Q3 2020 Avid Technology Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the habit.
Third quarter 2020 earnings call today's call is being recorded let me turn the call over to Rappel Vice President Investor Relations. Please go ahead Sir.
Thank you Keith good afternoon, everyone and thank you for joining US today Rabbit technologies third quarter 2020 earnings call for the period ending September Thirtyth 2020.
My name is wed wrap all habits, Vice president for corporate development and Investor Relations.
With me. This afternoon are Jeff <unk>, our Chief Executive Officer, and President and Chief.
Chief Financial Officer, and D B P.
And they were prepared remarks, Jeff will provide an overview of our business and then Ken will provide a detailed review of our financial and operating results followed by time for your questions.
We issued our earnings release earlier this afternoon, and we have prepared a slide presentation that we will refer to on this call.
Press release and presentation are currently available on our Investor Relations website at <unk> Dot com.
And a replay of this call will be available on our website for a limited time.
During today's call management will reference certain non-GAAP financial metrics and operational metrics in accordance with regulation G well in the appendix to our earnings release today, and our Investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definition.
For the operational metrics used on this call and in the presentation.
Unless otherwise noted all did your as noted by management during the call our non-GAAP figures.
In addition, certain statements made during today's presentation contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Our comments and answers to your questions on this call as well with the accompanying slide deck may include statements that are forward looking and that pertain to future results or outcomes.
Sure future results or occurrences may differ materially from these forward looking statements for more information, including a discussion of some of the key risks and uncertainties associated with these forward looking statements. Please see our press release issued today and our most recent annual report on form 10-K, and quarterly reports on form 10-Q filed with the <unk>.
Yeah.
With that let me turn the call over to our CEO and President Jeff Rosica for his remarks.
Thank you Ed and thanks to everyone for joining us to review average third quarter results that we released today.
We're certainly pleased with our Q3 results.
Specifically, we are encouraged by the start of a turnaround in demand that we encountered in or nonrecurring business during the quarter.
Also with the continued strength of the recurring revenue elements of our business driven by both the growth of our great software subscription business.
The initial rollout of our enterprise subscription offerings.
COVID-19 did continue to have some temporary impact on customer demand on some parts of our nonrecurring product business, but we expect magic continues recovery that started in the third quarter.
We have adjusted our strategy and investments to quickly respond to the changes in the market were seen focusing even more sharply on the parts of the business that we believe will drive more profitable growth.
We also remain focused on ensuring we have the right cost structure moving forward to make sure Abbott interest 2021, as a stronger and more profitable company.
Today, along with our CFO, Ken gave them. We will review average Q3 results our resilience to the ongoing to sex of the global pandemic and how we remain hard at work delivering product innovations to better position habit and our customers for the future.
In addition, we'll discuss our long term strategy to continue to grow recurring revenue streams and increase our efficiency and effectiveness in the way, we work and serve our customers.
So let me dive into our third quarter results I want to take a moment to reflect on the strategic priorities. We outlined at our November 29, She's Investor day, and the progress we have made toward these priorities.
To say that we have stayed focused on execution in spite of the obvious distractions from the cobot and 18 situation and that we achieve significant results against these priorities laid out for 2020.
Our first priority is to grow recurring revenue from subscriptions maintenance and long term agreements.
Right the challenging market conditions for most of this year, we have continued to make progress in this area by focusing our sales and marketing efforts on subscription business models.
As of Q3, our LTM recurring revenue has increased year over year on a dollar basis driven by the success of our growing growing our cloud enabled software subscriptions.
The number of paid subscriptions in particular is up approximately 81000 or 43% since the beginning of the year. Despite the impact of the global pandemic.
Our second priority is to deliver more consistent growth enhanced profitability and free cash flow.
Couldn't 18, that's having an obvious impact during 2020 on the nonrecurring elements of the business. We have continued to deliver solid growth in our subscription and overall software sales we.
We have also focused on controlling operating expenses and non material Cogs, which altogether have contributed to our improving profitability and strong free cash flow.
We are free free cash flow positive year to date as of the end of Q3 for the first time in many years.
Especially proud that we've accomplished this while strengthening our balance sheet as we're in a strong position going into the fourth quarter historically, our strongest quarter for free cash flow generation.
Our third priority is to improve business operations and expense control, while making the needed R&D investments to support growth.
We've adjusted our strategy and investments to quickly respond to the changes the market focusing even more sharply on the parts of the business that we believe will drive more profitable growth we.
We also remain focused on ensuring we have the right cost structure as moving to 2021 to ensure that we can continue to deliver improved profitability.
We've also adjusted our product Roadmaps and R&D spending to focus on the product and solution areas that will address our customers' changing needs and will help to drive growth for the company.
Other one of our important priorities we.
We have continued innovating listening and delivering new product offerings I would say.
Talk about some of those innovations shortly but suffice to say that we have the least numerous new solutions. This year and have even more plants in Q4 and throughout 2021.
And our final priority is to create innovative cloud and SaaS solutions for media enterprises to enable secure flexible and powerful media creation workflows.
During the past year, we have expanded our SAS offerings and added several early adopters of cloud based solutions at large media companies Studios broadcasters and post production facilities across the globe.
Now, let me jump into the discussion of our third quarter results.
