Q4 2020 Avid Technology Inc Earnings Call

We are currently on hold for today's avid technology Q for full year 2020 earnings call. At this time, we are sitting with today's earnings from point of view.

We appreciate your patience for please.

[music].

Please standby we're about to begin.

Good afternoon, ladies and gentlemen, and welcome to the avid technology's for fourth quarter and full year earnings conference call.

During today's call. We will have a question answer session, if you'd like to join the queue at any time. Please press star followed by one on your telephone keypad.

Now, let me turn the call over to wait Russell of Investor Relations.

Thank you Karina good afternoon, everyone and thank you for joining us today for avid technology's fourth quarter and full year 2020 earnings call for the period ending December 31, 2020. My name is Whit Rappolt habits, Vice President for corporate development and Investor Relations with me. This afternoon are Jeff for US It got our Chief Executive Officer.

President and Ken Gay, Ron our Chief Financial Officer and EVP.

In their 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.

The press release and presentation are currently available on our website at IR avid dotcom.

A replay of this call will be available on our website for a limited time.

Okay.

During today's call management will reference certain non-GAAP financial metrics and operational metrics in accordance with regulation G. Both 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 for those non-GAAP measures that would require a reconciliation.

And also definitions for the operational metrics used on this call and in this presentation.

Unless otherwise noted all figures noted by management during the call are non-GAAP figures, except for revenue, which is always GAAP.

Yeah.

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 as the accompanying slide deck may include statements that are forward looking and that pertain to future results or outcomes actual.

Actual 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 SEC.

With that let me turn the call over to our CEO and President Jeff <unk> for his remarks.

Well, thanks, Rick and thanks to everyone for joining us to review average fourth quarter and full year 2020 results I'm here with our CFO can go wrong and we're happy to have this time for listeners to look back on average performance.

Overall, we're quite pleased with our progress and our execution through the difficult environment of 2020.

Driven by our ongoing transition to a subscription focused business and our focus on profitability. This year, we turned the corner to being a growing free cash flow story, given the improving profitability and free cash flow that avid accomplished in the face of all the unforeseen difficulties I would characterize average rapid pivot and successes as a remarkable outcome.

At this point remain cautiously optimistic in our outlook for 2021, well nobody can predict when the world will completely returned to normal we do see lots of upside opportunity for our business. We're now even more confident in our industries ventral recovery and we believe we have the ability to emerge stronger than ever.

Of the opportunities ahead of us.

As the business climate Normalizes, we expect we will continue to revisit our outlook and guidance for the full year.

Our decisiveness throughout 2020 has demonstrated the strength of avid and our customer relationships as we quickly responded to the onset of COVID-19.

Adjusting our spending outlook, helping our customers to overcome the adversity as they were facing and continuing to bring to market significant software updates and new products that contributed to our Q4 and full year 2020 results.

Okay. So there's a lot we want to share with all of you today.

So during the fourth quarter, we have seen continued strengthening in the end markets for our products and solutions and we are assisting our customers as they adopt more distributed and flexible workforces and workflows.

First up is the continuing growth in subscription revenue, including strong performance across our tools for creative individuals' and further helped by the initial success were seeing with enterprise subscriptions for both our creative tools and our media central platform.

The key subscription growth categories, we will discuss during the call.

The growth in subscription revenue together with sequential growth in maintenance revenue resulted in significant improvement in annual contract value.

Second we're very pleased to report another quarter of sequential growth in our non recurring product revenue from integrated solutions, largely from new product introductions and our audio hardware for in studio work as well as modest contributions from our media storage and graphics lines as those markets continue to recover gradually.

And third among these performance trends, we finished 2020 with strong profitability and record free cash flow, resulting from stable gross margin reduced operating expenses year over year and improved working capital trends.

As we exited 2020 many of the important indicators of the health of our company and the ability of our long term strategy were positive as a result, our growth continued sequentially in the last quarter and so did our profitability producing average strongest free cash flow in more than a decade.

Now I will take us through the key financial metrics for Q4, each underscoring average overall performance and the success of our ongoing strategy and execution.

We saw continued growth in recurring revenue and we also benefited from sequential recovery in non recurring revenue from integrated solutions, which contributed strongly to quarterly performance.

Subscription revenue was up nearly 55% year over year total paid subscriptions for our creative tools continued to deliver strong growth aided by our ongoing stream of product releases and enhancements.

In Q4, we added 27000 paid subscriptions, putting us just shy of 300000 total paid subscriptions.

Growth in subscription revenue in Q4 also reflects the uptake and subscriptions by our enterprise customers are.

Our maintenance revenue increased on a sequential basis in Q4, and along with the strong subscription revenue growth. We saw combined subscription plus maintenance revenue growth of 12, 7% year over year.

Our E Commerce business continued to deliver good growth in Q4, we are continuing to enhance our digital marketing programs to ensure consistent growth of our web store as a profitable commercial engine for subscription sales and other offerings. We're also seeing more significant contribution from the channel and the direct sales efforts towards our subscription growth.

Throughout Q4, we maintained our cost discipline and operational rigor, which helped to contribute to robust free cash flow of more than $40 million in the fourth quarter and we believe will contribute to continued strong free cash flow looking forward.

For the full year average solid execution across a wide range of strategic fronts went a long way towards offsetting in the overall market headwinds from the pandemic, which was the driving factor in the revenue decrease year over year for full year 2020.

Nevertheless, subscription revenue grew 61% in 2020, surpassing 20% of total revenue.

