Q1 2021 Avid Technology Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to avid technology's first quarter 2021 earnings conference call today's call is being recorded during.
During today's call all participants will be in a listen only mode. Following today's presentation. We will open the floor for questions and instructions will be given at that time.
Now, let me turn the call over to your host for today's call, which rebel VP of Investor Relations.
Thank you operator, good afternoon, everyone and thank you for joining us today for avid technology's first quarter 2021 earnings calls for the period ending March 31 2021.
My name is Whit Rappolt Abbott's, Vice President of corporate development and the Investor Relations with me. This afternoon are Jeff for us to kind of our Chief Executive Officer, and President and Ken gave Ron our Chief Financial Officer M. D V P.
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 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. Both of the appendix to our earnings release today, and our Investor website contain a reconciliation of the most closely associated GAAP financial information to these non-GAAP measures and also definitions for.
The operational metrics used on this call and in the presentation.
Unless otherwise noted all figures noted by management during the call are non-GAAP figures, except for revenue, which is always GAAP.
In addition, certain statements made during today's presentation contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 of comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward looking and that pertain to future results or outcomes.
Actual future results of 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 <unk> 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. Thanks.
Thanks, Whit and thanks to everyone for joining us to review average first quarter results.
Overall, we are quite pleased with our progress during the first quarter of 2021, where we returned to year over year revenue growth and generated strong improvement in recurring revenue earnings and free cash flow at this point, we remain optimistic in our outlook for 2021.
Last week in fact, we spent time with the district.
The strategic Advisory Board of our customer Association, where we got to hear the many ways that our customers continue to adapt their business priorities and workflows in the current environment to a new normal here.
These valuable conversations and our first quarter performance reinforced our belief of the gradual market recovery that started in the third quarter of last year will continue into 2021 the.
The discussions of our customers also suggests that many enterprises will be looking to move to subscription and SaaS solutions or cloud based workflows over the next few years.
Okay. So there's a lot we want to share with all of you today in our prepared remarks, so let's get started.
During the first quarter, we continued to drive growth in our strategic revenue and saw continued strengthening in the end markets of our products and solutions.
We work closely with our customers as they adopted more distributed and remote workflows. We are also excited to have returned to year over year revenue growth in the quarter, let's talk about a few key areas that contributed to that success.
First is the growth of our subscription revenue, including strong performance across our creative tools and the continuation of the recent uptick we're seeing with the adoption of our relatively new enterprise subscription offering.
The price customers buying habits are a bit seasonal based on a typical budgeting and the maintenance renewal cycles, but they are embracing the new business models, which is great to see.
Second our integrated solutions business continues to show signs of gradual recovery.
<unk> below pre pandemic levels solutions of four individuals and all of you are rebounding nicely, but large scale purchases by enterprise customers, while improving are still yet to fully return to pre pandemic levels. As many of these customers continue to wait to make some of these investments until they return to their offices or facilities.
Lifestyle solutions are only just starting to show some signs of recovery as the restrictions on events imposed during the pandemic are starting to lift in some key markets.
And third we significantly improved our year over year profitability and free cash flow because of the increase in revenue combined with expanded gross margin the benefits of the more efficient operations and cost structure and of course lower interest expense from our recent refinancing.
Now, let me talk about some of the business highlights for the quarter.
As I mentioned earlier, we saw continued gradual recovery in our end markets and we even exceeded our own expectations a bit.
We are not saying we are at the end of the business impacts from the pandemic, but we are continuing to see more of our customers returning the business as usual and making key investments.
Growth in our subscription business continues to be strong with subscription revenue up more than 78 per cent year over year.
In our creative tools business, we continued to see strong adds in the number of paid subscribers with more than 28000 net subscription adds in the first quarter.
We also benefited this quarter from the continued uptake in the recently launched subscription licensing for enterprise customers.
We saw increased adoption across a broad set of enterprises that included broadcasters studios sports franchises government institutions and the major telco.
We're also realizing improved economics from these enterprises, including an increase in wallet share from some of our largest customers.
Another trend we began to see is our ability to go into adjacent markets outside of the traditional media entertainment industry, where the need for video content production with the company media management capabilities is quite strong and was made even more possible by the tighter integration of our media central platform and nexis storage products with Adobe premiere pro.
And finally during the first quarter, we realized the benefits of the more permanent elements of the cost structure improvements in operational efficiency programs that we put in place last year.
I'm very pleased with the continued diligence in this area by the entire avid team, which contributed to the robust free cash flow of more than $11 million in the first quarter and the significant year over year improvement in our adjusted EBITDA.
Let me now talk a bit about where we see things going forward from a business perspective.
As I mentioned earlier last week, we spent some time meeting with dozens of our customers and we also had the opportunity to bring in some young creative and students to hear directly from them about what they're seeing I love hearing directly from our customers and users, which we call our voice of the customer sessions, because it helps us to validate and sharpen our strategic plans as well as offers us.
Direct feedback on the trends of our customers are seeing today.
We also learn directly what their current requirements are and ultimately better understand where the most attractive market opportunities are for the future.
