Q2 2020 Avid Technology Inc Earnings Call

Good day, ladies and gentlemen, and welcome to the other technologies second quarter 2020, <unk> earnings call. Today's call is being recorded at this time I like to turn the call over to wait Rabble, Vice President of Investor Relations. Please go ahead.

Thank you Christine.

Good afternoon, everyone. Thank you for joining us today Rabbit technologies second quarter 2020 earnings call.

My name is what rubble Abbott's Vice President for corporate development in Investor Relations with me this afternoon or Jeff.

Our Chief Executive Officer in President and can do on our Chief financial officer or GDP.

And their prepared remarks, Jeff will provide an overview of our business.

Cash provided.

Where do you still be over financial and operating results followed by time for your question.

We issued our earnings release earlier this afternoon.

Slide presentation that we will refer to on this call.

Press release and presentation are currently available on our website at <unk>.

Dot com.

<unk> this call will be available on our website.

[music].

During today's call management go reference certain non-GAAP financial metrics and operational metrics.

In accordance with regulation G bought the Appendix tour earnings release today and are Investor website contains a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures adult definitions for their operational measures used on this call and in the presentation.

Unless otherwise noted by management during the call all figures noted that data during the call.

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

Our comments and answers your questions on this call is what was the accompanying slide deck may include statements that are forward looking and that pertain to future results or outcomes.

Actual future results were occurring since may differ materially from these forward looking statements.

For more information, including a discussion of some of the GE risks and uncertainties associated with these forward looking statements. Please see our press release issued today or trends you put a three month ended June Thirtyth 2020, and our 10-K pretty you're ending December 31st of all 20 like gene on file with the FCC.

With that let me turn the call over to our CEO and President Jeff let it go through.

Thank you it and thanks for talking to US to review avid second quarter, two when you're when the results that we released earlier today.

Please speak with you about the Companys resilience in the progress we've been making most facing a difficult business climate as a result to close <unk> 19 pandemic.

We discussed in prior calls me I knew tradition saboteurs, we increased our emphasis our software subscription business and recurring revenues. This quarter, we really saw the benefits that transition begin to play out with the most profitable second quarter, we've delivered in three years.

Across I would be rapidly adjusted our strategy hopefully reoriented our teams to effectively respond challenges created by the called the 19 situation and to help our customers adapt to changing environment. So they can get you to produce can deliver high quality content consumers demand.

We've demonstrated to help our customers mainstream cobiz, making further cementing our position and reputation with customers of all types.

At the same time get thus far effectively mitigated the impact of the pandemic on a company's profitability with comprehensive planning and an aggressive management actions.

Hey, along with average CFO can get wrong. He will review our Q2 results continuing efforts are effects of the global pandemic on our business and how we're becoming better position for the future.

In addition, we'll discuss the continued strengths and just over a long term strategy to grow recurring revenue streams and increase our efficiency and effectiveness in the way we work server customers.

Now, let's start with the important takeaways from Q2.

During the second quarter, how do you continue to work with our media industry customers to rapidly adapt to the new working conditions caused by the could take team situation. However, the headwinds our business that started at the end of the first quarter persisted through the second quarter.

The non recurring revenue parts of babich business related to product sales and professional services for the greatest impact will lead to an expected year over year and sequential decline snaps told the revenue for the quarter.

The positive side of our second quarter revenue performance came from the continued strength in recurring revenue portions of our business.

Contract value from our subscription and maintenance and long term agreements also continues to grow increasing 8% year over year end up slightly over Q1.

This is even more impressive given the challenging business quite we're facing like somebody others are.

In fact, we renewed four of five strategic purchasing agreements that were up for renewal during the quarter. What's the wondering will be the lifestyle partner that we expect to resist it looks that end market has recovered.

We also added a new global strategic purchasing agreement with one of our largest systems integration partners. That's serves media and entertainment and other industries.

And then the quarter the strong broken subscription revenue continued.

Despite of the excess global disruption and lower revenue during the quarter, we were able to deliver significantly improved margins and profitability during the second quarter as a cost savings will quickly implemented early in the quarter in both operating expenses and non material cost of sales and Dusty up.

Across the company to remain disciplined and focused on execution gilded improve results.

Rapid response to the developing pandemic not only helped us to persevere through Q2, but also contributed to better financial performance.

Anticipated revenue headwinds.

We're confident that are cobot mitigation programs and the associated cost savings measures will continue to benefit the company going forward as it wasn't pandemic through the second half of this year.

