Q2 2021 Avid Technology Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to avid technology's second quarter 2021earnings conference call. Today's call is being recorded at this time all lines are in a listen only mode. After the presentation and the call will be opened for questions. You May Press star 1 on your telephone keypad, if he would like to ask a question.
And if you're on speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment now let me turn the call over to your host for todays call, what Russell VP of Investor Relations.
Thank you operator, and good afternoon, everyone and thank you for joining us today for avid technology second quarter 2021 earnings call for the period ending June 32021.
My name is wherever Apple Abbott's, Vice President for corporate development and Investor Relations with me. This afternoon are Jeff <unk>, Our Chief Executive Officer, and President and Ken gave on our Chief Financial Officer and EVP.
And 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 dot 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 and in accordance with regulation G. Both the appendix to our earnings release today. This presentation and our Investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also.
Definitions for the operational metrics used on this call and and the presentation.
Unless otherwise noted all figures noted by management during the call today 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 future results or occurrences may differ material.
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 for Us and kept for his remarks. Thanks.
Thanks, Whit and thanks to everyone for joining us to review average second quarter results. We are pleased with the continued progress this quarter as we saw sequential revenue growth and strong year over year growth and revenue earnings and adjusted EBITDA and free cash flow.
At this point, we remain confident and our outlook for 2021, and we haven't raised our full year 2021 free cash flow guidance and reaffirmed all other full year 2021 guidance items.
And there's a lot we want to share with all of you today, So let's get started.
During the second quarter, the 3 main takeaways and I would like to review with you. Our first we continue to have robust year over year growth and our subscription business.
And the gradual recovery, we have seen and our integrated solutions business since late 2020 accelerated during the second quarter.
And third we continued to deliver healthy profitability and free cash flow.
These factors helped us to deliver a strong first half of 2021 and gives us confidence and our ability to achieve the full year 2021 guidance that we gave earlier this year.
Now, let me dig in a bit more and provide some additional specifics on each of these 3 areas.
First we saw a sustained robust year over year growth and our overall subscription business, including solid performance across our creative tools and continued strong adoption of our enterprise subscription offerings.
Cloud based software subscriptions grew 43, 2% year over year as both individuals and enterprise customers continue to embrace the new business models, which is great to see.
Subscriptions for our creative tools continued their strong overall growth trajectory as the anniversary of the start of Covid passed we saw increased purchases of certain creative tools. During the initial months of the pandemic and as many customers adapted to remote work and stay at home restrictions and demand for these products remains strong and growing and we continue to innovate and invest and mark.
And need to drive sustained growth and our creative tools.
During the second quarter, we saw strong adoption of media central subscription offerings, and we see global enterprises increasingly use subscription licensing and decentralized license management as well as to ensure that their organizations are on the most recent releases of our software we.
We added several new media central enterprise subscriptions with marquee enterprise customers during the second quarter.
The annual price of media Central seat subscription is generally multiples of the average annual price, but 1 of our creative solutions, depending on the configuration. So this growth is especially encouraging and we're just getting started with our enterprise customers.
In addition, we saw increased adopt a contribution from our avid edit on demand SaaS offering and other cloud cloud based solutions and the sales pipeline and for these products remains strong.
Next during the second quarter the recovery from the impacts of Covid, which we haven't seen since the third quarter last year really strength in the year over year and sequential recovery and our integrated solutions business was driven by strength in many product areas.
Our storage business saw an increase and purchases of on premise hardware by customers as their production schedules gradually returned to normal levels and the resume investing in capacity and updates to the latest technology to support their more distributed work environments.
We also saw a strong increase and life sound solutions due to the return of many music festivals and touring activities as restrictions have loosened up in certain parts of the world. While there is still not back to pre pandemic levels lifestyle and revenues were higher than in any quarter since the start of the pandemic.
Our other audio integrated solutions and Couldnt control services and audio interfaces also continued to grow nicely.
And the recovery and integrate solutions volumes, particularly higher margin storage also contributed to a significantly improved quarterly gross margin for integrated solutions overall.
And third during the second quarter, we continued to deliver healthy profitability and free cash flow.
We realized strong revenue growth during the second quarter, driven by the ongoing recovery of our markets and the new product innovations. We've delivered in recent periods, resulting in nearly 20% year over year revenue growth.
Revenue growth combined with the benefits from the cost structure improvements and operational efficiency programs that we've put in place last year drove year over year improvement and our profitability.