We were encouraged to hear that their views of the market recovery, we're very aligned with our own expectations of of continued recovery trend for most end markets.
The all spoke about issues and challenges they are still having but for the most part of agreed the things are starting to head back to normal.
Although it will be a new normal and it will be different than it was before we expect we will get back to production for the TV and film Studios and we will see live events coming back as well later this year.
We did hear that the pandemic has accelerated their move to the cloud and we talked to them of specifically about new business models like SaaS and subscription for the enterprise from those discussions in other key indicators, we do see the trend continuing as enterprise customers make the transition from perpetual to subscription licensing models and from less on premise infrastructures to <unk>.
More SaaS or cloud based solutions to support their business requirements.
In early March we delivered the G. A version of our cloud based <unk> solution, we call avid edit on demand, which had previously only been available as an early access program.
Since the launch we've seen good uptake of not only the number of customers, but also in the use cases and types of customers that are embracing this new SaaS offering we saw TV studios looking at this tool to be used for new program development and we experienced studios wanting to take advantage of the bursting capabilities that added on demand provides them.
So we are quite pleased with the initial increased uptake of the solution and expect that to continue throughout the year.
Our teams will continue to drive new innovations in our SaaS SaaS offerings as well as look at new opportunities to solve industry challenges based on new business requirements.
What our early adopters have shown us is that we do need to make additional investments in the areas of digital infrastructure and scalable operational processes for SaaS and cloud based offerings. So that'll be a key area of that we will invest in going forward and our new CTO. Kevin Riley is already working on the plans to make this happen. We also have of digital transformation initiatives.
<unk> underway to address the digital customer experience requirements for today and the future, especially as we continue to expand the high growth areas of our business, including subscriptions and SaaS as well as continuing to lean into our e-commerce and digitally enabled the channel go to market to attract the next generation of users and pursue new market opportunities.
To support our focus on growth investments for the future, we will be deemphasizing efforts on some of our less profitable areas and reducing our investment in some lower margin products and services, primarily impacting the integrated solutions part of our business.
Let me end my remarks by saying that we will continue to focus on improving efficiency and maintaining the cost reduction initiatives that we rolled out last year.
We believe the new products and features we have recently introduced combined with the operational improvements we have made during the past several quarters positions us well for future growth and improve profitability as we move forward through 2021 and beyond.
So let me now turn the call over to Ken The review more of the financial details taken of weekend.
Thank you, Jeff and good afternoon, everyone.
Overall, we are very pleased with our business and financial results in the first quarter of 2020.
A return to growth driven by robust performance in our subscription business and our growing recurring revenue.
Our improving margins and cost structure has resulted in stronger profitability.
Our focus for the remainder of 2021 we to drive higher quality recurring revenue and improve the nonrecurring portions of the business related to our integrated solutions as our end markets continued to gradually recover.
We expect these efforts to result in continued improvement in our key financial metrics Inc.
Including stronger profitability and free cash flow through 2020 one.
With that let's now turn to the details of our first quarter financial results.
We are encouraged by the continued growth of our subscription base, which reached a new high in paid subscriptions.
Subscription revenue growth benefited from enterprise subscription adoption, whose early returns exceeded expectations.
In the first quarter, we added roughly 28000 net new subscriptions for our creative software solutions and our total subscription count reached approximately 324000 at the end of the first quarter, an increase of 49% year over year.
Subscription growth was strong for all creative tools with pro tools up 55% year over year media composer up 41% year over year, and Sebelius up 38% year over year.
Annual paid upfront subscriptions grew a 135 per cent year over year in the fourth quarter and now represent 28% of total subscriptions up from 18% of year ago.
These 324000 paid subscriptions represent subscriptions for our creative software tools media composer pro tools, and Sebelius, where they're sold to individuals' are enterprises and does not include subscription count for our media central enterprise subscriptions or our new SaaS offerings, such as edit on demand.
Over time, we plan on adding the subscription count for these products to provide additional detail on the progress of our enterprise subscription business.
Now moving to the composition of our revenues the continued growth of number of paid subscriptions for our creative tools as well as our new revenue from enterprise subscription and cloud drove continued growth in subscription revenue during the first quarter, reaching $24 9 million, an increase of 78% year over year.
Continuing the trend that started in the third quarter of last year several more of our enterprise customers signed enterprise subscription agreements during the first quarter, resulting in several million dollars of subscription revenue.
We expect additional enterprise customers to select our subscription offerings driving the next stage of subscription growth as we continue through 2021.
However, we do note that the first and fourth quarters provide the largest natural opportunity for us to convert customers from maintenance to subscription given traditional enterprise budget cycles, and the number of existing maintenance contracts that renew around the calendar year end.
As a result, the trends in enterprise subscription may be uneven in the second and third quarters, but we expect to see strong year over year of growth in each quarter as more of our customers moved to subscription.
Maintenance revenue was $29 9 million during the first quarter down 6% year over year, and three 7% sequentially due to enterprise customers transitioning from perpetual maintenance of subscription and due to the lower product sales during 2020 and the associated maintenance.