I just mentioned recurring revenue portions of our business continued to demonstrate strikes during the second quarter and again Boyd overall performance did the impact of coping 19.

Subscription revenue climbed again in the quarter by over 68% year over year as it continues to see rapid growth the number of paid subscriptions for our creative software tools.

We started to see increased revenue contribution from our enterprise cloud business, including its on the cloud services agreement that we signed with a major media company ended the first quarter.

In Q2, our gross margin continue to improve coming it over 65%, which was up 600 basis points year over year actually benefited from the mix shift to more software sales and yes, we reduced expenses in our non material Cogs during the quarter.

Maintenance revenue has continued to be relatively stable combined with a strong subscription revenue growth. We saw combined subscription plus maintenance revenue grew 13% year over year.

Our E Commerce business gets you to show strong growth, increasing 28% year over year to over 19 million during the quarter, representing an annual run rate.

In dollars.

Last few years, our E commerce business has grown into a large strategic profitable and valuable route to market for subscriptions perpetual license and maintenance agreements so our creative software tools.

During the second quarter, the girls and subscriptions the improved gross margin and the efforts we made on controlling costs. During the Pandemics resulted in a 43% year over year increase in adjusted EBITDA.

And finally, we continue to see significant interest from our customers in our new cloud solutions, such as <unk> support remote workers and distributed workflows that studios broadcasters and for book Productions.

During the second quarter and as anticipated we continue to encounter kobin related challenges in the nonrecurring portions of our business as we saw a weakened demand given the ongoing disruption in live music major sporting events and film and TV production.

Continue to believe these are temporary factors that we expect to abate as a pandemic subsides.

The allowing our industry to return towards double pace of creativity.

Production.

Overall, the dozens of Abbott's channel partners has also been impacted by the temporary reduced demand and biceps Scully. They have remained careful with their stocking orders as many continued to exercise tight management of certain Tory levels.

Additionally, some of that was enterprise customers such as television broadcasters film Studios and post houses have temporarily delayed some of their purchases and pause some of their larger projects due to the business quite a bit unrestricted access to facilities caused by the ongoing pandemic.

We continue working very closely with these customers and anticipate closing on several of these opportunities in the second half the 2020 as the market adapts to the pandemic and asked restrictions east.

As we look forward to the third quarter and the rest of 2020, we expect that the market environment for our solutions will continue to be impacted by October 19, but we do expect to grab a gradual but potentially.

Yes, the second half progressive and as life supports and live entertainment slowly churn film and television production because I guess companies continues to improve their capabilities to work in mid to corporate environment.

We expected their curry portions of our business will continue to hold up and and for our combined subscription maintenance revenue continued strong growth as more customers adopt our subscription offerings, including from our conversions are paid subscriptions of many of the free temporary 90 licenses that we provided to customers during March and April and from the expected.

Launch of the war and the price subscription offerings that we're going to happen later this year.

In addition, we continued to see opportunity to grow our cloud offerings to enable work from home remote editing and other media work flows through the cloud.

Given the external market conditions will remain focused on growing these high quality revenue streams from subscription cloud and SaaS.

We will remain vigilant on controlling our operating expenses and non material cogs to optimize our profitability and free cash flow.

A couple of 19 pandemic has also created opportunities to grow the strategic portions of our business, we're adjusting our strategy and our investments to respond to the changes in the market, which are formed by ongoing discussions with customers across the mi industry, placing greater focus on the products and solutions that we believe will drive profitable growth as we emerged in the post covance environment.

We're also in the process of realigning our cost structure and we are committed to making the changes that are necessary to ensure that abbott exits and spend as a stronger and more profitable company delivered to shareholders that kind of results. They expect a company with our recurring revenue suffer business.

Now with that I'll now hand, the call over to can get Ron will offer more details behind our Q2 2020 results or you can.

Thank you, Jeff and good afternoon, everyone.

It above Jeff and I was referring to non-GAAP figures unless noted.

Overall, we're pleased with our business and financial results for the second quarter up 2020, given the macro challenges facing our business in the quarter.

Our recurring revenue sources, including subscription and maintenance revenues have remained healthy why the nonrecurring portion of the business continues to be negatively impacted by week external market demand related to cobot 19.

Our focus in the second quarter was on effectively managing the business to profitability and as a result of these efforts were able to deliver healthy adjusted EBITDA Hell bent on lower revenue into limit our negative free cash flow in the quarter, all while incrementally improving the balance sheet.

We are cautiously optimistic that the actions, we've taken should position us to achieving year over year improvement in profitability as the external market environment gradually recovers.