During the quarter, we saw a strong sequential recovery in our nonrecurring revenues from our integrated solutions, including our Nexus media storage systems, which turned in a strong performance aided by our newest release during the quarter Nexus 2020 like.
Likewise, our pro audio solutions category had another strong quarter, even though the pandemic is having an ongoing impact on the lives sound portion of the industry.
This nonrecurring revenue recovery also reflects improved demands the perpetual software licenses avids creative tools and the Mediacentral platform.
During Q3 on the recurring revenue side of our business, we saw ongoing growth in software subscriptions for our creative tools as well as for growth in annual contract value.
Says of individual subscriptions for creative tools continued their upward trajectory and in the quarter. We also saw initial success with <unk> with subscription sales to our enterprise customers for our biggest central as well as our creative tools.
In the quarter, we signed subscription agreements with several large organizations and broadcast post production and higher education.
We're very pleased that enterprise customers of all types is starting to take advantage of this new flexible way of working with us to ensure their production tools and other Abbott based resources are always available to their teams.
As we were in the early days of this plant expansion of our software subscription offerings for enterprise customers. We see this as an additional growth engine for our overall subscription business.
Also during the third quarter, we saw ongoing benefits from the operational in fiscal discipline that we embarked on two years ago as well as the additional cost savings measures. We established very quickly in April as it became clear that COVID-19 would likely materially impact our operating plans this year.
This discipline significantly contributed to our higher gross margin and lower operating expenses.
Combined with the accelerating growth in our high quality revenue streams and solid performance of the strategic elements of our business. All of this contributed to significantly improve profitability and free cash flow.
Now, let's review a number of key metrics and indicator is highlighting average overall performance and success of our ongoing strategy.
As I mentioned earlier I haven't delivered continued strength in recurring revenues and benefited from recovery in the sales of nonrecurring integrate solutions and perpetual licenses, which together contributed to substantially improved results in the third quarter.
Subscription revenue was up nearly 74% year over year total paid subscriptions for EUV tools continued to deliver strong growth aided by a number of major new product leases enhancements.
Clifton subscription revenue in Q3 also reflects the introduction of enterprise subscription for our Mediacentral platform and the initial sales to enterprise customers as I had mentioned earlier.
Our maintenance revenue increased slightly on a sequential basis in the third quarter and along with a strong subscription revenue growth. We saw the combined subscription plus maintenance revenue growth of 11.6% year over year.
Our E Commerce business continued to deliver strong growth, increasing 41% year over year.
This part of our business, which has increasingly valuable route to market continues to perform well as a profitable commercial engine for our creative software tools and we're supporting the growth of our E. Commerce Web store was with focused digital marketing efforts to generate additional demand through this channel.
Adjusted EBITDA was up over 50% year over year in the third quarter as GAAP revenue almost returning to the level of last year's Q3 like gross margin is significantly higher year over year and operating expenses are significantly down year over year.
Our continued cost discipline operational rigor and the overall profitability contributed to very strong free cash flow of $15.5 million in the quarter, which gives us positive free cash flow for the first time first nine months of 2020 and possesses positions us well heading into what is typically our seasonally strongest free cash flow quarter.
Throughout the market challenges, we faced during 2020, our product and engineering teams stayed focused on developing innovative solutions to address our customers evolving needs leading to several notable product releases in the latter part of Q3, which we expect will contribute to growth in Q4 and beyond.
First we introduced several new innovations to enhance our Mediacentral platform for media enterprises. This included the new Mediacentral collaborate application that streamline production workflows and enables better collaboration across disparate genes, including remote journalists and production teams wherever they're working.
We surprised the market also by announcing our joint efforts with Adobe to develop and market. The Mediacentral connector for Adobe premiere pro which improves on the interoperability between Adobe and avid environments opening up new market opportunities for avid solutions, including the Mediacentral platform and nexis storage.
Also delivered an important update to mediacentral subscription licensing, which expands our subscription offerings to address the end to end requirements of our enterprise customers.
In addition, we have continued to innovate around our creative tools to improve support for remote and cloud based workflows.
Just the new Mediacentral report or mobile app, enabling remote journalists to capture edit content on their mobile devices and send it back to Mediacentral.
We also released several important updates in Q3 for avid at an on demand a pure SaaS solution for cloud based entity, which is currently in an early access program that has been made available to dozens of abbott's key enterprise customers had been putting solutions through its paces player to our general General release, which is planned for early 2021.
In addition to these major releases, we delivered many more upgrades, including continued improvements in our creative software tools in support of our subscription business.
Well, we are really happy with the amount of innovation, we delivered to help address the challenges of our customers and what they're facing today, we still have several major releases planned for the fourth quarter, including trip lazy innovation that we'll announce very soon which will believe musicians and audio produces will be quite excited about.
In closing coming off of our strong performance in Q3 I believe this team has done a great job navigating the current market environment, and we are well positioned to take advantage of the opportunities available as end markets continue their recovery given our focus on operational improvements and structural cost adjustments along with the many innovations that we're bringing to market.
To say I'm truly excited about the opportunities in front of us.
Now I will hand, the call over to Ken who will offer some more details behind our Q3 2020 performance over you can.
Thank you, Jeff and good afternoon, everyone.
As noted above Jeff and I are referring to non-GAAP figures unless otherwise noted.