Looking forward, we are seeing an improving trend in the renewal rate of maintenance contracts related to integrated solutions, which we expect should provide stability and growth for hardware maintenance revenue moving forward as our integrated solutions business recoveries with the overall market.
Total subscription and maintenance revenue increased year over year by 19, 6% in the first quarter as the subscription revenue growth was greater than the maintenance revenue decline.
Perpetual license revenue was $7 1 million up 31% year over year in the first quarter as some customers continued to prefer a perpetual licensing option.
Total software revenue from combined subscription and perpetual licenses increased over 65% in the first quarter.
Finally, total revenue was $94 4 million in the first quarter, an increase of nine 2% year over year and was our first quarter of year over year revenue growth since the start of the pandemic in the first quarter of 2020.
Now moving to recurring revenue and annual contract value.
In Q1 <unk>.
LTM recurring revenue was 75% of total revenue up from 66% in the first quarter of 2020.
The recurring revenue percentage increased due to a higher subscription revenue and lower nonrecurring revenue, while we expect the recurring revenue portion of our business to continue to grow we believe the recurring revenue percentage has been elevated in the last few quarters due to the impact of the pandemic, which has caused volatility in our non recurring revenue stream.
<unk>.
As such the recurring revenue percentage could be uneven during the next few quarters as those non recurring revenue streams continue to recover.
Annual contract value was 302 million at the end of the first quarter up 14% year over year a C V benefited from strong year over year of growth in subscription revenue and improvement in contribution from long term agreements, which offset a decline in ACB from maintenance.
During the first quarter, we added one new strategic purchasing agreement, we successfully renewed them one other S. P. A M and we do not renew another S. P. A related to the transition of our Latin American distribution partner that we discussed last quarter.
Now, let's look at the rest of our results for the first quarter combined subscription and maintenance revenue was $54 7 million up 19% year over year integrated solutions revenue was $26 2 million in the first quarter down 10, 7% year over year integrated solutions revenue as well.
Above the low seen in the second quarter of last year due to the pandemic, but the end markets for these products have not fully recovered.
However, the year over year decline in integrated solutions revenue in the first quarter was the smallest of any quarter since the start of the pandemic last year.
A summary of our key integrated solutions product families includes the following pro tools audio hardware revenue up year over year in the first quarter supported by new products, including the pro tools carbon of base introduced during the fourth quarter of 2020.
Video service revenue was also up year over year in the first quarter.
Live sound solutions revenue remains down significantly year over year as the recovery in that market related to the theaters concerts and festivals is largely still to come in third party video of hardware revenue was also down year over year as we of deemphasize those lower margin sales.
Storage audio control surfaces, and graphic solutions revenues were basically flat year over year in the first quarter and remained below prepayment dynamic levels.
The balance of our revenue comes from professional and learning services professional services revenue was $6 4 million in the first quarter, an improvement of 6% year over year.
At constant currency, our first quarter of 2021 revenue was up six 3% year over year as the weakening U S. Dollar benefited revenue growth by about 280 basis points.
Gross margin was 65 six per cent for the first quarter up 390 basis points year over year due to the mix shift as higher margin subscription business made up of higher percentage of total revenue, 26% in the first quarter of 2021 versus 16% in the first quarter of 2020.
Gross margin also benefited from a year over year recovery in gross margin from integrated solutions and professional services.
Gross margin from software subscription perpetual and maintenance was 83 per cent for the first quarter down two 5% year over year due to higher mix of lower margin subscription products and an increase in customer experience cost to help drive improved retention.
In the first quarter integrated solutions gross margin was 37% an increase of 460 basis points year over year. Despite the lower revenue volume due to the mix shift within the hardware and improvements in our freight and logistics.
Gross margin on professional services was.
It was 17, 4% in the fourth quarter up 200 basis points year over year as we have adjusted our resources to bring utilization back the target levels increase keep gross margin above historical levels.
Operating expenses for the quarter were $46 3 million of $5 million decrease year over year the year over year decrease in operating expenses was due to the benefits from our cost savings efforts during 2020 with the largest benefit coming from our $4.5 million reduction in selling and marketing expense.
Overall, the year over year savings, we achieved in our operating expenses in the first quarter keeps us on track for our 2021 target of roughly $190 million in annual operating expense as approximately 60% of the savings achieved during 2020 are now permanent and our cost structure.
And income per share was 28 cents for the first quarter up 36 cents year over year, reflecting the increase in operating income and lower interest expense adjusted.
Adjusted EBITDA was $17 7 million in the first quarter up 324% or $13 5 million year over year due to a higher gross margin on higher revenues lower operating expenses.
Adjusted EBITDA margin was strong at 18, 7% in the first quarter, an improvement of roughly 1400 basis points from the prior year period.
Free cash flow was $11 1 million in the first quarter, an improvement of $18 million year over year due to improved operating results and favorable working capital trends.
We also paid $6 8 million of the employee Twenty-twenty bonus during the first quarter and we paid the remaining $3 5 million of these bonuses during the second quarter of 2021.
Working capital was the use of cash of 100000 in the quarter. We are continuing as the improvement in average of working capital cycle is our business moves to more software and annual paid upfront subscriptions.