And while certain of these cost saving measures were temporary during Q2 and Q3.2020, we have remained diligent and our spending controls as we continue to look at smarter ways to manage our business, resulting in a year over year increase and adjusted EBITDA and 108% year over year increase and non-GAAP EPS.
Additionally, we delivered strong positive free cash flow and what is typically a weaker free cash flow quarter.
Now, let me and my prepared remarks by talking a bit about where we see things going forward from a business perspective.
We are expecting to see the gradual recovery from Covid globally to continue through the second half of 2021. However, we do remain cautious as a recovery and integrate solutions could be uneven due to the impact of the Covid Delta variant or other factors.
We expect creative individuals' subscriptions to continue on a solid growth trajectory driven by new product offerings and innovations.
We continue to deliver new subscription and software solutions, including 1 we announced late last week, Scibelli and for mobile, which fully integrates sebelius music notation and experience across the world of mobile and desktop and premise users to work on their iOS device their laptop or both.
Our recent notable releases include new feature rich pro tools and media composer software releases and adding the capability to now published Dolby Atmos music tracks to Apple music from our avid play service.
Enterprise subscription continues to strengthen and we expect will become a larger part of our overall subscription business largely driven by media central but also from expanding deployments of our creative tools across many of our enterprise customers around the globe.
As we continue to add new innovations and educate our customers about the benefits of the subscription offerings. We expect to see continued robust growth and we expect continued success and getting customers to adopt and expand their usage of our cloud solutions, including added on demand, which was introduced at the end of the first quarter.
Finally, we continue our efforts to improve efficiency and maintain the cost discipline that we've been so focused on for the past 15 months.
We have reduced spending on our certain legacy products, allowing us to increase spending on new product innovations and our growing subscription and cloud areas and.
In addition, as we have discussed previously we are making certain investments to support our digital transformation and various infrastructure improvements to enable us to more profitably scale, our subscription and SaaS business.
We believe the new products and features we have recently introduced combined with the operational improvements we made during the past several quarters position us well for further growth and improve profitability, while generating strong free cash flow as we move forward through 2021 and beyond.
So now with that let me turn the call over to Ken to review more of the financial details I'll take your weekend.
Thank you, Jeff and good afternoon, everyone.
We are pleased with our business and financial results for the second quarter of 2021.
Our year over year growth driven by continued strong growth and our creative and enterprise subscription revenue and a recovery and our integrated solutions business together with our efficient cost structure delivered strong profits and free cash flow.
Our focus for the remainder of 2021 will be to continue building, our subscription revenue and to improve the nonrecurring portions of the business related to integrated solutions.
We expect these efforts to result, and continued improvement and our key financial metrics, including higher levels of profitability and free cash flow and the second half of 'twenty 'twenty 1.
With that let's turn to the details of our second quarter financial results.
We are encouraged by the continued growth of our subscription base, which reached a new high and paid subscriptions. Our total subscription count reached approximately 346000 and at the end of the second quarter and increase of 43, 2% year over year.
And the second quarter, we added roughly 19000, net new subscriptions, including 15000 net new subscriptions for our creative software solutions as well as 4000 net new subscriptions for media central.
Our enterprise solution, which we expect to drive our next stage of subscription growth.
This is the first quarter that we are including media central subscriptions and our reporting as the count has now reached a material number.
Media Central subscriptions are sold as a number of seat licenses and these seats are included in our subscription count.
At the end of the second quarter, we had approximately 7000 media central subscriptions, we started offering and media central subscriptions during the fourth quarter of 2020, and we have revised the total subscriptions count for the fourth quarter and first quarter of 2021 and the chart to include the <unk>.
<unk> Central subscriptions, we will continue to include media central subscriptions and the count going forward.
Subscription growth was strong for all of our creative tools with pro tools up 40% year over year media composer up 50% year over year, and Sebelius up 30% year over year.
Annual paid upfront subscriptions for our creative tools continued to grow nicely, increasing a 101% year over year and now represents 31% of our total subscriptions up from 22% a year ago in.
In addition, and media central subscriptions or at least 1 year duration and as Jeff mentioned, the annual price of medial and central seat subscriptions is generally multiples of the average annual price of 1 of our creative solutions.
Now moving to the composition of our revenue.