During 2020 gross margin increased from a higher mix of software and subscription sales and operating expense decrease from cost savings activities undertaken during the year, which together resulted in healthy adjusted EBITDA for 2020, and strong free cash flow, which for 2020 was up 172% over 2019.

Now let me highlight a few of our accomplishments that contributed to overcoming the extraordinary conditions of the business here.

In our largest annual increase to date, we added over 108000, new paid subscriptions to pro tools.

Rosa and Sebelius during 2020, representing the continued influx of new subscribers.

Increasingly our enterprise customers are seeing the clear cost performance advantages of moving their teams over to more flexible subscription based offerings for both our creative tools and now our media Central Enterprise solutions. This additional leg of our subscription growth strategy resulted in a number of new enterprise subscription agreements in the third and fourth quarters.

We're extremely proud of the accomplishments of our development teams, who delivered numerous new software releases and major new product introductions throughout the year in spite of the challenges brought on by the pandemic.

During Q4, we reshaped our executive leadership team to drive the next phase of our strategic growth by hiring top business and technology talent with strong cloud and SaaS expertise, we sharpened our focus on our core audio and video business areas and realigned our customer facing functions to elevate go to market performance and ensure success for every customer.

In early 2020 at the onset of COVID-19, we moved quickly to a net cost saving measures to successfully reduce operating expenses by 27% compared to 20, Meg or excuse me 27 million compared to 2019, and we focused our strategy and adjusted our spending in R&D investment priority is to make money of these savings continue.

2021.

And all of these accomplishments contributed to our successful debt refinancing that we executed in the very first few days of 2021.

Now with the continued strong growth in average subscriptions are avid subscription business that has occurred over the past couple of years, including the substantial growth. During 2000 22020 is important to understand the significant opportunity. We still have ahead of us and the efforts we are making to continue to drive growth in our creative tools business.

From continuing our freemium efforts with the first versions of our creative tools to monetizing legacy users, who are no longer paying us for maintenance from converting our enterprise customers to subscription offerings to expanding our efforts in education, including a stronger focus on K 12.

And also from going after next generation creators with enhanced solutions for professional video to pursuing a larger share of the music creation category.

Taken together, we see a large addressable market for average creative tools and enterprise software solutions with millions of potential new users still to be tapped.

The sequential recovery that started back in the third quarter and continues through the fourth quarter. It makes us confident in our trajectory and position as we enter 2021 week.

We expect subscriptions to continue to grow in 2021 as additional creative professionals adopt our solutions and are able to create high quality video and audio content using our creative tools.

Further we expect many more enterprises to elect subscription licensing as many customers are looking for the increased flexibility and the added features at these subscription offerings spring.

And we have initial proof points that we can get a revenue uplift from these conversions of our enterprise customers to subscriptions.

We had strong bookings and billings across all of our products in Q4, and we are starting the year with a healthy revenue backlog positioning us well for the year ahead.

We also started 2021 with a streamlined cost structure as we've taken the actions to ensure that about 60 per cent for about $18 million of the cost savings achieved in 2020, we will continue.

We continue to focus our spending on the areas that best support our customers and allow us to deliver the new innovations to support profitable growth in 2021 and beyond.

And the refinancing that we completed in January is expected to significantly reduce our interest expense, which should support free cash flow growth and provide us additional flexibility as we plan for growth and focus on delivering shareholder value.

Turning back to our innovation efforts, we're expecting continued benefits from our stream of new product innovations to drive both recurring and nonrecurring revenue growth.

From a full year contribution by the solutions that we introduced in 2020, including media Central collaborate Adobe integration with our media central platform and pro tools carbon.

And from the new releases already during 2020 and clean are fully cloud based avid edit on demand released just this week, our media central stream content ingest solution and a significant update to our software for avid venue live sound systems for when the life performance market returns and from the many more innovations planned for 2021.

So stay tuned and now I'll turn it over to Ken to review more details. So go ahead Ken.

Thank you, Jeff and good afternoon, everyone.

Overall, we are very pleased with our business and financial results as we exit 2020 as the gradual recovery that started during the third quarter continued through the fourth quarter.

All of our product areas saw sequential improvement during the quarter.

Recurring revenue continued to show strength with strong subscription growth and growing a C V. Non.

Non recurring revenue from integrated solutions had strong sequential growth.

These areas combined with a significant year over year reduction in operating expenses and improve working capital trends resulted in avid generating strong profitability and exceptional free cash flow in the fourth quarter.

Our focus in 'twenty 'twenty, one will be to drive our subscription business, our high quality recurring revenue streams and improve the nonrecurring portions of the business related to integrated solutions.

We expect these efforts to result in continued improvement in our key financial metrics, including stronger profitability and free cash flow in 'twenty 'twenty, one and subsequent years.

With that let's now turn to the details of our financial results.

We are encouraged by the continued resilience and growth of our subscription base, which reached a new high in paid subscriptions.

In the fourth quarter, we added roughly 27000 net new subscriptions for our creative software tools.

Our total subscription count reached approximately 296000 at year end, an increase of 58 per cent year over year.

Subscriptions growth was strong for all of our creative tools with pro tools up 66% year over year and media composer and Sibelius, each up 44% year over year.

Annual paid upfront subscriptions grew 169% year over year in the fourth quarter and now represent 26% of our total subscriptions up from 15% year ago.

When we look at our total users for paid subscriptions and active maintenance agreements. The total number grew 26% year over year to approximately 468000 at the end of 2020 as the growth in paid subscriptions far exceeds decline in active maintenance contracts.