Capital expenditures were $1 3 million during the fourth quarter down slightly from the first quarter of 2020, we expect that capital expenditures will increase by several million dollars. During 2021, as we had reduced capital expenditures during much of 2020 due to the pandemic, we will be investing in the digital transformation initiatives.
To improve our internal operations as Jeff mentioned earlier.
Now, let's turn to the balance sheet.
The cash balance at March 31 remained strong at $55 6 million cash benefited from the strong free cash flow during the quarter, but is lower than December 31st due primarily to the repayment of $23 million in debt and our January refinancing occur.
Accounts receivable was down $19 8 million sequentially due to collection of seasonally higher billings from the fourth quarter of 2020.
Net inventory was up 1 million sequentially, but down $5 million year over year due to improvement in operating efficiencies and forecasting that drove reductions in hardware inventory levels.
Accounts payable was down $2 6 million sequentially and $15 8 million year over year consistent with our plan to reduce accounts payable would spend an inventory reduction with the lower AP balance we are seeing improved pricing from our vendors that we expect will allow for continued improvement in profitability.
As discussed during our fourth quarter earnings call on March nine we refinanced our bank debt in January to decrease our total debt outstanding.
Reducing our cost of debt, extending our maturities and providing additional financial flexibility and liquidity total debt was down $23 4 million to $184 3 million at the end of the first quarter two of the refinancing.
Net debt was at $128 7 million at the end of the first quarter.
Now, let's move to our credit metrics.
Our strong free cash flow in year over year growth in adjusted EBITDA continued to improve our metrics. The January of refinancing further reduced our total leverage and interest expense at the end of the first quarter. Our total leverage was two six times down from total leverage of three five times at the end of the fourth fourth quarter 2020 and $3 two.
Times as of the end of the fourth quarter pro forma for the refinancing.
Additionally, at the end of the first quarter, our net leverage was one eight times down from two three times at December 31, 2020 pro forma for the new facility.
During the first quarter, our effective interest rate on the new facility was 3.25 per cent and the interest spread will decrease another 25 basis points in the second quarter based on a reduced net leverage level, which should further reduce our interest expense.
Overall, we are pleased with the health of the balance sheet as the reductions to long term debt and improvements in leverage provide the company more flexibility to operate its business.
Let's now turn to guidance.
As Jeff said earlier, we are confident in the underlying strength in our business as we progressed through 2021 and given this we are raising the guidance for full year subscription and maintenance revenue and free cash flow debt. We issued on March nine the 2021.
Our total revenue guidance for the second quarter of 2021 is $88 5 million to $94 5 million a range, which represents a year over year revenue growth of 15% at the midpoint.
Subscription and maintenance revenue guidance for the second quarter of 2021 is 51 million to $55 million, we expect to see the same strong trends in subscriptions, we have seen and seeing for the past year and expect to have a similar quarterly increase in net subscriptions during the second quarter remember that Q2 'twenty subscription.
Revenue benefited from strong subscription adoption due to the pandemic and also included several hundred thousand of revenue related to our enterprise cloud solutions.
The midpoint of the guidance for subscription and maintenance represents 13% year over growth in subscription and maintenance revenue.
Non-GAAP net income per share guidance for the second quarter of 2021 is 19 to 27.
Assuming $46 7 million shares outstanding.
Adjusted EBITDA guidance for the second quarter of 2021 is 13 million to $17 million a range that would result in adjusted EBITDA at the end of the second quarter of $73 6 million at the midpoint.
Now for full year 2021 guidance for the full year 2021 we are raising our guidance for subscription and maintenance revenue to $217 million to $225 million.
We are raising our guidance for 2021 free cash flow to 47 million to $55 million the fee.
Free cash flow guidance includes the impact of the increased capital expenditures mentioned earlier.
For 2021 we are providing revenue guidance of 382 million to $402 million.
Non-GAAP net income per share guidance for 2021 is $1 five to $1 27, assuming $46 6 million shares outstanding adjusted EBIT.
<unk> EBITDA guidance for 2021 is 69 million to 79 million.
Lastly, we'll be hosting a virtual investor day on Wednesday may 19th at.
At the Investor Day, we expect to provide further detail on average the business strategy and our long term model.
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 if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you were using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask the question well pause for just a moment to allow everyone an opportunity the signal for questions.
We will take our first question from Josh Nichols with B Riley FBR.
Yeah. Thanks for taking my question and great to see such strong results, particularly from the the subscription business.
Do you do to.
To help frame kind of of the subscription longer term opportunity as far as potential subs that you could be going after on the post summer versus the enterprise market and if we were the kind of break that down a little bit between audio audio of subscription versus video editing subscription and how would you kind of frame the opportunity on both of those fronts.
Okay. Thanks, Don appreciate the question and period of time. So this is Jeff I'll start off and I'll turn it over to Ken talk more of what details he wants to share, but look I think of general there's kind of as you kind of in your question I think had it had that loaded in there as we of our creative individuals' subscription business and now we have as cash.
And I referred to before it's kind of a second leg of the of the growth engine with the enterprise side, we're continuing to see very strong.