Overall, we're very pleased with our business and financial results for the third quarter.
Our recurring revenue sources, including subscription and maintenance maintenance revenues have remained healthy and we significantly improved profitability in generated our strongest third quarter free cash flow since 2007.
Additionally, the nonrecurring portions of the business related to perpetual licenses and integrated solutions starts to recover in the quarter.
As we exit the third quarter, we are seeing a clearer path to sustained improvement in profitability and higher levels of free cash flow that should result in a strong finish for fiscal year 2020.
With that let's now turn to the details of our third quarter financial results.
GAAP revenue was $90.4 million during the third quarter down 3.2% year over year, but up 14.1% sequentially.
Recurring revenue was strong as combined subscription and maintenance revenue was 48.7 million up 11.6% year over year, while nonrecurring revenue from integrated solutions perpetual licenses and professional services was up 29.5% sequentially.
Although down year over year due to the continued impact of the COVID-19 endemic on this portion of the business.
At constant currency, our third quarter 2020 revenue was down 3.8% year over year as the relatively stronger euro compared to the U.S. dollar negatively impacted revenue by 60 basis points.
Gross margin was 64.9% for the quarter up 280 basis points year over year. The increase was due to more favorable revenue mix of higher margin subscription and maintenance revenue.
As well as the impact of our cost savings initiatives on non material cost of goods sold.
Non-GAAP operating expenses for the quarter were 41.4 million, a $5.9 million decrease year over year, and a $900000 increase from the second quarter of 2020.
The year over year decrease in operating expenses was due to the benefit from our cost savings efforts, including $6 million from temporary furloughs $2.8 million from travel reductions and 2 million from contractors in consulting.
Partly offset by a bonus accrual of 6.1 million.
Of which 3 million was related to a one time catch up for the accrual in Q1 and Q2 of this year as we are seeing an improvement in our internal forecasts for certain metrics for average 2020 corporate bonus.
Adjusted EBITDA was 19.3 million in the third quarter.
Up 51% or 6.5 million year over year as the benefits of higher gross margin and lower operating expenses far outpaced the 3% revenue decline.
Adjusted EBITDA margin was strong at 21.4% in the third quarter, a significant improvement from 13.7% in the prior year period.
Non-GAAP net income per share was 27 cents for the third quarter.
Up 17 cents year over year, reflecting the increase in non-GAAP operating income.
Free cash flow was 15.5 million in the quarter up 20.2 million year over year due to the improvement in adjusted EBITDA.
Free cash flow for the quarter could have been higher but we chose to repay 4.4 million of accounts payable to drive better pricing with our key vendors.
Working capital was a source of cash of 3 million in the quarter. As we are clearly seeing an improvement in avids working capital cycle as our business moves to more software annual paid upfront subscriptions.
Now moving to recurring revenue and annual contract value.
The percentage of our revenue that is recurring continues to increase for the 12 months ending September Thirtyth 2020, 71% of total revenue was recurring up from 59% in the 12 months ending September Thirtyth 2019.
The percentage of recurring revenue increased due to higher subscription revenue and revenue from long term agreements plus lower nonrecurring product and professional services revenue in 2020.
Well our strategy is focused on building the recurring revenue portion of our business.
We believe the percentage of recurring revenue has been elevated in the last few quarters due to the impact of COVID-19, which has caused volatility in our nonrecurring integrated solutions perpetual licenses and professional services revenue.
As such the recurring revenue percentage could be uneven during the next few quarters as those nonrecurring revenue streams continue to recover.
Annual contract value was 271.9 million at the end of the quarter up 6.5% year over year benefiting from increased subscription revenue offset in part by decreases in maintenance and long term agreements year over year.
During the third quarter, we renewed three of four long term agreements and added one new long term agreement.
As was the case last quarter. The one agreement we did not renew was with a channel partner who serves the live sound market.
We expect to revisit the agreements with these two partners when the lives sound market recovers.
As we look into the detail of our revenue streams, we continue to be encouraged by the resilience and growth of our subscription base, which reached a new high in paid subscriptions.
In the third quarter, we added roughly 27000 net new subscriptions for our creative software solutions and our total subscription count reached approximately 269000 at quarter end, an increase of 58% year over year.
Also during the quarter, we signed five multi year enterprise subscription agreements, resulting in $1 million of revenue in the quarter.
Overall the growth in subscriptions has accelerated since the third quarter of 2019 is a combination of new product innovations improvements in pricing strategy and increased digital demand generation efforts.
Subscriptions growth was strong in all creative tools with pro tools up 68.5% year over year media composer up 41.3% year over year, and Subareas up 43.6% year over year.
Additionally, we continue to see a shift towards annual paid upfront contracts, which we believe are higher quality revenue streams for avid when compared to a monthly paid subscriptions.
Annual paid ups subscriptions grew to 109% year over year in the third quarter and now represent 23.5% of total subscriptions up from 12% a year ago.
We believe that the share of annual paid up front subscriptions will continue to grow as more of our enterprise customers adopt subscriptions and we continue to optimize our pricing models.
Finally, when we look at our total creative tools users, both subscriptions and active maintenance agreements. The total number has grown 20% year over year as the growth in paid subscriptions far exceeds the decline in active maintenance contracts.
Now moving to the composition of our revenues.