With that let's now getting the details of our second quarter financial results.

GAAP revenue was 79.3 million during the second quarter down 19.7% year over year.

Recurring revenue was strong as combined subscription and maintenance revenue was $47 million up 13.5% year over year, while nonrecurring revenue from hardware and perpetual licenses was down due to the impact sales of Kogan 19 crisis.

At constant currency, our second quarter 2020 revenue was down 21% year over year.

That's a relatively stronger euro compared to the U.S. dollar negatively impacted revenue by about 0.4%.

Gross margin was 65.4% for the first quarter up 600 basis points year over year <unk>.

The increase was due to a more favorable revenue mix up higher margin subscription and maintenance revenue.

As well as the impact of our cost savings initiatives on non material cost of goods sold.

Operating expenses for the quarter were 40.5 million now $11.2 million decrease year over year, and a 10.8 million dollar decrease from the first quarter of 2020.

The year over year decrease in operating expenses with due to the benefits from our cost savings effort.

Including 6.6 million from temporary furloughs in wage reductions we implemented at the beginning of April.

3 million from travel reductions and 3 million from marketing spend reductions, partially offset by a bonus accrual of 1.3 million.

Adjusted EBITDA was 13.5 million in the second quarter up 43% or 4.1 million year over year do the benefit of higher gross margin and lower spending.

Adjusted EBITDA margin was strong at 17% in the second quarter never get improvement from 9.5% in the prior year period.

Non-GAAP net income per share was 12 cents for the second quarter up 10% up 10 cents year over year, reflecting the increase and non-GAAP operating income.

Free cash flow was negative 5.2 million in the quarter.

Down 700000 year over year, resulting from lower billings as was a large change in working capital.

Working capital was the use of cash of $12 million in the quarter, reflecting an unfavorable working capital change of 7 million compared to the prior year period.

During the quarter the company reduce its accounts payable by $21 million year over year to facilitate an improvement in vendor pricing that benefited margins.

The reduction in accounts payable plus improvement in cost structure and profitability.

The strong foundation for higher free cash flow for the second half of 2020.

Now moving to recurring revenue and annual contract value.

The percentage of Eric revenue, that's occurring continues to steadily increase.

For the 12 months ending June 30, 2020, 70% of total revenue was occurring.

From 58% in the 12 months ending June 32019.

LTM recurring revenue percentage increase due to higher subscription revenue in revenue from long term agreements as well are well lower nonrecurring product and professional services revenue in the first half of 2020.

Our focus on building the recurring revenue portion of our business.

And we expect recurring revenue percentage to continue to increase in the long term. We believe it is elevated in the second quarter given the short term volatility nonrecurring hardware in perpetual product revenue and therefore, it may be on even sequentially. During the next few quarters as the nonrecurring product and professional services revenue.

Starts to rebound from the current depressed levels due to cold it.

Annual contract value was 265 million it ended the quarter up 8% year over year.

Benefiting from increased subscription revenue in greater contribution from long term agreements year over year.

During the second quarter, we added one new multi million dollar.

Strategic purchase agreement and renewed four or five long term agreements in the quarter.

The one agreement we did not renew was what that channel partner, who service the lifestyle market, we expect to revisit this agreement with the partner as the life sound market recovers.

I do look into the details of our revenue streams you continue to be encouraged by the continued resilience and growth of our subscription base.

And the second quarter, we added roughly 25 24000, net new subscriptions to our creative software solutions and our total subscription count reached 242000 at quarter end.

An increase of 64% year over year.

Subscription growth with particularly strong in pro tools up 70%, 7% year over year and media composer up 52% year over year.

The number of net new subscriptions was slightly lower and the second quarter than in the first quarter due to the early ways of users preparing to work remotely at the onset of the pandemic during March.

Additionally, we continue to see a shift towards annual paid upfront contracts, which we believe our higher quality revenue stream for avid when compared to monthly paid subscriptions.

Annual paid up subscriptions grew 310% year over year, and the second quarter and now represent 22% of total subscription.

From 9%.

A year ago.

Lower quality revenue.

Month to month subscriptions were down 20%.

Every year and now account for only 9% of total subscriptions.

Down from 19% a year ago.

We believe that the growing share of annual paid up subscriptions for the result of pricing changes, we have but in July 2019, and that the share of annual paid up front subscriptions will continue.

To grow as more of their enterprise customers adopt subscriptions and continue to optimize our pricing models.