The continued growth and a number of paid subscriptions for our creative tools as well as new subscriptions for media Central drove continued year over year growth and subscription revenue during the second quarter, reaching 21, and a half million and increase of 39% year over year.
We believe demand will continue to be healthy and growing for our creative subscriptions and new enterprise subscription offerings. As we are driving more innovation and additional marketing spend to capture this large and growing market opportunity.
As mentioned during our first quarter 2020, and more on an earnings call. The first and fourth quarters and provide the largest natural opportunity for us to convert enterprise customers from their existing perpetual licenses with maintenance contracts to subscription agreements given traditional enterprise budget cycles and.
And number of existing maintenance contracts that renew around the calendar year and.
As a result of the seasonal pattern, we expect year over year subscription revenue growth to lag total subscription growth and the second and third quarters and 4 year over year subscription revenue growth to exceed total subscription growth in the first and fourth quarters.
Overall, we expect to continue to see strong year over year growth and our subscription revenue each quarter throughout the year as more of our enterprise customers move to subscription models.
Maintenance revenue was $30.4 million during the second quarter.
Down 4% year over year and up 2% sequentially.
And its revenue remained stable as we saw improving renewal rates on our maintenance contracts and contribution from the stronger product sales and the first half of 2021.
Offset by the transition of certain enterprise customers from maintenance software contracts to subscriptions and recent periods.
Looking forward, we are seeing an improving trend and the renewal rate of maintenance contracts related to integrated solutions, which we expect should provide stability and growth for our hardware maintenance revenue moving forward as our integrated solutions business continues to recover with the overall market.
Total subscription and maintenance revenue increased year over year by 10, 5% and the second quarter as subscription.
And revenue growth was diluted slightly by the slight decline and maintenance revenue our subscription as subscription revenue is getting closer to maintenance revenue that the combined subscription and maintenance revenue growth should more closely track subscription growth going forward.
Perpetual license revenue was $5.9 million down 14% year over year and the second quarter as we have de emphasized perpetual licenses and focused on strategic subscription revenue.
Total software revenue from combined subscription and perpetual license increased year over year by 17, 7% and the second quarter.
Our integrated solutions business continued to make a strong recovery off the low and the second quarter of last year due to Covid integrated solutions revenue was $31.3 million and the second quarter and increase of 55% year over year and an increase of 19, 5% sequentially.
Within integrated solutions revenue from our storage products was up sharply both year over year and sequentially as our enterprise customers continue to recover from the pandemic live sound product revenue was also up significantly year over year and sequentially due to continued market recovery as many festivals and touring acts resumed the law.
Live sound and recovery was ahead of our expectations for the quarter.
Audio control surfaces revenue also increased nicely year over year as many largest studios began to add new capacity.
<unk> audio hardware revenue increased year over year, and the second quarter driven by sales of pro tools carbon interface introduced during the fourth quarter of 2020.
Finally video service and graphic solutions revenue were down year over year as we deemphasize certain of these solutions and the revenue from these product lines remains below pre pandemic levels.
The balance of our revenue comes from our professional and learning services businesses professional services revenue was $5.7 million and the second quarter and improvement of 23.
<unk> percent year over year.
Now moving to recurring revenue and annual contract value.
And the second quarter.
LTM recurring revenue was 76% of total revenue up from 70% and and Q2 of 2020, the LTM recurring revenue percentage increased due to higher subscription revenue and revenue from our long term agreements and from lower nonrecurring product and professional services revenue and the last 12 months.
Annual contract value was $293.1 million at the end of Q2 up 10, 5% year over year.
<unk> benefited from the strong year over year growth and subscription revenue and improvement and contribution from strategic purchasing agreements with our channel partners.
<unk> was down sequentially due to the impact of the greater enterprise subscription sales during the first quarter of 2021 associated with the maintenance contracts that renewed around calendar year and as we have discussed before.
During the second quarter, we added 1 new strategic purchases and agreement and we successfully renewed all 5 strategic person and agreements that were up for renewal.
Now, let us look at the rest of our financial results for the quarter total revenue was $94.9 million and the second quarter and increase of 19, 7% year over year and a slight sequential increase at.
And at constant currency, our second quarter 2021 revenue increased 16, 2% year over year.
Non-GAAP gross margin was 63, 9% for the second quarter down 150 basis points year over year due to the sales mix from greater integrated solutions revenue as well as 2 non 1 time events and $800000 royalty and license accrual true up related to our creative software.
<unk> and a $400000 and costs related to a strategic professional services commitment.