During February 'twenty 'twenty, one we surpassed 3 million cumulative downloads of premium versions of our creative tools with the third million occurring in just the last 11 months versus 18 months for the second million as freemium users continue to be a source of growth for our subscription business.

Also during the quarter several of our enterprise customers signed enterprise subscription agreements, resulting in several million dollars of revenue in the quarter day.

These agreements include our creative software solutions as well as our media central and Nexus cloud storage.

We believe that the addition of enterprise customers selecting our subscription offerings.

Provide another leg of growth as we move into 2020 one.

Now moving to the composition of our revenues.

The continued growth in a number of paid subscriptions for our creative tools as well as new revenue from enterprise subscription and cloud drove continued growth in subscription revenue during the fourth quarter, reaching $24 5 million an increase of 55% year over year. We do note in the fourth quarter of 2019.

We had a large beneficial true up to our subscription revenue reserve at year end than we had in the fourth quarter of 2020, causing a 700000 unfavorable revenue variance for the fourth quarter of 2020.

Normalizing for this reserve true up difference Q4, 'twenty 'twenty subscription revenue growth was 63% year over year.

For the full year subscription revenue was $72 8 million up 61% year over year.

Maintenance revenue continued to also be a strong part of the business and it's stabilized during 2020.

Maintenance revenue was $31 million during the fourth quarter down seven 3% year over year due to the transition of the model to subscription, but up 0.5% sequentially. As a result of improved renewal rates and stronger product sales in the second half of the year for.

For the full year maintenance revenue was $124 2 million down four 8% year over year due to the transition of the business for subscription and was roughly $31 million in each of the quarters of 2020.

Total subscription and maintenance revenue increased year over year by 12.7% in the fourth quarter and by 12, 2% in the full year 2020, as the subscription revenue growth exceeded the maintenance revenue decline.

Perpetual license revenue was down 29, 7% year over year in the fourth quarter and down 23% for the full year perpetual license revenue was negatively impacted in the fourth quarter by the adoption of subscription offerings by some of our enterprise customers in the fourth quarter and also by reduced demand.

During the COVID-19 crisis.

Total software revenue from subscriptions in perpetual licenses increased year over year by $23 one per cent in the fourth quarter and by 25, 7% and full year 2020, as our subscription revenue growth exceeded the perpetual revenue decline.

Finally, when looking at our revenue backlog, which is comprised of deferred revenue and other unbilled committed backlog. The total revenue backlog that is expected to convert to revenue in the next year stood at 231 million at the end of 2020 up 16% from the end of 2019 benefiting from.

Strong bookings and growing deferred revenue from subscriptions and maintenance the higher opening revenue backlog expected to be realized in 'twenty 'twenty. One provides us confidence that avid should return to favorable revenue growth in fiscal year 2021.

Now moving to recurring revenue and annual contract value and.

In 'twenty 'twenty recurring revenue was 74 per cent of total revenue up from 62 per cent in 2019 the per.

Percentage of recurring revenue increased due to higher subscription revenue and lower nonrecurring revenue in 2020.

While we expect the recurring revenue portion of our business to continue to grow 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 certain non recurring revenue streams.

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 $300 6 million at the end of 'twenty 'twenty up seven 4% year over year as and was seasonally high due to the impact of strong enterprise subscription revenue during the fourth quarter.

Which contributed disproportionately to fourth quarter a C D.

Well, we expect enterprise subscription sales to continue to grow overall, the greatest opportunity for conversion of existing customers to subscription is during the fourth quarter when many of our mains maintenance contracts come up for renewal.

During the fourth quarter, we successfully renewed 10 of 12 long term agreements and we added four new long term agreements one of the non renewals was up with a channel partner, who serve the lifestyle market.

The largest new edition was a multi year S. P. A with Aztec was named our sole master distributor for the Latin American region.

Now, let's look at our fourth our results for the fourth quarter.

Revenue was $104 3 million during the fourth quarter down 10, 3% year over year, but up 15, 3% sequentially.

Combined subscription and maintenance revenue was $55 5 million up 12, 7% year over year.

Hardware and integrated software our integrated solutions continued their gradual recovery that started in the third quarter.

But remain below 2019 levels integrated solutions revenue was $35 9 million in the fourth quarter up 34, 1% sequentially as demand continued to recover what was down 28, 5%.

As these markets still haven't fully recovered.

The balance of our revenue comes from our professional services business professional services revenue was $6 1 million in the fourth quarter sequentially higher as we continue to improve our ability to complete services delivery in the current environment, but down 15, 1% year over year, a certain projects continued to be pushed out for.

Gross margin was healthy at 63.1 per cent for the quarter in line with year over year performance.

Gross margin from software subscription perpetual and maintenance was 84, 2% for the fourth quarter.

Gross margin for integrated solutions was negatively impacted by lower volume.

Shipments during the year, but it is recovering as volume has picked up during the second half of the year in the fourth quarter integrated solutions gross margin was 34.2% a decrease of 890 basis points year over year, but increasing 390 basis points sequentially.

Gross margin on professional services was 18.5 per cent in the fourth quarter down 30 basis points year over year as we've adjusted our resources to bring utilization back to target levels and keeping gross margins above historical levels.

Operating expenses for the quarter were $46 3 million and $8 1 million dollar improvement.

The year over year decrease in operating expenses was due to benefits from our cost savings efforts during 2020.

However, operating expenses were sequentially higher due to the end of temporary furloughs at the end of the third quarter and a higher bonus accrual in the fourth quarter.