The growth and subscriptions and impact of our early cloud business drove continued growth in subscription revenue during the second quarter.

With subscription revenue, reaching 16.4 million.

An increase of 68% year over year.

From a cash perspective billings for subscriptions increased 80% year over year in the second quarter above the growth rate in subscriptions due to the increase in annual paid up front contract in price increases.

Finally, when we look at the total creative tool users, both subscriptions and active maintenance agreements. The total number has grown 22% year over year at June 30, 2022 about 404000.

The growth in paid subscriptions far exceeds the decline in active maintenance contracts.

Now moving to the composition of our revenues.

Maintenance revenue was 30.6 million during the second quarter down 3.4% year over year.

We continue to see the impact of the end of support for legacy storage solutions and slowly declining noncash revenue that flows through the maintenance line.

Putting these factors maintenance revenue would have been down 0.7% year over year.

Due primarily to reduce first year maintenance revenue from lower product sales in the first in the second quarters.

Well subscription revenue continues to grow.

Petro license revenue was down 20.8% year over year due to continued weakness in mediacentral perpetual sales due to cope at 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 85.6% in the quarter up 40 basis points year over year.

The company's hardware in the <unk> integrated software revenue was 20.8 million in the second quarter down 50.1% year over year do the impact of cobot 19 on customer operations in purchasing decisions.

The revenue line was impacted by decline in sales of storage solutions in video service do the impact of Coven 19 on studio and broadcast customers as all the substantial decline and lifestyle audio sales caused by significantly less activity and music concert tour music concert tours and festivals, resulting from.

<unk>.

That's companies any Cogs reopened we expect to see improvement in hardware integrated software in future quarters, and we believe there will be strong resurgence in content creation, requiring the our integrated solutions.

Gross margin from hardware products integrated solutions was 25.8% in the second quarter down 1100 basis points year over year as lower production volumes did not absorb as much of the manufacturing overhead in the quarter in the mix shift within hardware with a greater contribution of lower Martin margin audio products versus higher margin story.

Products.

The balance of our revenue comes from professional services business professional services revenue was 4.6 million in the second quarter down 33% year over year, a certain projects are pushed out due to limited ability of professional services personnel to the on site at customer locations.

Gross margin on professional services was 8.9% in the quarter down 220 basis points year over year due to low utilization.

As of June 30, we had a cash balance up $55.7 million down from $81 million at March 31, 2020.

Cash balances decreased due to use of cash to repaid $29 million and convertible notes.

And negative free cash flow in the quarter offset by $7.8 million of proceeds from the PPP loan.

At June 30, we had total debt of 230.7 million down 21.8 million from March 31.

During the quarter, we experience a reduction in our leverage ratio with the improvement in our LTM adjusted EBITDA with our net debt to adjusted EBITDA falling from falling two or 3.4 times as of June three from 3.6 times at March 31.

On may 19th we amended our credit facility to provide for additional covenant flexibility.

Part of the Amendment, we also removed the second tier covenants when liquidity falls below 60 million.

The amendment to increase our interest rate by 50 basis points to LIBOR plus 675, I was however, as we continue to improve our profitability. We will continue to evaluate path to improve our cost of capital moving forward.

As of June 30, we reported leverage under our credit or agreement of 4.3 times down from 4.6 times at March 31.

What's our amended covenant levels plus the improvement in our leverage ratio, we have substantial cushion against the six times maximum leverage covenant at June 30.

Finally, let's let's turn to our outlook.

The continuing cobot 19, pandemic and its potential impact on our business and market demand for our products is still uncertain.

Given the level of uncertainty we are only providing a limited outlet for the third quarter and the remainder of the year and not providing official guidance.

Our current expectation for the <unk> third quarter. Despite the weakness that we saw during the second quarter to continue however, we expect to see a gradual yet on even recovery of the market.

We expect that recurring revenue will continue to perform well, but that the nonrecurring portions of our business will remain challenged in the near term.

We expect that the growth in subscription will continue in maintenance will remain stable. So combined subscription plus maintenance revenue will continue to grow year over year in the third quarter.

We expect that the cost savings efforts implemented starting in April we will continue to reduced year over year operating expenses, yielding sequential and year over year increases in adjusted EBITDA in the third quarter.

As we look to the remainder of 2020, we continue to evaluate various scenarios for how the cobot 19th situation.

Could play out in our business. Although we currently expect the market to begin a gradual yet uneven recovery overall demand for certain products will remain relatively weak into the second half of 2020.

We do expect.