Absent those nonrecurring items non-GAAP gross margin would have been over 65% and the quarter.
Non-GAAP operating expenses for the quarter were 47 million, a $6.5 million increase year over year operating expenses. During the second quarter of 2020 included significant temporary cost savings initiatives put in place due to COVID-19, including temporary employee furloughs.
While many of the temporary cost saving efforts are no longer and effect. We have continued to exercise similar discipline and managing our expense structure. Overall, we remain on target for approximately $190 million and non-GAAP operating expenses for fiscal year 2021.
Non-GAAP net income per share was 25 cents for the second quarter up from 12, and the second quarter of 2020, reflecting the increase and operating income and the reduction and interest expense adjusted.
EBITDA was $15.8 million and the second quarter up 17, 1% or $2.3 million year over year due to the increasing gross profit from higher revenue adjusted EBITDA margin was 16, 7% and the second quarter.
Free cash flow was $5.6 million and the second quarter and improvement of $10.8 million year over year to the improved operating results and favorable working capital trends as we continue to move more subscribers to annual paid upfront subscriptions. We also paid the last 3 and a half million of the employee 2020 bonus and cash during the second quarter.
<unk>.
Working capital was a use of cash of 6.5 million and the quarter, we're continuing to see improvement and avid working capital cycle as our business moves to more software and annual paid upfront subscriptions.
Capital expenditures were $1 million during the second quarter down slightly from the second quarter of 2020 as we previously have mentioned, we expect that capital expenditures and prepaid expenses will increase by several million dollars. During the second half of 2021, as we will be investing and internal operations to support our expanding subscription business.
Now, let us turn to the balance sheet.
The cash balance at June 30, and remains strong at $53 million accounts.
Accounts receivable increased $5.8 million year over year due to an increase and billings.
Net inventory decreased $5.4 million year over year due to increased integrated solutions shipments and the quarter and improvements and operational finished CS and forecasting that drove reductions and hardware inventory levels.
Accounts payable increased $3.9 million year over year to support the growth and our business while D. P O continuing to trend down.
Total debt decreased to 182 million at the end of the second quarter as we continue to strengthen our balance sheet. Following the refinancing completed in the first quarter net debt was $128.8 million and at the end of the second quarter.
Our strong free cash flow and growth and adjusted EBITDA continues to improve on all of our credit metrics with net debt to adjusted EBITDA of 1.7 times at the end of the second quarter down from 3.4 times and the prior year period.
Overall, we are pleased with the health of our balance sheet as the reductions to long term debt and to total leverage provide the company more flexibility to operate and grow its business and to explore capital allocation alternatives to drive long term shareholder value as we outlined at our Investor day earlier this year.
Let us now turn to guidance.
Given our favorable performance and the first half of 2021 and the recovery and the end markets. We are raising our guidance for full year 2021 free cash flow and we are reaffirming the rest of our guidance for full year 2021.
We're also providing third quarter 2020.1 guidance as follows.
Our total revenue guidance for the third quarter of 2021 is $94 million to a $100 million a range, which represents year over year revenue growth of 7% at the midpoint.
Our subscription and maintenance revenue guidance for the third quarter of 2021 is 51% to 55 million.
Our non-GAAP net income per share guidance for the third quarter of 'twenty 'twenty..1 is 20 to 28.
Assuming 47.2 million shares outstanding our.
Our adjusted EBITDA guidance for the third quarter of 2021 is 14 million to $18 million a range that would result in LTM adjusted EBITDA at the end of the third quarter of $71.1 million at the midpoint.
We reaffirm our full year 2021 guidance for revenue subscription and maintenance revenue adjusted EBITDA and non-GAAP net income per share that was issued on May 5.2021, and our total revenue guidance for 2020, 1 remains 382 million to $402 million, our subscription and maintenance revenue guidance for 2020.1 <unk>.
217 million to $225 million, our adjusted EBITDA guidance for 2020, 1 remains 69 million to $79 million and our non-GAAP net income per share guidance remains $1.5 to $1.27 per share for 2020.1.
We are raising our guidance for full year, 2020, 1 free cash flow to 49 million to $57 million as our first half free cash flow performance and our trajectory gives us confidence and our 2021 free cash flow with that I'd like to turn the call back to wet.
Thank you Ken and thank you Jeff.
That concludes our prepared remarks, and we're now happy to take your questions. Operator. Please go ahead.