Creative endeavor of individuals. This is everything from aspiring pros, which you can call prosumer as all the way up to <unk>.
Independent people working in the in the music of the video space, we're continuing to see that market performed very well for us in that sector to perform well I would say that our teams continuing to innovate around the products set that we have in that area to make those products more.
More accessible and more desirable by a wider market opportunities of that work continues as the company number two our go to market efforts will continue to be very aggressive both from an e-commerce and as I said in my comments around our digitally enabled channel and really going after more of that market.
And I talked about our digital transformation initiative with the investment, we're making to really everything around customer experience of everything around our digital acquisition and digital execution around these customers is all very important price. So we see this as a continued strong growth engine for us and so we'll continue the focus in there and keep going after that opportune.
As you've seen from us for several quarters.
And then on top of that is the creative.
And the enterprise by sales of creative tools and the platform tools that we sell the enterprise customers on subscription so there's kind of two.
Two pieces of our of our growth there.
The answer your question of as far as percentage of the candidate it will how much we're giving her explain right now yeah. So you know I would say in terms of the opportunity just hear your question as well.
We see tens of millions of users.
On the creative side and kind of the audio area is the potential market opportunity and tens of millions and video, especially as we go more to the middle market.
When you look at the creative individuals', we're pleased with the performance we've had with 300000 plus subs.
But we still think we're in the early stages and we still feel like there's a lot of room to move on the on the creative subscription.
The subscription product offerings that we have and as Jeff pointed out we're going to continue to drive functionality.
And in the products to gain more users in and in certain areas and the video look at areas to expand our Tam.
And then on the enterprises.
You know we've talked about.
Early growth last year, we're pleased with the performance. It is our second stage of growth, which you see in their numbers, but again, we believe we're very early.
Actually probably at home plate at this point.
And we're kind of in the position, where we see a lot of opportunity as theres thousands of enterprise customers that our sales team is targeting.
To drive and it's obviously in media enterprise, but we're also getting interest from industries outside of the media enterprise and our sales team is very incentivized to drive those types of those transactions. So again, we have a lot of opportunity to move we're going to be speaking of lot of this about this in our Investor day, and we hope.
That will help provide additional clarity on the points.
Yes, thanks for the additional detail around that and look forward to attending the Investor day in the coming weeks also I believe the company has had a pretty good track record over the last couple of years right from rolling out some of the new products, whether it's software or integrated solutions anything coming up in the pipeline that could be a potential.
Needle mover and then thoughts on.
Pricing the ability to flex pricing or improved margin on that front of I believe there have been some price increases historically that the company has taken.
<unk> taken application of mine.
So it's a good question, Josh So I'd say the mean, yes, I'm not ready to we're not ready to announce things of standard products on this call, but I would say you know probably talk more about this as each of our business leaders will talk about their strategy.
But there'll be continuous innovation all year long every year for the for the years ahead of raw.
Round software, obviously areas of how we're going to expand our software and quite frankly not just.
Create functionality of features that are important to monetize our markets, but also to look at how we attract greater users and greater customers in that space as I mentioned.
Ken just mentioned about obviously, we're trying to go through into the broader markets book on audio and music and video and also for more of the enterprise type customers. There's a lot of opportunities outside of the M&A space that are more recent offerings with the Adobe integration of with the SaaS offering on demand is starting to show our teams that there was a lot of opportunity to.
Avid let's say outside of some of its core markets into some other adjacent markets. So we see a lot of opportunity for the company in that space and you'll see us not just innovate in our core markets around them any but what we will be innovating new ways to attract new users and new customers. So I would say expect to continuous.
Train of innovation in that regard.
Thanks, and then last question from me. The then I'll pass the torch here.
I mean, the business clearly doing quite well I mean, the one piece of the business as you know integrated solutions, which is still at pre pandemic levels.
I don't expect any specific answer, but if you could kind of maybe opine on it for a little bit for you.
How long it may take before you get back to some proximity of pre pandemic levels at least adjusted for some of the emphasis of this integrated hardware lower margin offerings.
Yes, yes, that's a good point you mean, the second part of it.
And we'll definitely share more of what we're doing precisely when we get to Investor day, but I.
I think of you if you remember the things that we're deemphasizing and we've already been deemphasizing them. So they are they are going to be a bit of.
The headwind on the on the year on year compares but the something with the emphasizing is very low margin and or no margin products that really.
Don't generate.
You know really much at all from the from an earnings or cash flow perspective, So we really done kind of a pivot in the last several months to make sure that we are deemphasizing those products. Because we also want the of dollars. We're investing to go towards things that are kind of give us the better growth from the better.
The profitability up.
I think largely what's the lifestyle and because that is of a part of our of our integrated flow sort of put lifestyle to aside for a moment most of the other products are really around.
The music, we've already seen us as Ken said in more detail in his remarks, the music space around integrated solutions is already back to growth. So we're seeing that already showing some real good signs the audio and video post production markets are definitely improving and we saw improvement last quarter, we think that will continue to debt gradual recovery.
And that we've talked about that.
That will go into the second half I think we'll see that continue and we are seeing some improvement from the broadcast sector to I will say, though that a lot of the one of the nice things of that even if the.