Jeff demand to surface when restrictions eve and more production resumes.

We believe the demand for our subscription offerings should remain healthy as content creators individually within studios strive to continue to deliver new content for their audiences.

We expect that the cost saving measures, we implemented during Q2 will deliver more than $30 million year over year operating expense reductions for fiscal year 20.

Taken together, we expect that both adjusted EBITDA margins should be higher year over year and fleet free cash flow should be positive for the full year 2020.

Also as we exit 2020, we expect.

Approximately 60% of the cost savings measures taken during 2020 will become permanent in 2021, that's we realigned our cost structure. So that Abbott is positioned to exit the pandemic as a stronger and more profitable company.

With that I'd like to turn the call back to it.

Thank you can't thank you Jeff.

That concludes our prepared remarks, and we are now happy to take your question Christy go ahead.

Thank you if you'd like to ask a question. Please press star followed by them Wonder why on your telephone keypad, if you're calling for the speaker phone. Please make sure section is off to ensure that you're still kinda chocolate.

Ken Starr like ask a question first of all that you Josh Nichols from B. Riley Your line is helping.

Yeah. Thanks for taking my question then great to see how well the management team has navigated a very challenging quarter.

Any <unk> billion actually improving one thing I did want to ask is could you provide any outlook on what you're seeing as far as the magnitude of a hardware rebounded in the last couple of months and if you could potentially kind of subdivide that.

Between what you're seeing through the traditional hardware and also storage that would provide a little bit more color would be helpful.

Yes, so Josh. Thank you for your question I would say you know we expect the market to gradually improve.

You know in terms of the hardware business it has been.

Impacted due to the situation but.

I would say in general we expect that you know Q3 to be an improvement over Q2, and then Q4 should be a better quarter and I would say that you know, we expect to see subscription and maintenance to be though if we continue to perform well and then the hardware to to recover I would say in terms of the hardware.

We see audio being the strength.

And that will continue to perform well and then likely.

As as broadcasters and students look to continue to fill their content pipelines, we expect a on Prem software and then storage to continue to rebound more towards the back half of year.

[noise], thanks for providing some additional detail and then switching gears a little bit I think really the longer term added stories about the company's growth that you've seen in this recurring revenue into subscription based you said you expect the maintenance revenue to remain relatively stable in the back half.

Do you think that the subscription revenue growth than you've seen in the second quarter is kinda durable and expected to maintain to the back half of the year.

Yes, I would say that you know the suite, we feel good about the subscription business. Yeah. We feel Q3 will be a very good quarter as well as Q4.

I think we did benefit a little bit from people working at home and the first quarter, but in general we feel like you know these growth rates in subscription.

We'll continue to remain healthy and.

Scripts, and plus maintenance, which accelerating that growth rate from 11% in Q1 to 14% in Q2, Yeah, we expect that to continue to be low double digits.

And that will be ahead of you know our initial guidance. So we see the highest quality revenue streams growing.

More in this environment than we initially expected we continue to see a positive outlook in that piece of the business.

Hi, Thanks, Thanks for that and then last question for me is the company's recently released new enterprise offering I heard on the call earlier, Jeff that there's a couple more in the pipe what's the expectation for how quickly the company will be able to get some of these larger enterprise customers.

Onto a more subscription basis over the next 12 months or so.

Yeah, I think look I think is gonna be good questions, it's going to be gradual to some degree, but we will see I think every quarter hopefully our plans to have new customer sign of every quarter. So will the project actually form we <unk> the wider project the wider product. It goes across all of our platform products, including Mediacentral actually releases in the third quarter lot of our channel.

Pardon is aware of it now but is there to formally releases in the in starting September timeframe and then we expect from their forward, we'll be doing a lot of work with customers and move them to subscription. So I think the trend will continue where we'll see.

Our expectation or anticipation as it we'll see.

Probably a huge on your quarter.

Great. Thanks, guys I'll hop back into queue.

And we'll take our next question for me, how taxi something like Northland capital markets. Your line is happening.

Thank you and congrats on the amazing subscription quarter there.

I want to focus on the nonrecurring portion of the business, though pretty cool that what percent of that nonrecurring with associated with audio and what percent video.

I'll, let Ken Brad down.

Yeah, So I would say on the on a pre covert basis, you know audio which was was fill up the main contributor.

Of the business in terms of.

Hardware I would say on the audio when you look at.

<unk> revenue line it was roughly 40% of the business if it is growing.

Nicole good environment, because we are seeing some weakness in the and the the video in the storage, we expect that to rebalance as we as we move into.