Adjusted EBIT EBITDA was 21.6 million in the fourth quarter up 2% or $400000 year over year due to lower operating expenses offset in part by lower gross profit dollars on reduced revenue.

Adjusted EBITDA margin was strong at 27% in the fourth quarter, an improvement of 250 basis points from the prior year period.

Net income per share was 33 cents for the fourth quarter up five cents year over year, reflecting the increase in operating income. Please recall that the fourth quarter of 2019 included a onetime tax benefit of 14 cents.

Free cash flow was healthy at $30 6 million in the quarter up $13 7 million year over year due to lower cash interest expense and improved working capital trends.

Working capital was a source of cash of $13 1 million in the quarter due to seasonality with accounts payable and deferred revenue we're continuously improvement in average working capital cycle as our business moves to more software and annual paid upfront subscriptions.

Now, let's turn to fiscal 'twenty 'twenty results.

Revenue was $365 million in fiscal year, 2020 down 12, 5% year over year as strong growth in subscriptions was offset by declines in other categories, primarily integrated solutions due to COVID-19 on a constant currency basis revenue in 'twenty 'twenty was down 12, 6% year over year.

Combined subscription and maintenance revenue was 197 million up 12, 2% year over year as the benefit from strong growth in subscription revenue exceeded the impact of a decline in maintenance revenue.

For the full year integrated solutions revenue was $112 9 million in 2020 down 34% year over year, but improving in the second half of the year.

Professional surface revenue was $22 7 million in 2020 down $6 million year over year due to the impact of COVID-19.

Gross margin was healthy at 63, 7% for the year up 220 basis points due to higher mix of higher margin subscription revenues offset in part by lower integrated solutions gross margin.

Operating expenses for the year were 179.5 million $27 1 million lower than 2019, the year over year decrease in operating expenses was due to the benefits from our cost savings efforts, we put in place in April at the start of the pandemic we.

We embarked on restructuring actions in the fourth quarter. So we can realize approximately 60% or roughly $18 million of these savings in 2021, consistent with our prior comments unexpected permanent cost savings for next year.

Adjusted EBITDA was $58 6 million for the year up for 0.7% adjusted EBITDA increased as the benefits from higher gross margin and lower operating expenses more than offset the impact from lower revenue year over year.

Net income per share was <unk> 65 cents for the year up 27, 3% as the improvements in operating expenses expenses benefited our non-GAAP net income.

Now, let's turn to free cash flow you can see that avid has now delivered three consecutive years of improved free cash flow and significant improvement in the conversion of adjusted EBITDA to free cash flow.

Our strategy of driving higher quality recurring revenue together with effective cost controls favorable working capital trends and reduced interest expense continued the trend of growing free cash flow the.

For $33 9 million in free cash flow in 2020 is the highest annual free cash flow for the company since 2007 and was up from $12 5 million in 2019, and $5 9 million in 2018. Additionally, during the year avid repaid $18 million of accounts payable and could have reported much higher free.

Cash flow in 'twenty 'twenty, if had a lower payable position at the beginning of the year.

Free cash flow conversion from adjusted EBITDA reached 57, 8% in 2020 up from 22 for.

Sent in 19 and 12, 4% in 2018.

Looking forward, we believe avid is well positioned to drive further improvement in free cash flow and the conversion rate of adjusted EBITDA to free cash flow due to the shift in our business to more predictable and higher margin recurring revenue streams. The reduced interest expense following our January 'twenty 'twenty, one refinancing a more favorable working cap.

<unk> position and more effective management of the business now lets turn to the balance sheet. The company ended the fourth quarter with $79 9 million in cash due to the strong free cash flow during the year.

Its receivable was up 4.8 million year over year on increased sequential billings in the fourth quarter that should benefit collections in the first quarter of 2021.

Net inventory was down 2.6 million year over year at the end of 'twenty 'twenty as we continue to see the benefits from the transition in manufacturing supply chain vendors completed in 2019.

Accounts payable was down $18 1 million year over year at the end of 'twenty 'twenty with a lower accounts payable balance we are seeing improved pricing from our vendors that will allow for continued improvement in profitability.

Deferred revenue was $99 3 million at the end of the fourth quarter, an increase of 1.4 million year over year, reflecting the increase in paid upfront subscriptions.

Now, let's move forward with respect to our J P. Morgan credit facility in our credit metrics.

In early January we capitalize on the recent success in our business by refinancing our bank debt in order to decrease our total debt outstanding.

And significantly reduce our cost of debt extend maturities and provide additional financial flexibility and liquidity.

The new J P. Morgan led facility consists of $180 million term loan and a $70 million unfunded revolving credit facility.

The new facility for improves our where our capital structure building upon the retirement of our convertible notes in June 2020, and further reduces our outstanding debt by $21 million.

In addition, it provides a significant reduction from our prior interest rate and what the initial effective interest rate of 3.25%. We expect our annual interest expense to be approximately $10 million lower than 2021 than in 'twenty 'twenty.

The strong free cash flow and year over year growth in adjusted EBITDA in the fourth quarter resulted in a decrease in our total leverage to 3.2 times and our net leverage to 2.3 times, both as of December 2020, and pro forma for the new facility.

Overall, we are pleased with the improvement in the health of our balance sheet as the $43 million reduction in total debt during 2020.

Pro forma for the new facility should provide the company more flexibility to operate its business.

Now, let's turn to guidance.

As Jeff said, we are confident in the underlying strength in our business as we enter 2021.