The continued growth in paid subscriptions for our creative tools as well as new revenue from enterprise subscription and cloud drove continued growth in subscription revenue during the third quarter, reaching $17.9 million or an increase of 74% year over year.
Maintenance revenue was $30.8 million during the third quarter down 7.6% year over year, but up 0.8% sequentially.
We continue to see small impacts from decreasing noncash revenue and from the end of support from legacy storage solutions lashed there.
Excluding these factors maintenance revenue would have been down 4.7% year over year due.
Due primarily to reduced first year maintenance revenue from lower product sales in the last three quarters I was as a result of the impact of the COVID-19 pandemic.
[noise] perpetual license revenue was up 3.5% year over year as demand for our Mediacentral enterprise products in perpetual licenses for our creative tools started to recover in the third quarter.
Gross margin on software licenses and maintenance was 85.2% in the quarter down a 150 basis points year over year due to a onetime credit in Q3 19.
But otherwise the gross margin remained stable.
The company's hardware integrated software our integrated solutions revenue was 26.8 million in the third quarter up 28.8% sequentially as demand started to recover from the COVID-19 downturn.
However, due to the continued impact from COVID-19, our integrated solutions revenue was down 21.7% year over year.
Gross margin from integrated solutions was 30.3% in the third quarter down.
Down at 390 basis points year over year as lower production volumes did not absorb as much at the manufacturing overhead in the quarter.
However, our gross margin improved by 150 basis points sequentially on the higher volumes in the mix shifts towards higher margin storage in the third quarter compared to the second quarter.
The balance of our revenue comes from our professional services business professional services revenue was $5.9 million in the third quarter down 14% year over year as certain projects were pushed back out due to the cobot.
Demick, However, professional services revenue was up 27.4% sequentially on improved ability to complete service delivery during the quarter.
Gross margin on professional services was strong at 23.7% in the quarter up 920 basis points year over year due to the ability to work remotely and other cost saving measures.
Now, let's turn to free cash flow.
You can see that avid is on a path to generating sustained sustainable levels of stronger free cash flow and significant improvement in the conversion of adjusted EBITDA to free cash flow as we projected during our Investor Day last November.
As a result of our strategy of driving higher quality recurring revenue, we are seeing stronger profitability higher margins and lower investment in working capital.
With this transition in our business avid reported its strongest third quarter free cash flow since 2007.
Free cash flow in the third quarter was 15.5 million up from negative 4.6 million in the third quarter of 2019.
The company generated positive 3.2 million in free cash flow year to date in 2020.
From negative 4.5 million in the first nine months of 2019.
And during the last 12 months the company generated 20.2 million in free cash flow up $7 million or 53% year over year.
As the company enters its seasonally strongest quarter avid is well positioned to drive further improvement in free cash flow this year.
Shifting our business to more predictable in high margin recurring revenue streams and improved working capital position with us with a significantly reduced the amount of accounts payable and higher accounts receivable, both sequentially and year over year.
Now, let's move to the balance sheet.
The company ended the third quarter with 49.1 million in cash after fully repaying the $22 million outstanding balance on its revolving credit facility in September.
Accounts receivable was up 6.8 million sequentially and up 6 million year over year on the strength and billings at the end of the third quarter that should also help augment our cash collections in the fourth quarter.
Inventory remained low at 28.4 million as we are seeing the benefits from the transition the manufacturing supply chain vendors completed in 2019.
Accounts payable was reduced in was 13.5 million at the end of the third quarter.
Down 4.4 million sequentially down $22 million year over year with.
With the lower accounts payable balance, we're seeing improved pricing from our vendors that will allow for continued improvement in profitability.
Now, let's move to our capitalization and credit metrics.
The company ended the third quarter with a healthy cash balance and net debt of $159.1 million.
The strong free cash flow in the third quarter and the year over year improvement in adjusted EBITDA resulted in a reduction in the company's total leverage to 3.6 times at the end of September 2020, and net leverage at 2.7 times.
With avids, improving credit metrics and a clear path to improve free cash flow. The company is well positioned for a potential reduction in borrowing costs during 2021.
Finally, let's turn to our outlook.
We expect the external markets to continue the gradual improvement in the fourth quarter and into 2021.
And this improvement should result in a sequential benefit to revenue in the fourth quarter.
In addition to the expected continual gradual improvement from the coven downturn, we anticipate typical seasonality to benefit Abbott in our fourth quarter revenue.
We expect continued growth during the fourth quarter and subscription revenue from both additional paid subscriptions from our creative tools and growth in enterprise subscription and cloud.
As well as the expectation of improvement and nonrecurring perpetual license integrated solutions revenue in the fourth quarter.
We ended the temporary furloughs, we implemented during the second in the third quarter at the end of September.
Well, we continue to be on track to deliver the cost saving targets, we set in the second quarter.
We expect adjusted EBITDA margin in the fourth quarter to be higher year on year on higher gross margin and lower operating expenses than in Q4 2019.
The seasonally higher revenue expected in the fourth quarter combined with the higher adjusted EBITDA margin and improved working capital position at the end of the third quarter physicians Abbott for seasonally strong free cash flow in the fourth quarter.