Integrated solutions, which is more of a hardware base business is still a bit of of pressure year on year. If you look at the software numbers, we've seen really not just subscription but the overall software numbers had grew substantially in the quarter. So the good thing is we are seeing the enterprise customers spend hours with us. They are just right now maybe putting more of those dollars and soft.
The investments and not as much in the hardware investments, but we do see that will continue to get better on the hardware side again as people get back into their facilities get back into full production and can really start doing doing those those kinds of investments, but I'd say my answer would be the same as it was probably the last quarter because of true.
The Canada, I talked about which is a gradual recovery going through the first half from probably by the second half. We believe we will be in a place that I would maybe call it pre pandemic levels.
And I think Josh the other point of that talks about the mix that we're at that Jeff talked about earlier in terms of.
Driving the right revenue streams, obviously more of investing in software you know we are pivoting around some of the products integrated solutions you can see the improvements in the gross margin line, which of course clear proof points of that.
And although we had a decline on integrated solutions.
Just because of the better mix and the audio products gross margin on integrated solutions was up 460 basis points year on year. Despite lower volume. So we're pleased with the decisions we're making on that you know we still have more room to go in as the market gradually recovers, we're going to continue to see further gross profit improvement of any.
<unk> solutions and topline.
Thanks, guys. That's all from me.
Thanks, Josh Josh.
Thank you we'll take our next question from Jack Vander Arent with Maxim Group.
Great Congrats on solid results guys.
Nice to see as Jack turned to positive year over year revenue growth.
That's now the puts and takes.
Thanks sure. So thanks for taking my question a lot of them actually had been addressed but it's.
The thing I wanted to get back to the question that I asked last call just I think would be interesting for an update on that.
Jeff.
Just regarding.
The overall change of tone and sentiment from from your end customer discussions.
And some of those nonrecurring product categories are.
There had been most impacted from COVID-19 now I think you just touched on a lot of those things.
I wanted to be redundant here, but yes I.
I do recall I think video services from what Ken was saying, we're up year over year and storage graphics had been kind of flattish, but that's not down anymore. So that's good and lot of events is still under pressure but.
Just anything you're hearing I guess like an overall discussions then the amount of discussions youre, having the visibility of the timing of new things that are being talked about.
Maybe they're getting creative of how they are thinking about putting out of festivals in light of events and planning for that just I don't know I'd be interested to hear your thoughts on that.
It's good it's a good question I kind of check of can you talk about a little bit in my opening remarks about.
Our customer yard avid customer Association.
<unk>, we do of annual voice of the customer recession. This year, we did it virtual obviously because of the pandemic.
And we had about 70 customers and users.
Really we go through under NDA all of our road maps all of our strategic plans, we talked to them a lot about what theyre doing and what their priorities are and so we get we gather a lot of it is a sample, but it's a pretty reliable sample we've been gotten quite good at sampling of the customer base precisely and the feedback. We're getting is is as I said first of all.
There is a lot of focus around moving to more subscription based models from the software perspective moving to SaaS in many cases in fact that is accelerating the talk around cloud and SaaS based environments, but in general I would say that the mood is definitely getting better I mean, I think that the people. We're seeing we're seeing a lot of projects get green lit again now we're seeing investments.
Flow, obviously much better than they were just a few months ago and so we are seeing a good pattern. There again I wouldn't call. It all the way back to quote unquote pre pandemic levels quite yet, but it is heading in that direction and I would say.
As I said in my remarks, and I admit it is that even Q1 was a bit better than we thought it did it did go a little better than we had originally expected from the customer take up of investment cycles. So I'd say look I think it's performing as we expected maybe a little bit better and we think that'll continue but I think it'll be.
Q2's environment will be a little better than Q1, and Q3s would be better than Q2, and you'll keep the aggressively I think getting warmer we got to remember the U S market U K market those markets are coming back a little faster now.
Other markets of Europe is still in the bit of coming out of the pandemic and so it really on a global scale it'll take a little more time for every major market that we're in to come back as we are seeing already of the U K and U S markets of coming back.
Terrific. None of that's help answer its very helpful color Yeah, absolutely you touched on everything I wanted their debt that's great.
And then maybe just a question a question for Ken.
Just regarding the annual paid upfront subscriptions subscription business as a whole remains very strong group of bright spot here.
At the annual paid upfront subscriptions. It seems like those of you know they'll just continue to climb is this.
I'm reading in the presentation I believe 28% of total subscription sale.
Or is this mix heading and what does this how does this impact the the next couple of quarters from a I don't know from the from our revenue growth trajectory and then also from a maybe of margin trajectory as well.
Yes, no. We're we're obviously.
Pleased with the move that we're making making an annual paid upfront subscriptions.
You know our last Investor day, probably 18 months ago was probably 12% of its now 28% I see this becoming 50 per cent of the business in the next probably Inc.
Teen months, just given the trajectory that we're on.
We believe those are better quality, obviously customers for us and of monthly.
Subscription.
And we're going to continue to drive that.
So I think that's going to be you know a big part of the revenue streams can compete.
With the growth will be it does help with cash flow, obviously and it's.