We are providing guidance for the first quarter of 2021 and limited guidance for full year 2021.

We expect continued growth in our subscription revenue from both additional paid subscriptions to our creative tools and year over year growth in enterprise subscription in cloud revenues. In addition, we expect continued grabbed gradual improvement and nonrecurring integrated solutions revenue.

Also we expect 60 per cent of the cost savings in fiscal year 'twenty 'twenty to continue into 2020 one 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 flow.

Given this for the first quarter of 'twenty 'twenty. One we are providing total revenue guidance of 88 million to $94 million, a range, which would represent a return to year over year quarterly revenue growth.

Subscription plus maintenance revenue guidance for the first quarter of 2021 is $50 million to $53 million.

Adjusted EBITDA guidance for the first quarter of 'twenty 'twenty, one is $12 2 million to $15 8 million a range, though it results in L. T M. Adjusted EBITDA at the end of March of $66.7 million to $73 million.

Non-GAAP net income per share guidance for the first quarter of 'twenty 'twenty. One is 17 cents to 'twenty for sense, assuming $44 9 million shares outstanding.

At this time for the full year 'twenty 'twenty, one avid is providing guidance for subscription and maintenance revenue and free cash flow.

Our 'twenty 'twenty, one subscription plus maintenance guidance is $214 million to $221 million and our 2021 free cash flow guidance is 45 million to $52 million.

We are planning to host an investor day in May following our first quarter earnings release at the end of the Investor Day, we expect to provide further detail on the evolution of our strategy our longer term outlook and we currently provide additional guidance on full year 2021.

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

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

Thank you as a reminder that is star.

If you'd like to ask a question on today's call.

We will go ahead and take the first question from Samad Samana with Jefferies. Please go ahead.

Hi, good afternoon, and thanks for taking my question. It's good to see the strong finish to 2020, maybe first Jeff just as I think about the the commentary around enterprise subscription traction.

Can you help us understand maybe what's helping that inflected. It seems each of the last several quarters, there's been more and more traction for larger organizations moving over to subscription.

Is it more innovation is that there is it on the cost side, just help us understand what's driving that that does guidance.

Yes, it's a good question as amounts of thanks, and good to hear you.

Yes.

The <unk>.

If you remember we talked about that we were going to gradually rollout enterprise subscriptions over the course of 2020 as new capabilities came online and as we expanded the portfolio for creative individuals', It's pro tools media composer and values for enterprises. It also includes a number of subscription offerings from our media central product.

Line, which is our enterprise class slot for our platform. So as we start to roll those out and as the media composer enterprise product, which is a very subscription based enterprise focused product as those rolled out and reverb made available in the second half for the year and as we really started to bring up our go to market machine.

I think we saw then obviously continued strength in building strength as it went through Q3 and Q4 and so.

Our results were seeing from our customers as I said in my prepared remarks.

They like the flexibility they like the features and functions are innovation that we brought into our subscription offering because for the enterprise customer we do differentiate.

Enterprise products from our standard creative tool products for individuals.

And we give them a lot more flexibility so theres a lot of benefits to those models for enterprise customers and I would say, we're seeing success a bit better than we envisioned originally so we like what we're seeing so far.

Great and then Ken maybe a follow up in that vein, if I think about.

It's good to see the full year guidance for subscription and maintenance combined.

As a signal of visibility.

Is it fair to assume that maintenance kind of continues historical trends, which would maybe imply call. It like 30% plus growth for for subscription services or just maybe how should we think about those two lines given the stark difference in their growth rates.

Yeah. So I would say up you know obviously maintenance will will.

We will gradually come down as we move to subscription you know in our model. We are we believe that the subscription growth will be will be higher than 30%, which is the number you mentioned not only are we growing our creative users, but as Jeff pointed out the enterprise subscription offering is being well received.

So we believe that that will be.

A healthier growth rate on the subscription side with maintenance coming down and if obviously the subscription business does better maintenance may come down slightly.

More aggressive rate than our model, but you know we're very confident that we will continue to have double digit growth in subscription and maintenance, which is a real driver of higher gross profit and a higher profitability for the business.

Great and then maybe just a couple more questions. So as I think about the the sub adds is really robust in 2020, maybe just how should we think about net.

Net adds in 2021, and just maybe how that price is up against maybe the Tam.

Yes, so we expect to continue to have strong net new adds in.

In terms of the trajectory that we're on.

We also believe that there's a lot of room to grow because of the Tam the addressable market is substantial.

M across both audio video and cloud.

We're talking about a Tam that's tens of millions so although we're we're proud about growing 108000. This past year and were over 300000 paid subscriptions and we've got $3 million.

Downloads I would say that we have a lot more opportunity to grow this revenue stream.

As we look forward in our model.

Great last one for me and I think this could be for either of you, but you know the company is yeah, you mentioned significantly improving the balance sheet generating healthy free cash flow and the outlook for 'twenty. One is even better I guess thoughts on capital management as far as either a buyback or maybe where where you plan to use that.

Free cash flow that you'll generate going forward.

Yeah, Great question. So so really our focus is really driving shareholder value for avid.

We generated excess free cash flow, we're going to look at that the options, whether it's to drive you know.

Share repurchases are tuck in M&A.

Or other forums to drive the best returns for our shareholders.

I would say at this time you know avid management, we have a great partnership with our board Thats very experienced financially and operationally and were clearly focused on driving the right capital allocations to drive shareholder value.

So you know we're confident we'll make the right decisions to drive the best returns for our shareholders.