The back half a year and into early 2021.

Okay.

And based on what Youre seeing now how would you characterize video content production levels relative to what it has well what you saw during the June quarter, and then relative because at levels that everybody. That's what's the lag between selling donlin and when demand has generated for the avid products if theres any lag.

Yes. This is Jeff so I'll try to answer that well there's no. Let me say, there's no actual market data that comes out that quickly. The we can actually see by quarter, where the levels Arts I'll say this that the obviously the June quarter. It was kind of be ice storm with all pandemic. So it.

<unk> is expected to be the worst quarter of all obviously from a production standpoint.

As far as where we are in Q3, we are seeing a gradual warming, especially outside of the U.S.

So even in the U.S., we're seeing or the Americas I should say, we're seeing some returned to production it's little bit lighter in late in New York, but we are seeing production started up in Canada and in other parts, where they feel like they've got a better ability to to get go back to work, but they are starting to warm up in other parts of the world, It's going a little bit quicker so I.

I wouldn't give a percentage I would say they did this quarter is looking to be sequentially, but obviously than what we saw in Q2 and even within Q2. It was gradually starting to recover late at very late in the quarter.

So I think it's it's it's the sequential I wouldn't want to give an estimate yet, but I would say that we are we're making decent progress now on a global basis that production is it just starting to get either they're either Bakken production or they are planning to get back in production doing the work they have to Jim to produce the show what it sometimes in a different way than they were pretty cobot.

As far as the lag time, it really depends you know some shows that are more live oriented that you do you need the equipment right away to produce the show.

Their needs are usually pretty quick they'll be coming after us becoming something like cabin assumes preproduction isn't a serious stage. Other is more like still content can be a few months between.

The time principles and started photography is shooting and when they need to actually do post production.

Okay, that's very helpful date and sloshing.

Yes. It does and then my last question is on the subscription side what type of market share do you think avid has in the lower end to the market on video and audio I know, it's tough to size, but just broad stroke marketshare, because clearly you guys are great gaining share right now and just you know.

Broad stroke market show would help but gauge whats that should be the duration of this above market growth rates that you guys are.

Experiencing right now.

Yes, so I think what kind of video side, you have a lot of room to move.

A lot of companies who have share in that space. So it while AVOD is probably has a very significant share. It's a high in the as you know at the lower end of the market, where you have more individual creatives our shares probably sub 15%.

In the 10% to 15% in that markets. There's a lot of move for us to grow in that space at the lower end.

Were you know loves to other tools are competing against you seem to the numbers that were seeing good growth on the music and audio creation or music creation posts side, we have a larger market share there I would say again at the lower end, we're probably around.

I'm going to save 30, 40% of the market lets say and there's several players that make up the remainder of markets. So even there again, there's still lots of interest to move.

Great. Thank you very much.

Yep.

And again, if you like to ask your question. Please press star followed by the number one and your telephone keypad, Mexico to Jack Vanderheiden from Maxim Group. Your line is that from.

Hi, Thanks, guys. Thanks for taking my questions, which I guess I'll start with a a question for Jeff on so based on the comp basing your conversations with some of your larger enterprise customers are even potential customers that are not currently on a multiyear contract.

Are there any specific end verticals or customer types that you would say are slower to rebound or less likely to make you know a large purchase in the next one to two quarters.

And then on the flip side are there any specific customers in certain and verticals that are rebounding faster or are better than you would have expected say from a month or two ago.

Yes. Good question so on the on the markets I think markets that are advertising.

<unk>, where a lot of their revenues come from advertising, they're going to probably be a little bit longer I think it a larger percentage of their businesses advertising probably to the longer will be for them to potentially start making large investments, but that's not a black and white answer there are people, who are reinvesting in that space, but I'd say, but I think of things as a collect.

Yes, that's probably going to be slower to move that lets say people, who are doing you know streaming services or subscription based content services.

Those are going to return quicker actually anybody in the content.

Creation eco system in a disappointing content are creating content for a subscription based or or anything in that caliber they're gonna come back a lot faster because you know those business models require a constant stream of new content and otherwise people will turn service off and so I think those markets are moving.

A little more quickly we are seeing too in markets around the world the more public domain or the government type of areas. Those are starting to to see some once already so I think it really depends there's a lot of nuances you have to look at does what country are you talking about you know how much their business advertising how much of the this subscription based there's a lot of metrics to go with that.

And of course, if your post production provider or that you're you're working with Hollywood. Obviously your your you know your recoveries going to based on when production gets back to the into full slate.