It's a better.
Quality quality customer and there's an opportunity to actually upsell them as we locked them in <unk>.
Versus you know of monthly customer so we feel like that's the direction that the business will continue to head in that provides us the ability to raise to go drive ARPA and as we do Upsells and.
You'll drive more growth on that on that subscription line with bigger LTV lifetime value for the subscriber.
Yeah. That's helpful. And then maybe just one last question.
Maybe it's more of a sneaky question before your Investor day.
Just in terms of the you know the level of the content and the granularity.
Of what you.
We are going to unveil is.
Is it is it similar to how in depth and how I guess granular your last Investor day was like a three year operating model and on all sorts of line items and key metrics.
And I'm just wondering if it's going be something similar to that kind of granular level.
Yeah, No where are you where you should expect something similar.
And you know what I'm excited about is you're going to see more pieces of the of our business areas and then our our CTO will also provide some some commentary as well as our commercial leaders. So we're excited for the Investor day, and there'll be a long term model that backs up.
The strategy that we're driving and obviously.
We think that's positive to us to put out that model as we.
I think it's important for us as a company and for our shareholders to see the direction of our business.
Okay, great fantastic well I look forward to that.
Excellent results again guys.
Is it from me.
Sure Jack.
Thank you once again to ask the question. Please press Star one we'll take our next question from the home Chachi with Northland capital markets.
Yep. Thank you.
Nice strong feat and nice raise here, especially with the free cash flow.
We're happy to see that.
You do one of the exam.
Drilling all of that a little bit here so.
Oh I would argue that the subscription maintenance is the key metric here I think you guys agree with that as well and I think all of the interest rate with that as well.
You beat the beat your midpoint guidance by $3 million and the rates for the full year I think is about $3 5 million at midpoint.
I guess, the basically are we talking about no change in the year of your trajectory for the business for balance of the year relative to what you were thinking 90 days ago.
We see an improvement in the business obviously.
And especially in the subscription and maintenance line with the I would say the strong growth that we're seeing on the enterprise subscription in the core growth that we're seeing in the creative. So you know we're definitely in the second stage of growth.
We believe our maintenance business is very stable.
Sure our software maintenance as we move customers to subscription.
There'll be some there'll be a slight headwind, but we're seeing higher renewal rates on the maintenance from a hardware perspective, and we believe will have the improving product sales. We believe are our guidance as appropriate but it is conservative.
And our goal is to drive past that as the team but.
We feel good about the direction of our business at this point.
Okay, that's great.
I'm sorry, you May have said this at the very beginning of the call did you guys provide.
The detail on the enterprise subscription revenue within the quarter.
Yeah no. It was yeah, we did in our earlier remarks it was.
A few million dollars for the quarter and continues to be an important piece of the business is our second stage of growth.
So I think that's we.
We see that.
As part of our of our growth drivers moving forward that piece of the customer about position in the moving to subscription.
If I recall correctly last quarter, you qualitatively describe enterprise subscription as a few millions as well. So does that mean that was basically flat Q over Q.
It actually was down slightly because of the strong growth that we're seeing on the creative slide.
Q4 was slightly more revenue than Q1, and if you think about it they haul we have more customers that renew maintenance in Q4.
So the there's more opportunity to move them the subscription in Q1, although it is a good quarter for renewing maintenance.
You know it was down slightly versus Q4.
Just the raw.
Run us through real quickly the <unk>.
Counting on the subscription bookings to how that flows through to revenue in the couple of quarters of bookings happened and then subsequent quarters on how that plays out from the balance sheet.
Yes, so obviously if it's if it's annual you know we recognize that over the over the over the term under ASC 606, though there is some of them. If it's if it's not of SaaS subscription. There is some upfront recognition. We are moving if we have of multi year.
To have.
You know the revenue be recognized annually based on certain terms of putting in the agreements. So we don't have we have kind of a consistent predictable enterprise subscription revenue that we believe is best for our shareholders.
That said in the first quarter there was the both.
Both in the fourth quarter and in the first quarter. There was probably about a million of half dollars of I would say revenue that was.
I would say of accelerated.
The accelerated under ASC 606, just the way that the revenue treatment works in the from that from those from those enterprise deals, but we are as I said before putting terms in the contract that we have annual recognition on a multiyear deal going forward.
Okay and.
I see that there's a divergence between the to go from here.
For the March quarter relative to the number of subscriptions that makes sense given the enterprise subscription starting to become material here, but explain to me why we didn't see that the divergence in the December quarter.
You had very strong growth in our creative.
And you know obviously.
That helped drive the the overall sequential improvement I would say, we outperformed our initial expectation I would say in the second quarter.
Enterprise subscription can be a little lumpier.
Enterprise deals can be different sizes. So there could be you know in our guidance as we deemed conservative there.
There could be a slight decline.
So thats, what youre seeing in the guidance, but we do believe that the core creative market will continue to be strong.
Okay, great. Thank you very much.
Thank you Dale.
Thank you we'll take our next question from some months of mono with Jefferies.
Hi, good evening, Thanks, taking my questions and did that to see that strong subscription revenue growth to continue.