Also as we exit 2020, we expect approximately 60% of the cost savings in fiscal year 2020 to continue into 2021 as we have realigned our cost structure. So that avid exits the pandemic a stronger company that is well positioned to generate sustained improvement in profitability and free cash.
Hello.
With that I'd like to turn the call back to Whit.
Thank you, Jeff and Ken. This concludes our prepared remarks, we are now happy to take your questions. Operator. Please go ahead.
Thank you, ladies and gentlemen, if youd like to ask a question you may signal by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment star one for questions, we'll pause a moment, everyone an opportunity to signal for questions.
Well take our first question from Steve Frankel, what's called callers. Please go ahead.
Good afternoon, and thank you for the opportunity.
Like to ask a little bit about these.
Enterprise subscription agreements could you give us some details on maybe the size of the number of users covered in these agreements and.
What the term length is.
I think I see this is Jeff I didn't give us just a general sense of the agreements can run anywhere from one year to five years typically there are two or three years in length the ones that were doing.
And as far as number of users they can be anywhere from let's say dozens of users to the smaller accounts to hundreds of users on larger accounts just depends on the size account because we you know we deal with everything from.
A larger cap, maybe a large media broadcast companies or a large higher educational institution smaller may be more post Brexit companies that may have dozens of users.
So the the vast majority of the sequential improvement in cloud subscriptions were from.
Tier three prosumer kind of base that you've been growing so nicely over the last year or so.
Yes, yes, but it was it was helped some by the by the start of the enterprise, but as we've mentioned in the enterprise subscription is just started in September. So its impact is still fairly limited compared to the rest of the business, but yet most of the growth is from the growth in individual creative professionals and small businesses, who are subscribing to.
Our creative tools.
Yes, Steve.
In terms of adding to the color. There you know our license count was up 58% revenues were up 74%.
The the enterprise subscription accounted for roughly 8% to 10% of that growth.
But a million dollars so.
Again, thats going to be our second stage it but we're in the early phases and we see a lot of opportunity ahead.
Okay and.
How long do you think it's going to take for the lives sound business to recover is that something we ought to think about.
Maybe late next year into 22 before that starts to rebound.
Yeah, I would say that's probably a good estimate Steve Yeah, we may see a little bit of opportunity in the second half of 2021, it really depends on how the pandemic evolves on a global basis, because it's not just a regional you know to Mount a lot too as lot of events you need some regional.
Movement, but it really will depend on how things evolve and how things open up for <unk>.
Yes, not 20 or 50 people, but how hundreds of thousands of people can come together. So you know I think where were right now expecting late 21 of the earliest and that probably more like 2022.
Okay, and then in that core business do you expect to see a normal level of a year end budget flush. This year does that is that giving you confidence in this Q4 and the sequential gains in Q4.
Yeah, I think you know it's what it means there will be you know a typical slush or a typical investment at the end of the year and there's also just typical timing of things happened natural at the end of the year I think we'll see that happen.
It will be on a different base, obviously this year than in prior years, but we do see that as a benefit for Q4. As you know Q4 is a seasonally strong quarter for us both on the level of business, but also in our free cash flow performance.
Okay, and any update on the cloud storage trials that you've done with a couple of your large customers.
Yeah, they're going well I'll say in general we are.
A lot of these larger companies don't allows to name them anytime soon but.
We're working with a large media company as large broadcasters Studios don't studios.
And even post production companies and the tests are going well and more than test some are in production and.
In fact feature films have been in production in the tool. We've also got pretty important content, that's being produced the television in the cloud already so it's progressing well and we are happy so far with the progress.
Okay, great. Thank you.
Thanks, Steve.
Well take our next question from Josh Nichols with B. Riley.
Great. Thanks for taking my question and good to see such a strong showing for free cash flow this quarter should rebound from the lows twoq.
I was going to ask just one thing I wanted to just hit on is if you could talk about strength or weaknesses that you're seeing in various geographies just because the way cobot has evolved and popping up in some places and coming back down and others, what you're seeing on that front.
I think in general what I would say is that when we look back at Q3.
Europe actually performed quite strong over Q3, it actually was up slightly year over year.
So we saw really really solid performance in in Europe.
Asia and the Americas were down slightly.
From a year over year perspective, I think that Thats more also based on the regional business that we have in those areas in Hollywood, obviously that is a big driver and so as you know large broadcasters in the U.S.
So I think it really depend depends on the different markets, but we did see a lot better situation in Europe than we did see.
We saw a bit of recovery everywhere, but we saw a better result in Europe than we did other parts of the world.
Thanks, how should I say, you're going to say I should say Europe, and middle size or should say Europe and into the least actually across all we know.
Thanks for clarifying.
And then how should we think about the sales mix a little bit more if we think about separating it between like distribution direct and E. Commerce I assume E. Commerce is going to continue to play a very big role in the company sales or an increasing role as time evolves based on the current economic backdrop.
Yes, I think as we as you reported again this quarter E. Commerce had a growth that was north of 40% year on year that trajectory hasn't let up for us in several quarters, I mean, it's plus or minus a little bit beyond that but we're seeing some really strong growth very strong double digit growth in E. Commerce. If you look at Q3, we did see a nice.
Sequential recovery in the tier one are you able to largely enterprise business. It was north of 50% improvement.
Quarter over quarter over quarter. So that was nice to see we also saw a double digit increase improvement sequentially in the channel part.