Great not that's that's very helpful. And then I guess a question question for can so you know in your prepared remarks to profitability benefited from this 11 million or so.

Reduced operating expenses are cost savings, which is a good chunk of bad that plan 30 million or so target for 2020.

Did I hear correctly can that about 66 zero, 60% of the cost savings in 2020, a will will be permanent as you head into 2021. So I guess, that's 18 million or so is that correct.

Yeah. That's correct. So 30 million was the Opex savings, we believe 60% roughly will be permanent and.

In 2021, where we feel good about the.

Movement that we're making in certain areas of the cost savings and.

Yeah, that's we're benefiting from those programs and we want to try to.

Realize.

A majority of those so 50% of what we feel comfortable saying in our cost structure and 2021 is we want to drive continued improvement in profitability.

For our shareholders.

Sure. That's helpful. Thank you and then in case I missed it did you had I think part of the cost savings plan to was was for some savings opportunity I think it was about 10 million or so is the target for cost of goods sold savings in 2020 did you guys experience or any.

Any savings from the cost of goods sold buying and then do you have any similar guideline or framework for what percent of that would be permanent heading into 2021 as well.

Yeah, I would say you know we our goal is 10 million for the year, we're on track or actually slightly ahead.

In that base at Q2 results and you can see that in our gross margin.

Gross margin, 65%, yes, 700 basis points from year over year period.

I would say in general.

You know, we're probably going to be in the.

30% to 40% area.

On the Cogs.

I'd say, that's probably a good estimate at this point for us and 2021.

Our getting the benefits of.

Continued vendor negotiations that we'll continue to drive that that number. So that's it that's an estimate that would have for you for 2021.

Okay. That's helpful. And then just just one more for me.

Looking at that through the 10-Q and I know, it's like the gross margin for for product sales contracted about 550 basis points are so for the three months.

Just wondering how much of this is related to the temporary headwinds from coping 19 are essentially just less fixed cost absorption due to the lower product revenue scale or you know how much is actually due to normal business.

Factors that just like pricing pressure or.

Are there, maybe discounting or anything like that.

Yes, so when we look at our our product business. We look at both product margin and then obviously gross margin, which includes the overheads our product margin year on year was.

Pretty well.

And that margin was impacted by a mix shift more to audio which lower margin our storage. So the product margin, we feel really good about.

The overhead were not absorbed.

When when revenues are down it.

The hardware side, so is that that business rebound.

Market gradually recover as you know I will we should see a fairly large increase in hardware margin.

That is that those overheads are absorbed so you know as Jeff and I pointed out we expect the gradual recovery should be a it can be uneven but in general we're seeing the better better better health of the market. So I've hardware revenue improves we should see that that gross margin on the product side and.

Prove as well because we'll be able to absorb overhead.

Okay, and then actually just just doesn't fall to that to is your target for adjusted EBITDA margin for the year, which is supposed to you know I think you you'd kind of bye bye.

Not explicitly but our or formally sad, but you expect it to be up year over year.

Do you in bed that sort of product Mark gross margin expansion in into that that comment about adjusted EBITDA ending higher in 2020 Onest twin engine.

Yes, so we expect adjusted EBITDA margin you know to improve this year and you can see the benefits obviously, we you know even.

EBITDA margin was 17% this quarter was 9% year ago. So you can see the the improvements that we're making on the cost structure, that's driving the higher profitability as well as the improvement in Cogs, that's driving the favorable gross margin.

In addition to the higher quality revenue. So when we look think about that margin, we expect some improvement in the hardware margin.

In the back half of the year to help get to our goal. So that is you know there is some recovery really in the fourth quarter that we expect to get to those levels.

Okay fantastic Thanks for taking my questions guys.

Yeah.

Thanks.

Well go next to some odd Snyder from Jefferies. Your line is open.

Hi, Good evening. Thanks for taking my question, maybe or maybe I'll start on it maybe how to pipeline has changed and had deal wins look now there were several months or moved from the Disney Microsoft partnership announcement, I know that received a lot of visibility at the time and I know, there's a lot of changed in the world, but I'm curious if that's having some of that intended effect.

Yes of drawing larger.

And your content providers into the pipeline.

Yeah, Hi, My this is Jeff let me answer for you. So I think you intended effect, we had while obviously coated the very beginning kind of upset the trend it's space I think it stabilize now and we as we mentioned we haven't names the company yet, but there was another major media companies that we signed to integrate with in Q1, that's starting to convert.

