 as Jeff pointed out subscriptions doing well already in a in April we continue subscription maintenance will be will be healthy with respect to product revenue. We see those challenges that were in Q1.
Continuing into cue to.
But in general you know I think <unk>. We see is you know really highlights on subscription maintenance for the for Q. too. So I hope that kind of gives you some indication of what we expect for the quarter.
Yeah, Yeah sure that's helpful and.
But if I just revisit again, you know <unk>, what the Q1, that's always a product grooming Q1, the drop off was there.
Was it mine is my understanding that was more related to you know new customers being kind of I guess <unk> landing new customers towards the end of the quarter because it <unk>.
Now that the Mexico manufacturing and product manufacturing is is back on line is the hang up in product revenue can be related to.
Just the customer demand poured out at the current time or the ability to take on.
New product orders or is it it doesn't cause it doesn't seem like it's an inventory bottleneck or supply issue. It's it's just more related to the customers I guess logistics.
It is yeah. This is Jeff Burroughs ago. So there was no even though we had some supply pausing in the last once a month or so it had no impact on our on our you know Abel ability to supply our customers. We've we've had the regulatory buffer throughout the so supply is not been a constraint we had <unk>.
Usually customer demand and customers ability to execute you know when when everything from Hollywood shows are entered by an entertainment or sports or.
Music programs music tours are pausing or suspending or canceling you know the needs immediate needs for the equipment or gear. They were gonna. They ruined deployed isn't there and so part of it is just things that are being deferred because you know, they're gonna wait and see how things play out for there to their goodness in other areas. It was just because you know they were.
You know they are they were and are still quite busy dealing with their own business continuity in dealing with their own business issues. So you know it will gradually mourn back up but you know they will be some.
Demand constraints from the customer side for a little while.
Has his recovery.
Okay that that's helpful. And then just just lie.
It wasn't just.
Well, you said new customers it wasn't really dark in print there wasn't just new customers those any customer, whether it's a customer upgrading or adding on or expanding their environment or new it's it's I wouldn't really <unk> characterize at one of the of.
Okay, Okay, they should the clarity.
And then I guess, just just last way I just want to revisit the kind of they they the cash conversion <unk> billings collection process.
Is.
How how much of how how big of an issue has that better I guess, how get the colder challenging has that been versus you know if he could parse out between you know demand for from customers for your products versus you know <unk> How's that I guess.
Late to the billings collection process, which I think was an issue towards the end of last quarter as well for this kind of court.
Yeah. So in terms of you know our customer base. We've you know fairly healthy customer base in terms of the the credit worthiness of it I would say the D.S. So.
Did increase from year end to March 31, you know, we we did see a lot of companies you know due to the work from home.
Arrangement imposed by governments you know.
There was less people in the office. So as we were making collection calls it just naturally there was less response.
But I would say you know R.A.R. is the D.S. so is still.
Roughly 60 days and that's you know fairly good metric and looking at other companies.
But you know we're very focused on.
Collections, we're engaging more.
And you know, we're working with our sales team to make sure that we collect our receivables.
Understood. Okay. Thanks, guys. That's it for me for now.
It's around my notice Star one if you would like to ask a question.
There was no additional questions about this time I would like to turn the conference back to Jessica additional for closing remarks.
So thank you operator, so let me close by saying that abbott's collaboration with our customers to keep the industry work has shown us it's steep capacity to adapt to this difficult situation quite rapidly. We are encouraged by the resilience innovation, both inside out and surround our community.
Strong recurring revenue streams increasingly rigorous operating in cost us when combined with our unique position to help the industry today will enable avenue enter the most of the global rebound. So I'm gonna. Thanks, all of our investors analysts outdoors for join this today and I hope everyone will remain safe and healthy as we look ahead to the essential global recovery from cover 19.
Thanks.
Ladies and gentlemen, this can click please call and we thank you for your participation you may not.
Okay.
Our private once again, we still have which <unk>.
Yeah. Thank you.
So <unk> <unk> yeah. Thank you out there and with our next called the Zoom call I think at what time.
I fix pen.
Okay got it.
Okay.
Jump back over the other than just.
Comment there I will I will too okay. Okay. Thanks, Thanks Abby.
Yeah, everybody can have a great.
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