Part of the business.
So it's it's progressing I think you know that the business will evolve as we as we go to more.
Subscription business and more SaaS business that is more of a direct digital engagement through webstore through digital.
Digital selling but.
But but channel and our direct sales teams that column in large enterprise accounts, it's still a significant portion of the business.
And then I think you mentioned in your earlier comments that you saw a pretty nice rebound from the storage business I was wondering if you could elaborate a little bit on.
Maybe what the outlook looks like for Fourq, you, because that's a pretty favorable margin contribution business on the on the integrated hardware side piece right.
I think I mean, we don't give specific guidance, but I would say we recover we saw we expect that recovery to continue and we expect the storage business continuing to be a strong contributor for us.
There was a lot of pent up demand and catch up going on in Q2, but there was also a lot of that demand still being fulfilled and Q4 is typically also a pretty strong quarter for us relatively strong quarter for for storage business.
I'd say generally what I'd tell you is we expect.
A similar trend to continue.
And then last question for me and then I'll pass the Baton and hop back in the queue. If you could comment a little bit fund.
And I'm pretty phenomenal growth from the subscription piece of business are you expecting I guess, if I'm looking at for Q.
Relatively similar like quarter over quarter growth rates, if I look at that relative to last year subscriber increases or what's the pace that you're seeing on that front.
I think look you look you've probably seen similar pace a lot in the last couple of quarters I think at the moment, we're assuming that that pace is going to continue into the fourth quarter fourth quarter is typically a strong quarter because of holiday shopping, especially for our music customers. That's typically a very strong quarter. So we're on.
Obviously encouraged with the level of the market adoption and the response, we've had to our subscription offerings for our creative tools as we look to you know everything from from.
You know cyber Monday, all the way through the holidays, we expect that to be a typically strong period for us.
Thanks, Jeff and I can hop back in the queue.
Okay. Thanks.
Yes.
Well take our next question from Neal Chokshi with Northland Capital markets. Please go ahead.
Yeah, Thank you and a great free cash so awesome free cash flow congratulations on that.
Regarding a soft spot yep regarding the soft clients.
Saying expect normal seasonality for revenue.
So I look at the past six December quarters at the average of up 3% QQ Cure Acumen Center give you sort of 11%.
Not really too short what is normal seasonality can you just help us to find out a little bit better.
No I would say you know in the fourth quarter.
Normally do we see improvements in our subscription business that that.
So Jeff mentioned earlier due to holiday buying.
Especially in music with pro tools.
But also.
No we see improvements in certain integrated solution. So in general there is an uplift in the fourth quarter I think historically.
The fourth quarter has revenue increases of generally.
$15 million to $20 million over Q3.
And that's kind of historically when you look back so I think that's a good estimate of.
The traction that this the company had historically and.
I think thats, although we're not providing guidance I think those are some goalposts to help you with your model.
Okay great.
And then can you did mention that there was a spread between subscription revenue, increasing 24% year over year subscribers up 38% year over year and I think you said about 1000 basis points came from the beginning of the enterprise subscription.
Is that correct and b, what sort of range or so that spread.
Yeah, I know so you're absolutely correct. So yeah, we are seeing the benefit of revenue being higher than the license count because of number one continued traction annual paid up fronts, both for creative users, but also as enterprises.
Start migrating this.
Better.
Front revenue is there some siding typically the upfront agreements in this a better revenue recognition on those agreements so roughly.
Roughly a <unk> excluding the enterprises, we would have been up 65% I.
With the enterprise licenses that we talked about it was up 74%.
Okay, Great and then my final question is that.
On your slide deck, you provided nice a breakout of the subscribers total stability us and media composer and it looks like a pro tools was the major contributor to that Q over Q increase and you didn't give a metric I think about total subscribers that's the perpetual plus.
The subscription subscribers still being up 20% year over year I.
I guess to the bearish pushed back I've heard on this before they'd like to get your take on that well are you just simply potentially harvesting.
Perpetual users that had stopped paying the maintenance that wouldn't show up in that maintenance space can you address that they're asking for.
You know I think looking at the <unk> the the.
The subscription in the active maintenance cost contracts being up 20% year.
Year over year highlights that we are growing the pie.
I think that's 111 piece of data I think also subscription plus maintenance continues to grow double digits at 11.6%.
So we are expanding the pie its just not moving one piece of revenue stream so to the other.
So, we're expanding the pie and where where we're increasing gross margin and.
You can see that in the total total consolidated gross margin of the company in the nice attractive EBITDA and free cash flow generating.
Okay, great. Thank you very much congratulations again on a great free cash flow.
Yeah. Thanks Neil.
Well take our next question from some odd some money with.
With Jefferies. Please go ahead.
Hey, good evening gentlemen, thanks, a lot I think so as for the time today.
First hub everybody's doing well and maybe diving right into the questions. So <unk> I wanted to maybe ask a follow up on the subscription side. If we take maybe a step back could you maybe help us understand what you view as SK.
SK I did a tam or what is the kind of logical end market. I mean, we've seen really strong durable growth and cloud subscriptions, how should we think that maybe that that total market opportunity from your perspective.
Yes. This is Jeff I mean, I don't want to necessarily give you just well I won't give you emphasize.