Great really helpful. I'll hop out of the line, but thanks again for taking my questions.

Thanks Scott.

And we'll go ahead and take our next question from Steven Frankel with colleagues. Please go ahead.

Good afternoon.

And thanks for the opportunity yet keeping in the same vein.

And the last question, so if I'm an enterprise customer.

Give me a feel for what happens to my average deal size when I go from perpetual to enterprise SaaS for it for talking about media composer for example.

Yeah, Hi, Steve This is Jeff so it really depends on the on the customer I will say this as I said in my prepared remarks.

We are seeing very consistent evidence that as we move customers from a perpetual license and software maintenance program over to subscription we're seeing a pretty significant uplift in the revenue from that customer. So were seeing obviously better annual revenues from those customers and we're seeing better lifetime value it really depends though.

On the situations for enterprise customers are in all shapes and sizes and have different types of needs. So inc.

It can be from low double digit total very large double digit kind of growth.

In that from a revenue perspective, it really depends on the situation as to how much flexibility they want and do they want more licenses. They want more capabilities are looking for more more functionality. So it really depends but I'll say that we've now done enough of these.

Movements of customers over to enterprise subscription agreement that were I think Ken there are both very happy with the revenue uplift that we're getting on these agreements.

Guess is we'll probably share a bit more Steve when we get to the Investor Day, We'll probably show some specific models for people to show you some scenarios.

And is there a risk and as you migrate customers. This way that it begins to eat into your storage business as they move to cloud storage along with the cloud software.

No I don't for those that are moving to a SaaS offering.

We're again, we're still in the very early days of that I.

I think we've talked about it before but I'll reiterate today, our on Prem subscription or on Prem Nexus product is really in high performance production storage for <unk>.

Editorial and other types of production applications. So we're in a very specific market. We don't really have an offering for near line storage or or or colder archive storage as we go to the cloud one of the advantages of Nexus because we actually have a product called <unk> cloud that is on Microsoft Azure that is actually a multi <unk>.

Tier offerings. So that is not just high performance. We also have Super high performance with Azure and we also have near line and are.

Very cold or archival storage.

So as we move people to subscription obviously, you're moving into an upfront model to a subscription model, but there is a very significant we've seen already a very significant expansion of the opportunity with those customers because we're taking them to more than just high performance storage, we're taking them to multiple tiers of storage. So.

We even though we are obviously cannibalizing partially that storage, we're moving them to a high margin.

<unk> revenue stream, that's got real long term value to it also.

Steve We're seeing people really go in pieces theyre, not really going overnight its not like Theyre just <unk>.

Stopping their on Prem storage and going all the way to cloud, it's our evolution that will happen over many years for many customers. So we're going to be able to transition. This I think in a very orderly, but more important and very profitable way.

Okay, Great and then in terms of the.

Overall subscription business.

What's the churn dynamic.

That is happening new youre, adding about the same number.

Subscribers the last few quarters.

While youre rolling out enterprises, which one would assume are fairly large numbers of users that are getting rolled into there so what what's happening with the.

And in tier two tier three customer base relative to churn and those that are non annual.

Yes, so I would say you know our retention rates.

Our solid.

That said, we continue to look to invest in certain areas of customer care to improve our retention and reduce our churn.

And as and as you mentioned you know the enterprise subscription is really you know.

Taking shape really the second half of 'twenty 'twenty, one so as we think about Investor day, we'll be adding more metrics related to enterprise as part of our subscription business.

Okay, great. Thank you.

You're welcome.

Well go ahead and take our next question from Josh Nichols with B Riley. Please go ahead.

Yes, Thanks for taking my question and great to see the really strong cash flow coming out of this quarter and your expectation that that's going to continue into 2021.

I think a lot of people have hit on the enterprise business and it's pretty clear the subscription business.

Irene on all cylinders here.

One thing I did want to touch on what do you have in terms of visibility on the product side of the business I know that.

There is some opportunity for significant improvements in the second half with the vaccine Rollouts and whatnot as we think of things like for like live music and could you elaborate on kind of the expectations.

As we move through the year or is that something that youre going to update a little bit more on.

At the Investor day.

I think both for the bag, Yeah, Hi, Josh This is Jeff I can add a little color here, but also you are right. We will probably continue to add color as we get to Investor Day, New York.

And I both said.

We're we're optimistic but we're also going to be cautious in especially in the first half of the year. Just as you know the markets are as we said are recovering we are starting to see recovery. We saw a good sequential covering Q3, we saw again in Q4, we like what we're seeing so far as we as we look into 2021.

But it will be in some markets it will be gradual as things come together, but we are seeing all the indicators, we see around there as we talked about the bookings and billings were very strong in Q4, even though not all of that turned to revenue in Q4. It did turn to revenue backlog and as Ken said are our opening revenue backlog. This year is 16%.

Higher than last year, and remember last year was pre COVID-19. It was before Covid hit so it's really a comparable comp and so you'll see that kind of strength.

On top of the stairs strength you saw it in the revenues and EBITDA and cash flow in Q4, we did see this.

Real strong billings and bookings revenues, which is giving us nice visibility across 20 or better visibility across 2021. So I think the markets are going to recover as Kennedy I've said, all along it's going to be a gradual recovery into the first half of 2021.

Life sound hopefully will start to come back also maybe this summer or non fingers crossed we'll see but we're being careful right now, but as I said in my remarks, we'll continue to keep an eye on things will continue to revisit and look at where we our outlook and what we look at it and I'm sure Ken that will give some updates during investor day in May.