Revenue in Q2.

Our other as it was signed around the world that are maybe not as large as those to bear pretty significant size companies and those are starting hopefully to contribute in the second half we're continuing to see a lot of heavy amount of work.

Work and those in those.

Customers around the area, it's starting to the cloud is little bit different because you go through a process of doing PEO season doing things to prove out that you can do what they need you to do in the cloud, but that work is all going very well our team is almost overtaxed, they're quite busy working it's that's follows improving and we are converting some of that some of the funnel.

So so far we're pleased with it.

Okay, maybe just that the and I apologize if you've already addresses but it is I think about what some live entertainment, even though it's not in person that are coming back for instance.

Coming back again, and I mentioned other forms of media or is that how much of that allows you to use it maybe existing product that you.

Got to providers of purchase from avid versus maybe driving some incremental spend that's either in new areas are indeed quite a bubble that I guess, how should we think about maybe that being at least a short term south or opportunity if at all.

Well I think I mean really it gets all the above some customers have upgraded recently, so maybe they don't need to spend a lot in the short term others have you know puts things austin's they need to invest I would say in general.

Getting back even if there isn't.

<unk> fans in the stands at still good they're getting back because by the sports getting back you're not generate new advertising revenue or at least improved advertising revenue.

Getting eyeballs you go back to TV at those times, a day or or you need money when they want those levels. So I think it's going to eventually you know helped advertising revenue, which in by default helps see you know the economics of those broadcasters or media companies. So that's a good thing the more towards the return capacity were turned the better just for us as far as who needs of equipment. It.

Again, it's it's it's all to the map some people needed immediately some people have already given this contracts to to help get something upgraded or to get something additional put in others are waiting a little bit longer just see what are the season plays out. So again, it really depends on the sports and where the broadcasters for or people, who are or on the rights to that you know what's their plan is for their protect.

Youre environments.

But.

Atlantic was the more that gets back the more the gets back into production some up and better.

Yes right.

Hi, along with everybody else is rooting for more safely s. as possible. So oh were held in both loud and then you know a guy obviously the the company has done a lot in terms of cost cutting measures and.

And to benefit the Bottomline and keep the balance sheet, Dave <unk> <unk>, but how should we think that maybe is there any opportunity for tactical M&A for for avid and this type of environment, where maybe some of your smaller competitors or Jason pieces might be struggling whereas that whereas the company's balance sheets in good shape, how should we maybe think about that opportunity in that.

Next six to 12 months.

Well I wouldn't want to be specific about it there's nothing specific I would share I think obviously generally a market like as you know those opportunities are likely to present themselves.

They're going to do it immediately but I think eventually you're going to see those opportunities present themselves look all say is avid like any technology companies gonna stay pay attention and keep our eye on what's happening in the market, what maybe interest to us, but right now <unk> near term, we're focused on execution to ensure we've got the right profitability profile and cast quite spoke profile.

But we're paying attention we're keeping our eyes.

You got any Ken I think just one is probably more for you, but as I think about the the cloud subscriptions that continues to be an area that impresses and have you seen any patterns in terms of retention.

Cohorts, maybe that customer you signed at the end of March versus call. It as the month of golf and gone along in this or any changes or stabilization or getting where it as you think about the different cohorts of the sign ups.

Well, we're actually you know, we're actually overall seeing an improvement in retention rates on the subscription side during this environment.

Also.

Typically we're pushing you know more of the business and you'll pay Daniel.

Versus the monthly paid monthly and there's a significant improvement in the quality of revenue stream in terms of retention rate. So.

Those two strategies continue to nurture customers due to push the will you know paid annual we're starting to see you know kind of an improvement in the retention rate and that subscription. We will continue to do that because the you know very important piece of that that business and its outlook.

Great as always I appreciate you, taking my questions and I'll cede the floor to the next person.

And then we have no further questions in the queue at this time I'd like to turn it back to Jeff first I guess for closing remarks.

Well, thank you operator, and thanks, everyone again, so we just close by saying we remain enthusiastic about the opportunities for avid we're committed to supporting our customers through the co bid 19 pandemic and we're remaining vigilance in our cost savings efforts as we operate your business responsibly given the current environment and we're looking forward to strategically a position.

Average capitalize on to profitable growth opportunities expected in the post cobot environments. So thank you to our investors analysts and others, who joined US today and I hope everyone will remain safe and healthy we look forward to speaking with you again soon.

And that does conclude our call for today. Thank you for your participation you may now disconnect.

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