In precise numbers, but I'll say this if you look at our music space, where you've got pro tools and sabella, yes. They will have very large market share. We're still only a you know a relatively small portion even in music. We're probably one third of the market you're still too there is a market that use other tools.
Incidentally is even if it was even bigger difference in video editorial we're probably up total Tam, maybe 10% less than 10% of the market. So there's still like you can do the math there is a pretty large opportunity for the company to expand this I would also say that the pie itself is growing in that you're seeing growth whether it's on the way.
As excited on video editorial side content creation is growing and so there is for US we have a lot of runway left to to continue to grow our our opportunity here.
Great. That's helpful. And then you know on the enterprise side of this I appreciate the color and its contribution to growth when we think about the opportunity there at least let's call. It maybe over the next 612 months is it more about attaching subscriptions to the existing base or do you view it more as a new customer.
Acquisition strategy to have these enterprise subscriptions.
It was a little bit of both I will tell you that the first rollout of the subscription is around what we call fusion packages, which are preset work flow packages around the Mediacentral platform and these are designed to either get.
Greater share of a current account or two numbers give or take a competitor out with a specific work flow or application that customer, but it's largely also to get new customers onto the platform and so you know while we are converting some existing customers over to these offerings.
We're also having great success in getting new customers on so that it is a it is designed to be a new a new customer acquisition tool one of those we found it.
Subscription this subscription really does open up opportunities for customers that maybe thought or maybe even in properly felt they couldn't enter with an average solution I think we learned pretty quickly that when you offer a subscription offering it really allows people a lower entry point and easier entry point into our solutions. So we do see.
It as a very important driver of new again, new opportunities and that's why we did these subscription packages to make it also very easy around enterprise customers to be able to to.
Acquire the right solution and deployed.
Great and then maybe Ken a couple of questions for you.
I heard you mention on the enterprise license agreements that the renewal is there and the one that you guys will come back to later then maybe you know again stepping back and more broadly looking at as contracts are coming up for renewal.
How should we think about the general maintenance renewal rates are you getting pushback on price you are getting request for discounting or anything.
Maybe how should we think about kind of a dollar based retention on maintenance.
Yeah, No I would say in terms of the renewal rates, obviously the ones that were impacted both this quarter and last quarter were more on the hardware side, but with wives sound.
And we expect to revisit that as that market recovers, but in general.
The renewal rates for maintenance.
Have been relatively stable, although we did see a little bit of weakness still the last two quarters, just because of the impact of the environment It with coated.
And but we have been selectively increasing pricing to compensate for that so to keep the dollars hole. So we saw sequentially. Our dollars in terms of maintenance revenue actually went up slightly.
But we continue to you know I would say look at big discounting to hold on to revenue.
We've been able to kind of work in terms of actively working on Arps Act.
Actively going out to negotiate the maintenance contracts.
To to make sure that we continue to have a strong and stable maintenance revenue.
Got you and then just one last one and I'll.
Cede the floor, but.
If I think about.
[noise] cohorts.
Individual creatives that you've sold cloud subscriptions do.
Any any noticeable differentials into trends between the early cohorts versus the more recent quarters in terms of either retention or unit economics.
Well, we've actually on the retention rates, we've actually seen a slight improvement on the retention rate.
Both on the annual paid monthly and annual paid annual.
We continue to focus on on providing the right level of customer service and nurturing those customers.
In terms of the economics, you know we've been successful at driving price increases.
We did that last July.
And still have accelerated revenue since those price increases so we continue to to drive more lifetime value with those customers.
We expect that to continue over time because of number one our our products are leading brands. They are well regarded in the market.
And people get a lot of joy from from using them. So there's a lot of.
Good momentum that we have in the marketplace.
Gotcha. Thanks again for taking my questions. We appreciate that color and great to see a good quarter.
Thank you so much so much I appreciate it.
Well take our next question from Jack vendor Art with Maxim Group.
Please go ahead.
Okay, Great, Hey, Jeff Hey, Ken.
Sure Jack.
[laughter].
Yes, a strong quarter I think all the other analysts have been driving on that point as well. So thanks for taking my questions I'll start I'll start with the question on for Jeff.
Or Ken as well in terms of Ltacs on you mentioned you renewed three of those four LTAC that were up for renewal, but you also added a new enterprise customer under LTAC I'm, sorry, if you.
Are you able are you able to share any additional color on this particular, new L.K. customer maybe in terms of you know that.
The duration of the agreement is it is it.
Three to five year duration, or what kind of types of product solutions.
Are included in this LTAC.
I don't know we can't go too specific on this because it's not something we disclose and plus the customers don't want to disclose if it's found out but let's say they the ones. The first of all yes, weve been renewing EBITDA is the one area thats been more difficult is ones related to lifestyle and as Ken mentioned in his remarks, we believe.
Sam partners will come back onboard once they really see their end market starts to come back together again that may be at that maybe a year out. We've also been bringing the new agreements and so we have been you know.
Still keeping a very strong performance in this area the business. The LTAC you're talking about is a three year agreement. It does include several products from our portfolio.
And it's probably the general is probably the most I can give you at the moment Ellen.
Okay. No that's helpful and I appreciate any color you can provide I understand it's.
No not necessarily publicly available information or things you want you want to provide so but that's helpful. And then just Oh Pete.