Thank you and as a reminder, that is star 1 on your telephone keypad. If you do have a question if you're on speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
And we will go first to Josh Nichols with B Riley financial.
Yeah. Thanks for taking my question and great to see the breakout for media central with some strong transaction and just over 2 quarters of subscription revenue sales here I guess could you kind of elaborate on that as the pace that you're currently seeing do you think that thats sustainable or would you expect that to accelerate I'm just trying to get a.
A little bit of a frame of reference for how quickly the enterprise subscription business may grow over the back half of this year and into next.
Yeah. Thanks, So it's a good question and I think I appreciate you the.
And being on the call so.
I think what you're asking.
And said Q1, and Q4 are always going to be stronger enterprise quarters, because that's where the biggest opportunity to convert some of the enterprise customers over to subscription are but that said we are seeing a pretty continue on continuous opportunity quarter by quarter to move them over and look I think we're really early in the process I think as Ken commented, it's we're still very early.
And this in this opportunity to convert the enterprise customers.
So theres a lot of opportunity ahead of us I think theres going to be a lot of conversion possible and I think we see that trend continuing I wouldn't want to say, what we predict each quarter, but I think when you look at year by year, and we're going to see a lot of very positive momentum from enterprise subscription customers.
I'd like to add Josh.
To Echo Jeff's thoughts we have.
Over 1000 enterprise subscription costs and enterprise customers that are candidates for moving.
To subscription models.
Some of these customers may buy a dozen are.
Our 2 dozen licenses, but there are larger customers that could buy a 1000 seats.
And as the mall for enterprise matures and the coming years Theres, a tremendous opportunity for additional growth.
And as Jeff pointed out we've only converted.
Small percentage of these customers. So there is an incredible opportunity to drive not only license growth, but revenue growth and.
And as we move those customers that will expand our gross margins and profitability.
Thanks, and then.
1 follow up question for me I guess.
Good to see the return of the integrated solutions here that was like the 1 piece of the business right that had been hit worse. During the pandemic I guess could you kind of help frame a little bit what youre seeing and how sustainable that that growth could be with the return of volume of music and as we start to think about 'twenty 2 a little bit.
We've heard a lot of positive industry data points about concerts and things like that I guess, how much how much of a jump could we see and this.
Business segment, if we kind of compared to pre COVID-19 levels.
Well I don't want to necessarily compared to pre COVID-19 or are talking about quarter to quarter to jump at any period, Josh, but I think that what we are going to see as we've talked about it and we're going to continue to see a gradual recovery and the markets now we did see.
A very strong recovery in Q2, but as we look ahead, we are continuing to see the the signals from the market is that I think it was kind of 3 major categories I would say the more production customers that are working on television and film are continuing to give really good signals about their return to production and they're continuing to.
To bring back full production around the world again.
Situations going on different parts of the world, but we're seeing them from a global perspective, I'll say, we're continuing to see that market strengthen I think the larger enterprise customers the broadcasters and media companies.
And they're definitely green lighting, there they are bigger projects again, and so we're seeing we're continuing to see a solid funnel and a good opportunity to do some of these bigger projects with the enterprise customers and and the lifestyle market.
We've all seen and the news music.
Concerts, and festivals and also fixed facilities, youll people, who invest and churches or concert halls or things like that or Broadway shows we're starting to see those come back online. So I think overall, we're seeing a great trends and.
And again, it could be lumpy, depending on how things unravel with with Covid, but I think what we're seeing is a trajectory that's positive and we're seeing recovery continue and around the world.
Okay.
Thanks, guys I appreciate it.
Yeah. Thanks, Josh.
And we'll go to our next question from Steven Frankel of Colliers.
Good afternoon, and thanks for the opportunity Jeff I, just wanted to dig into the subscription numbers and.
Really appreciate you breaking out.
Central and the creative and.
While it's up nicely year over year that created tool net add number is relatively much smaller than <unk> seen for several quarters.
How much of that is a function of those.
Those.
People buying last year during the pandemic debt now maybe on back to work and therefore their subscriptions are lapsing or.
There are another dynamic at play here.
Well I think there's a couple of things first of all the comp.
And we know Q2 is a tougher comparison given the abnormal conditions, we saw last year due to COVID-19.
But I'll say that we continue to see really strong subscription ads across the portfolio and gross.