Thank you Josh.

Yes, I believe Josh.

Go ahead and take our next question Okay.

We'll take our next question from me.

Okay.

Capital markets. Please go ahead.

Thank you and congrats on a.

Blowout free cash flow quarter nice subscription results.

Even more impressive in the context of the guidance that you're providing for for years. So really congratulations that's pretty awesome.

So.

No.

Yes.

Within the 12% year over year growth for subscription plus maintenance for the quarter.

And it looks like we could have a slight tapering off of that and growth as the year continues Kevin D about 10% year over year growth for full year.

Which is consistent what we've seen over the past share, but it's also the much much tougher year ago comps and I presume the tapering is slightly because of the tougher year ago comps.

It's still really impressive growth that you're implicitly guiding to in the back half on the subscription offer really tough comps. So what gives you the confidence to provide that implied strength in the back half on the subscription business.

Well thanks, Neil for the question, let me just I'll, let Ken answer maybe more serious I'll say broadly.

Obviously, we've got good visibility with with that element of our of our revenue stream and so there is a lot of metrics and indicators that we look at to determine that.

And we do see.

A solid growth of our enterprise business, we've been able to look closely at what our enterprise opportunity is as we look out over the year, we feel good about how that's going to progress cannot do you want to add any color financially in that zone.

Say first M a.

As we think about the business, it's improving it's continues to do to to gradually improve.

As we think about guidance.

This is this is we're cautiously approaching it and when we think about our guidance for subscription plus maintenance.

Last year, we guided roughly 8% and we did over 12% we're guiding here a little over 10, a little over 10% subscription and maintenance for 2021.

In terms of the license growth. So far this year, we feel good about that that we're seeing in terms of that pattern.

We believe that the creative tools.

Granted.

We have higher base we.

We see continued improvement in that area, we have new features and functionality coming out in different areas, whether it be pro tools Sibelius or media composer and we think Theres a real strong opportunity to continue to grow the creatives at very aggressive growth rates.

And those in those areas and really we think we'll see that through Q2 Q3 Q4. It is throughout the whole all four quarters and then the enterprise subscription as Jeff pointed out earlier you know, we're just getting started and we're seeing nice uplifts.

As we move those customers. So we feel very comfortable that we will achieve if not exceed the.

The guidance that we provided on subscription and maintenance.

Okay, Great and then.

Why aren't you are providing a non-GAAP net income guidance, but you have the confidence to provide free cash flow guidance can you explain to me the spreads on you know.

Why you have confidence for free cash flow, but not non-GAAP net income.

At this point, we wanted to introduce.

These these two metrics you know as.

As we think about our Investor day, we.

We will provide more metrics.

And we feel like the trajectory of the business continues to be favorable we'll put more metrics and will likely have that that metric that you mentioned as part of the full year Investor day, I just want to capture it in the hole in the hole.

As we think about that presentation, our strategic outlook a lot of the day.

Areas that we're going to invest as well is that we'll return to growth and put together a whole five year model.

For people so they can see the evolution not only of the revenue streams, but.

Cash flow and profitability over that three to five year period. So people can look at EPS.

Growth over a three year three year model.

Okay, and then in terms of the free cash flow guidance, which is 30 plus percent year over year growth.

How much of that is due to favorable working capital dynamics, most specifically probably a day.

Payables continuing to go up.

How much of that is driving that year over year growth, there and the free cash flow.

Yes, we'll get some benefit of working capital and free cash flow, but really it's it's where we're going to improve profitability there'll be some savings on interest expense. Obviously from what has occurred so those are really going to be the two drivers we should get some benefit on working capital, but we're also going to be investing in the business.

And like we have a little bit more capital expenditures as we look to invest to support our rapidly growing subscription business. So.

You know those are the those are the areas that we're investing working capital will become.

A source of cash, but it's not a huge source that's driving the improvement it's really profitability, that's going to be driving the improvement.

Okay, Great I'll see the floor. Thank you.

Thanks Neil.

Okay.

Go ahead Andrew.

Last question from Jack Vander Ark with net.

Please go ahead.

Great Hello, gentlemen, thanks for taking my questions.

Oh, it's very impressive free very impressive free cash flow and subscription growth momentum great to see.

So I'll start just for the question for Jeff I'm, hoping you can speak to and you've kind of touched upon this already a little bit, but hoping you could speak to any interesting kind of changes in the sentiment and overall tone of maybe what you're hearing from your customer discussions of the nonrecurring product categories, which for on depression.

<unk> 20 of a gradually improving to me as it relates to storage live events and graphics and servers.

Are you surprised by any of these categories and customer discussions that.

More positive sentiment over the last three months relative to today anything of note there.

Yes, it's a good good question Jack I think that look overall I think we're seeing new customers are still.

Still being a little bit cautious, but they're all pretty optimistic on also their investment plans for the upcoming year for this year and quite frankly for the next couple of years and so I think there is look there is a bit of pent up demand and that people didn't execute on projects are on plan. So that there will be some benefit from that I know it gets going to be and because I only for the floodgates are going help.

But I think it's going to help really bring some strength for the business.

Nobody's really.

Put a put aside plans completely I think a lot of people have updated their plans and what we're generally seeing from people is that they.

They do see continued strength in the in the markets are all drive all dressed lifestyle separately.

But in general, what you're talking about storage or graphics or or servers or even the audio consoles for the larger studios.