The I guess, if I just continue this customer though.
The products that they are paying for it are you able to say if anything how that relates to maybe to the three new releases that you made in Q3, you know with Mediacentral and as a connector and enterprise subscriptions from mediacentral or any of those three categories.
Is it is there a chance that they are going to evolve from this contract or are the interest so maybe already paying for.
Look it's not well I.
Not directly were they.
Involved, but they anybody who does who who anybody who is it amazed if a customer has the ability to add any of the modules are applications that we have in that and again I don't I don't have all the details are great and what they are allowed to do within the agreement or not.
But.
I would say that a lot of our larger customers before they sign agreements like this.
Yes, they do look at our Roadmaps they want to understand when they signed a multiyear agreement where are we heading stuff that we make any commitments to them, but they generally want to know what we're investing in and where we're heading generally and so.
They have all people sign those we've got a pretty good idea what our innovation plans are in general.
Sure sure absolutely I appreciate the added color there and then I'll switch gears quickly maybe a question for Ken subscription business momentum continues to accelerate major bright spot for you guys.
You know obviously, you've talked a lot about this call and previous calls at annual paid upfront subscriptions are increasing and mix I believe you referenced like a 23.5% or so those tall subscriptions are are annually up front, which is almost double the knicks last year.
But my question is in terms of total subscribers added during this quarter and even previous quarters. In recent quarters can you provide any color on what the percentage of new subscriber ads on.
Our in terms of like on a geographical basis, you provide three regional segments.
Wonder if you can talk about subscription straight new subscription ads in each region, where the strongest adds coming from maybe in how the annual paid up fronts mix.
Mix happens in each of those three regions.
Yeah, No I would say that you know we're we're a global you know the subscription business can be continues to be in.
Impressive in terms of its growth rate.
It is a sold mainly through our E Commerce engine, but also sold through partners. It really is a is sold globally that you know in terms of breaking out geography is that something that at this point that you know we just we just don't do and we'll look at potentially providing other.
Other metrics related discretion over time, but at this point you know, we're not breaking out geography.
Okay fair enough and regardless I mean, the business the subscription momentum is exceptional and accelerating said, that's a certainly a bright spot congrats on that.
And then I guess lastly, I'll just squeeze in a question more related to our fourth quarter outlook.
You guys talked about free cash flow free cash flow is exceptional again through Q, I mean record I really and.
Given your comments that you expect Q4 to still be a seasonally strong free cash flow quarter.
I'm trying to figure out what that implies then for the EBIT dot.
Comments you provided for the fourth quarter. So EBITDA is supposed to be up year over year. I believe you said, but I'm not sure you necessarily said on a Q over Q basis, I guess, one is that is that correct.
No I mean, I would say our outlook is that you know we expect.
Our fourth quarter to obviously have sequential improvement in revenue.
We expect.
Good performance in terms of a sequential improvement in terms of the dollar of EBITDA and year over year improvement and EBITDA margin.
And then when you think about free cash flow.
Stronger EBITDA is one component, but our working capital position.
Is very favorable right now with you know.
Very high receivables, which will help our collections and low payable. So we think we will generate very strong free.
Free cash flow in the quarter and our LTM free cash flow should progress.
Over and over time.
So we have a clear path to improving free cash flow and improving conversion of EBITDA to free cash flow.
Yes that makes that makes a lot of sense I appreciate the color there and then I'm just just as it relates back to the EBITDA.
And the revenue growth sequentially here as you look at the fourth quarter in terms of gross margin because it's very sensitive to revenue mix, obviously and just wondering if I mean would it be reasonable to assume in software and hardware products. You know, it's it's starting to recover.
Not quite to the normalized levels, but it's getting there. So that is a lower margin, though I I believe so is that I mean, where do you see gross margins.
Yeah, I guess I sequential basis for the fourth quarter.
Assuming that that trend continues with an increasing mix of hardware revenue.
Yes, so I would say sequentially.
We do expect as Jeff pointed out our integrated solutions to some kind of.
Continue to perform better in the fourth quarter.
As we think about gross margin.
You know those some of those revenue lines will have a lower gross margin than our let's say, our our subscription or software. So.
That will impact overall gross margin, but we'll have more gross profit dollars, which will which will add to the EBITDA. So gross margin sequentially could.
Could be impacted on the on the negative side slightly because of the increase in revenue from the integrated solutions and fourth quarter.
Yes, the other the other part of it is so it goes into the main theme you should do it.
Correct.
No fantastic that that's everything I needed there on guys again, congrats on the strong results and best.
Thats good luck I hope the momentum continues.
So much appreciate it much.
And ladies and gentlemen, this will conclude today's question and answer session I would like to turn the conference back to Jeff Chris Tucker for any additional or closing remarks.
Well, thank you operator, and thanks, again to our investors or analysts and others for joining us today.
I said earlier, we're very pleased with Avon's third quarter performance. The resilience, we've shown in our business and uniquely strong position to capitalize on our market recovery as a result of our commitment to our strategy and operational in fiscal discipline.
That'd be reporting our progress when we deliver our fourth quarter and full year results next year and I hope everyone will remain safe and healthy until we have the opportunity to speak with you again have a good evening.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
Thank you Keith have a good evening.
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Mm Hmm.
Hmm.
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