<unk> don't forget too Steve that Q2 is if you take you got to kind of look at Covid has it kind of a weird.
Anomaly and also even seasonality, but if you remember going back a couple of years Q2 has always been 1 of our seasonally weaker quarters for net adds just because you've got the.
And the calendar of education markets, and so that's always going to going to weigh on on Q2 from a net adds but again, we delivered a very very strong.
Net adds for the quarter and we're very happy with that progress.
I think it's just again. This is this is a tougher comparison, given where we are last year, but we like what we're seeing on the trajectory of the of the market and we like what we see as we look towards the second half and we look towards 2002.
Okay and.
And how large does media central has to get before it starts to have.
The ability to lift overall <unk> and the <unk>.
Scripts and business.
Well I think every AD becomes true media central is going to increase our <unk>.
You can do the math as we continue to is that that new gold bar gets bigger and bigger obviously.
Compared to the other bars on the chart.
And then continuing to have a positive benefit on <unk> so far.
For us, it's that's all upside for and RP perspective, as we add more and our enterprise customers.
Okay and and.
You would expect software margins to recover.
And Q3 Q2 that was really the.
And 1 off nonrecurring charges that.
Put the.
Overall.
Overall software margins should recover given those those 2.1 off items.
And overall the total gross margins of the company will should track north of 65%.
Which would have been the gross margin in Q2 absent those 1 offs. So the team is doing a lot of great work.
In terms of looking at our gross margins and software, but also and hardware and we're looking at continuing to optimize our gross margin profile moving forward, we feel very confident about the margin trajectory and the company.
Okay, great. Thank you.
Thanks, Steve.
And our next question from Nicole <unk>.
Yes, Thank you and.
Congrats on yet another strong free cash flow quarter raised free cash flow guidance is great.
And also.
And that subscription is up 30% year over year, that's robust and almost in anybody's book.
Was this though and excess of your expectations that.
Embedded that subscription plus maintenance guidance.
Growth, 13% year over year for the quarter.
Okay.
Yes, so our subscription plus maintenance business continues to perform perform.
Well I would say that.
When we look at subscription plus maintenance, we raised guidance last quarter and a hall.
We continue to.
You see the trajectory moving forward very positively.
And we expect to have a very strong second half so we're very confident and.
Achieving the higher subscription and maintenance guidance for the year.
Okay understood.
And then just to level set I believe that this has been adjusted in the past, but just to make sure it's clear for everybody here.
A lot of investors that.
And there are new to avid are not familiar with the accounting that could create <unk> declines and the subscription revenue can you just go over that real quickly.
Yes, no and so in terms of the accounting, we follow accounting ASC 606.
So with respect to certain seasonality, especially with respect to our enterprise agreements.
We have a lot of.
Renewals that come in at the calendar year and for maintenance and then we will be converting those enterprise customers.
To subscription.
Likely more and the first and the fourth quarter.
As for the heavier amount of the enterprise subscription.
Subscription revenue will be.
Driven.
And because of the accounting there is and upfront portion that's recognized.
And at the time of signing the agreement so.
When the enterprises with the weight of the renewal being in the first and fourth quarter, we expect stronger subscription revenue in the and in those periods.
So that is a function of both the accounting, but also the pattern of when our enterprise business.
Contracts for maintenance cycle, and then obviously when we try and move those cuts.
Customers to subscription.
Understood and then and also a lot of investors try to do a <unk> calculation on your subscription.
And there is an implied year over year decline here.
And I believe this has a lot to do with the seasonality of the enterprise subscription, but can you just walk through as debt as well.
Yes, so in terms of.
The <unk> again, we because of the seasonality of the enterprise the first quarter and the fourth quarter.
We will have more enterprise revenue those are at higher <unk>.
Values in terms of price per seat so thats when you would expect to have.
Stronger <unk> and <unk>.
And those periods.
Again.
And we feel very good about the direction on the subscription business.
And as a result, we are reaffirming the higher guidance that we gave and subscription plus maintenance last quarter.
Right, Okay, and so to be Crystal clear here then.
And.
You haven't seen any pricing pressure or more than usual discounting on any of the pieces that compose subscription at this point and time correct.
Nothing out of the ordinary you know we do.
Run promotions like every company, but we we are very diligent in terms of driving favorable gross margin for our business and we had a couple of 1 offs that we mentioned on the call absent that we would have been over 65% gross margin. So we feel good about the direction of our margin profile and the.