We're seeing those markets continue to strengthen we were seeing that as we look into the early part of this year too. So we again, we've got you know we're again, we're being we're being cautious, but we're optimistic on what we see and.

Sentiment received from customers is quite good there is some change in how they're going to spend there are people who are going to make big on Prem investments now theyre looking for more kind of hybrid environments, where they still have to make investments on prem, but they're also looking for cloud based solutions to create.

A more adaptable workforce that is more work from anywhere and there's more flexible. So I think there's definitely different conversations, but great conversations in there and theyre going well and the funnel that we see looks very good funnel is stronger this year than what I.

When I was looking at last year.

As far as the live sound market.

Clearly, it's predicated on the return of events and not just big events, but also the return to people in churches and into other types of venues I will say this we did see a nice improvement in Q4, we didn't expect any improvement in lifestyles sequentially, we did see a bit of an improvement in Q4 and.

Again as vaccines get out there and as people get more comfortable.

People start reopening will start to see small and medium sized day use open up and there is some benefit in that for us, including churches, and then obviously the larger.

Concert tours will take a little bit longer to come alive again, but we do see them starting to plan grieve and seen some festivals in Europe start to start to talk about opening up in July and August so.

Again, we're optimistic but we're going to.

Ken I will plan carefully.

Great. Thank you for that that's a great answer.

And then maybe I'll follow up with a question for Ken.

The 2021 guidance for subscription maintenance revenue 214 $221 million that was that was ahead of my forecast at least and so clearly a positive as it as I as I view it.

Can you maybe provide some additional color on what's embedded in that in that guide of the subscription portion maybe like how much of a role does yesterdays.

Ladies enterprise subscription product offering play into that and any other factors I guess as it relates to subscription between enterprises and.

Creative.

No I would say that hey, I think in general the growth will continue to be very strong as we think about subscription business.

No.

Thank you know our creative base as much as higher than enterprise. So just the growth rates.

Well look.

Lower on it on the creative because the base is so much higher.

But we expect the dollar growth to be very very solid.

Across all segments pro tools media composer and Sibelius for.

For the creative as we're adding product functionality and those will be in excess of in aggregate the 30% that.

That one of the analyst indicated earlier, so we expect that to be more solid and then really the enterprise will have stronger growth rates just because of the base.

And we expect that to be a stiff contributor to the total subscription revenue.

So we believe you know we outperformed.

You know our strategic revenue guidance last year.

We believe these numbers, although they are attractive we think that we continue to execute this potential for outperformance, but at this point. This is what we feel comfortable in guiding.

We think we will have solid double digit strategic revenue performance with subscription being the leading category driving that.

Sure.

Got it great well I wish you guys the best and I appreciate the time. Thank you.

Thanks, Jack for Jay Thank you.

Yeah.

Do you have any follow up question. We will go ahead and take that with me.

Chuck <unk> with Northland Capital markets. Please go ahead with your follow up question.

Yes. Thank you.

So you guys had a press release, a think about a month ago, where you said that you had 3 million freemium downloads in the millions of them had occurred over the last 12 months I believe that works out for about 10% conversion rate.

Freemium to paid both cumulatively as well as we're past share.

Which seems pretty good.

Do you believe that Theres room for improving that.

So let me say so yes. It was actually just to be precise it was $3 million was announced and it was 11 months to get that that third million going so we have seen except with first we've seen acceleration of that product and that is a very successful.

Conversion or product for us now I will say this not all of our subscriptions come from the freemium conversions. So I would say our our conversion rate is not at that 10%, but I will say that our conversion rate is at very.

It depends on the market you are talking about but I would say they are very much in line with what people see it the high end of what people see and conversions for our software products like this so our conversion is a very strong there, but it's not the only source of of conversions that said, we're getting better better at that conversion in fact, as Ken mentioned there is some capital expenditure.

Actually we even made in late 2020, and we're going to be making 2021 to continue to put more strength in our in our internal machines. If I can call them that to be able to really drive conversions and.

And drive that revenue. So it is a very strong element of our growth, but it's not the only part of our growth.

Okay, Great and then how big do you think is the user Tam for Florida.

For the Creatives here.

Any more premium for NIM downloads interest and drive over a course of say like five or 10 years.

Well I'll say this I don't want to steal the.

The news from the Investor Day, we're going to go over this in some detail with market data during Investor day, but I'll say this.

It is tens of millions of creative users between audio and video that are out there.

And we've only really scratched the surface I think and the opportunity we see that that's as you saw in my remarks in the slide we put in there that simply in a little bit to what we want to talk about at Investor day, but we see a really large tam here.

And as we look at our strategy and we look at our innovation plans, we see an opportunity to really go after.

A lot there from a from a market opportunity.

Okay, great. Thank you very much congratulations.

Thanks Neil.

And with that I'd like to turn the call back over to Mr. Ross for any additional or closing remarks.

Okay. Thank you operator so.

So I'll close by saying that avid is today a much stronger company than we were at the start of 2020, our intention on this call has been to give our investors and others ample additional insights it proves avid ability to skillfully navigate the future keep growing and remained consistently profitable.

We look forward to engaging with you again during average annual Investor day, which we expect will take place virtually during may today, we only touch briefly on the widening horizon of average total market opportunity will continue to explore this in detail during that event. So I hope you can join us as Ken pointed out earlier Investor day details are coming soon.

So on behalf of everyone at avid I extend our best wishes for the continued safety and health of everyone, who follows and Collaborates with US we are deeply grateful for your support throughout this very challenging past year.

Bye for now talk soon.

Once again that does conclude our conference.

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