Maybe Jeff of all.
I'll ask it slightly differently you know you have given the mixed in the past of of <unk>.
Pro tools versus media composer and Scibelli S M and the kind of the contribution of subscription any noticeable differences in the <unk> versus past quarters or you're seeing more interest in the one versus the other and then all of a couple of follow ups.
No I don't think there was a really.
But by the way, it's about sort of.
There's been nothing of real Big change I think the trajectory it's been about the same on the mix.
You do get a little bit of of difference when do we get in the education season, where students and stuff are bringing the subscriptions on as you'll get like we'll get a nice burst of soap of pro tools Sibelius during those periods, but generally I would say the mixes of been holding up quite well the year over year growth. We're seeing on all three products as kind of noted in his remarks had been rather.
Strong and again each quarter of a little bit different the paint on the seasonality of the given market segment that we're going after but I think we're continuing we're happy of what we've seen and we're continuing to see the pattern that we want to see in all three products.
Great and then maybe as I think about it.
Yeah, just the go forward Ken when your when Youre looking at the cohorts of.
Our customers that we're signing up for subscriptions.
And kind of quarters of 2020, as we start cash.
To come up for renewals are you seeing any changes in renewal trends on dose cohorts versus historical cohorts.
No I would say in general we've been very pleased with the the renewal trends.
In terms of the.
The retention I would say that we had substantially strong new adds last year.
As those come up for renewal.
In general they're in line generally in line with our prior renewal rates. So we feel really good about that Additionally, we are adding more.
I would see talent to the customer experience area.
Help with the renewal rates.
So we feel good where we're adding the right investment in the right areas to continue to drive that and one of the other important thing is we move people the annual paid annual subscriptions the <unk>.
You know.
I think in general the just higher quality customer base and there's a big improvement in the renewal rate for that that piece. So as the whole pie moves we were at 12% annual paid upfront.
18 months ago, we're now 28 percentage that gets the 50% that becomes.
As a game changer for our renewal base and as our Chief revenue Officer, Tom corner is driving the huge enterprise subscription transition those of very very high quality customers.
So the retention rates should all improve so we feel like we're moving in the right direction on the on those areas and I think all sorts of can some modest if you look at Q1 remember Q1 last year was the really big quarter for creative licenses because of the second half of March we had a really big uptake because of when COVID-19 hit and we've gone through Q1 and we've seen.
Basically the pattern has held from of renewables standpoint, so so far what we're seeing is encouraging obviously.
Great and then maybe one last one from me and I'm going to go ahead and apologize. If this is a dumb question, but we've.
We've gotten from investors and we weren't sure of the answer but.
With COVID-19 and with a lot of people working from home and you know, especially with kind of a big part of the base being this individual creative professional have you guys has that benefited subscriptions and you know, whereas somebody let's say, it's either working on the studio of project and has access to the subscription there would there.
You still have to pay for their own individual one as well maybe.
Maybe how does that work in terms of access log ins was there any type of uplift of subscriptions over the last call. It 12 to 24 months from that.
Well I think look I, obviously, there was uplift in COVID-19 from let's call. It March all the way through probably.
The summer time, because I think we saw probably even one of the fall a little bit, but we obviously saw additional subscribers one new meet people, who make music people were at home. They have a lot more time on their hands. So they went in the subscribed to more music tools.
So I think but really for us what the benefit was was of customer acquisition right, we were able to acquire customers.
And bringing them attract them to our tools and during that environment I think for the people who are professionals that work for.
Organizations, whether they work for them independently or they worked for them as an employee we did obviously see some benefit both on the enterprise customer side, but on the.
<unk> side, where they probably got an additional license to make sure. They had another seat to work on from home.
But as I said earlier, we didnt see any real change in churn or in renewal rates. In this first because we were already in the comparative period from versus last year.
We talked about in Q1 of things held held very well. So I think we'll see how it goes long term there was some benefit but I think the COVID-19 benefits ended the long time ago and I think.
As you've seen the last couple of quarters now our last three quarters now we still had.
The 2020.
<unk> thousand 728.
Kind of numbers I mean, this is our third quarter now where we've been hovering around 2000 728000, net subscription adds and Thats all of the happened probably.
The COVID-19 benefits.
Understood. Thanks, again for taking my questions and great to see the start to the air and sea at the Analyst day.
Yeah, great. Thanks for the month of fear.
Thank you. That's the final reminder to ask the question. Please press star one.
Okay.
And with no further questions in queue I'll turn it back to the company for closing remarks.
Great. Thank you operator, so in closing I want to say, we look forward to engaging with you again during the average 2021 Investor day, which we'll be hosting virtually on may 19th today, we only touched briefly on the widening horizon of average total market opportunity that we see we will continue to explore this in detail during that event. So I hope you can join us details and registration.
Shneur available on the events and presentations page of our Investor Relations website at IR Dot avid dot com. If you need additional information you can also reach out to with directly so on behalf of everyone here 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 continued support.
Thanks, and Goodbye for now and we'll see you all hopefully on the 19th.
Thank you ladies and gentlemen. This concludes today's call you may now disconnect.
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