The discipline that we have and the sales organization.
Okay, Great and then my final question is that.
So now you're anniversarying the cohorts of pandemic.
Uh huh.
And then accretive have you seen any change and renewal rates between the what I'll call the pandemic cohorts versus the pre pandemic cohorts.
No we have had I would say the renewal.
And I would call the retention rates continue to remain stable.
And and.
And at this point, we are very optimistic on the subscription business. The team is continuing to invest more on customer success and and nurturing programs to continue even strength in that as we look out and our model.
So we feel very good about the direction of the retention.
Excellent. Thank you very much.
Thanks, Neil Thanks Neal.
And we'll go next to Jeff <unk> of Maxim Group.
Great solid results guys. Thanks for taking my questions.
Thanks, Jeff.
Your prepared remarks, you talked about lifestyle and.
So and he can and I believe QE, followed up with it but revenues were higher than any other quarter during the pandemic still.
Still below pre COVID-19, but just wondering how much as you looked at your 2021 guidance decision.
During this quarter here wondering how much of a role that delta variant and just kind of uncertainty with that and just COVID-19 and general how much what role that played and your decision to maintain the revenue guidance for 2021, just because of uncertainty.
And maybe relative to what you were thinking about that a month ago or 2 months ago.
Yes, I think well look I think the COVID-19 situation is different every months and I think that what I'd say is the industry or industries I've started to adapt and are starting to to manage your way through it. So I don't know if there's going to be.
That big of an impact 1 way or the other on the.
The markets again, we got to be careful.
I think the best way I think I said before is we're cautiously optimistic.
That's the way we are proceeding with things I'd say, we're being balanced on our approach and we're trying to stay very balance and what we're doing.
And we're keeping an eye and the future.
So far look even even.
And remember the trends are global we're not just looking at U S trends, we're looking at trends and every country of the market. So every market is different situation and what we are seeing is lifestyle and live events are coming back.
And as I said in my remarks, it could be uneven at times and Thats why were.
And I'd say balance and our approach, but we like the trend and we like what we're seeing going forward. We like the funnel. We're seeing ahead of us. So overall I think it's I think we're going to the right direction is going to be a gradual recovery it could be uneven at times for these integrated solutions part of our business and pricing a lot of our business remember is 75% of our 76% and of our business.
Now is recurring revenue. So it really is the part that can Ken let's say be uneven is becoming a smaller and smaller part of our business. So as.
And as we've seen through the whole pandemic, our recurring revenue business has been very stable and very predictable.
So.
It's a piece of our business that we have to keep an eye on but we like the direction that the markets are heading and we like what we're seeing.
Great I appreciate that debt added color there.
And then maybe a question for Ken and also maybe for Jeff as well, but.
It's good to see the subscription growth remains robust.
And our media Central Enterprise subscriptions got that that's very clear and factored those and now and retroactively.
There is a limited breadcrumb trail here to trade pack, but just wondering if you can dig into the momentum and try to.
And a little bit more of your media central enterprise subscription additions that you've had and the fourth quarter, which probably just a partial quarter.
And then the first quarter 'twenty, 1 and now this second quarter 'twenty, 1 on where you added 4000 of them.
And just what are you seeing in terms of that trend.
Is it a is it noticeably picking up.
Well, it's again as Ken said, there is seasonality and some seasonality to look every quarter the sales team and focus on closing and enterprise subscription business and so we will have success every quarter.
Part of it in Q1, and Q4 and the reason why those are bigger because the normal effort that our sales team is doing to get people on subscription there is a bigger opportunity because there's a natural conversation that our sales team has at the time of renewal.
On a maintenance contract for the software maintenance contract at least to have that subscription discussions. So there is always going to be more energy and more opportunity and Q4 and Q1.
But I will say this that that our chief revenue officer, Tom corner. He has got the team very focused on on the subscription engine for our enterprise customers. Besides all of our creative tools too and.
And I would say the sales team as we've said, Ken and I said during Investor day, and even and I think Tom talked about it.
Our sales team is very focused on this they are well incentivize to secure the subscription enterprise business and we're going to see I think good efforts every quarter again, it'll be different by quarter, but we like the momentum we like what we're seeing and as Ken said.
On a very very small percentage I mean, we're talking about a small very small single digit percentage of our customers have been converted.
And so it's it's.
The opportunity stands ahead of us.
Got you and then maybe just as a follow up with that just given your comments on the very small percentage of enterprise customers that converted you also talked about like the range or the volatility kind of like in terms of the size of the initial deployment of the enterprise subscription.
Yes, any noticeable trends are interesting takeaways in terms of like the and the vertical of those enterprise customers that have adopted the subscriptions and true.
Like what they actually do from a from a function.
And.
Well, yes.
It's a lot of different applications I think you kind of put the enterprise subscription market and a couple of big buckets..1 is the.
Larger broadcasters and media companies and they are using them for newsroom for sports production for program production.
News actually the actual news creation and so and there's also the back office and media Central is not just about creative tools are supporting the creative workflows. It's also about.
And just workflows and media management workflows and distribution workflows. So.
And Theres a lot of workflows that encompass.
And what media Central can do and obviously for the enterprise customers. Our sales team is not just working on and media Central and East Central is a big part of it because theres a lot of applications that may be a central focus on but they are also converting and be creative tools, adding tools sound mixing tools et cetera, like pro tools and media composer.
So it's a it's a.
It's a lot of opportunity they have and these customers from an application standpoint. There is also the postproduction markets or whether it's audio and video post production. There is opportunities. There those are generally smaller to medium size businesses.
But there is a large number of those around the world and those customers are in the dozens to 500 kind of license size opportunities and.
And as Ken said, our enterprise customers you can get from hundreds to thousands and those customers for a number of seats that we converted just with 1 customer.
Got it and then just 1 more question from me just given the Olympics.
And we're taking place right now and you guys are heavily connected to the Olympics and your customers. Just wondering is this sort of a 1 time revenue catalyst and the cyclical kind of 4 year.
Olympics show with how this generates your revenue is is this a onetime costs and all our growth cash flow third quarter, and 21 or is it kind of immaterial on the Grand scheme of things.
Well no any revenue that is regarding the Olympics has already been taken and we have to be low carefully some of the Olympics business that we do there on already enterprise agreements or some kind of multi year agreements. So that's already being recognized on a as a part of our recurring revenue.
Now there is things that are 1 time at the event I mean, they may do a small storage upgrade and they may just something like that that business. If it's product related has already happened that happened, while some stuff happened a year ago. Some stuff happened months ago. The only revenue that would be in quarter I got to be careful I'm looking over at our Chief accounting officer, there could be some project.
Related revenue that they would take when you're Olympics is over or some <unk> revenue. They would take when the when the Olympics is actually happening, but it's fairly small numbers and the scale of things.
And that's significant and then looking at 10 and 2 to make sure I'm answering the question.
[laughter].
Yes, that's good with me and fine by me and that's it for me I appreciate it.
And again guys. Thanks.
Great. Thank you. Thank you.
And we'll hear next from Jordan and breadth of Jefferies.
Hey, So this is John <unk> on for US some odd thanks for taking my question earlier in the quarter.
Hey, Thanks, I wanted to ask a quick question about the go to market motion as Sam was pretty consistent quarter to quarter have you seen any notable changes or trends there like with the reopening maybe and person versus digitally that you think are worth calling out.
Well, we still are doing most of our sales engagement remotely.
In certain markets like our London, Jim can go into London, and see customers are on some of our German team can go into certain German customers or New York or whatever so there is some face to face, but I'd say.
95% of our engagements are still zoom.
Zoom engagements, our team's engagements or pick your tool.
And so there is still fairly remote engagements and the 1 thing Thats nice about the software subscription conversion is that unlike hardware business, where you've got a larger project involved our sales team is.
To be honest Covid really helped I think teach our sales team and our commercial teams how to do those motions in the pandemic and how to do software business, even though maybe people aren't physically and our sites I think the 1 thing that the pandemic helped us as people realize they needed more flexibility and immediate need more remote worker and distributed work Cape.
Ability and so that motivated people to really engage with us and engage with our commercial team to talk about a new way of of.
Commercially buying and deploying this technology, so its really been and help for our sales team.
As they run their go to market and their sales motions customer by customer.
Yeah.
Great and then kind of along those same lines given that the hiring environment has been a bit tough lately, how sales hiring during the quarter maybe versus your initial expectations heading into it.
I think it's running about I mean, you are right and especially in tech businesses.
And the hiring is a little different than let's say and prior quarters.
I'd say, we're bringing on new people and we haven't had I would say, it's a little slower fill rates and we probably saw pre pandemic.
I don't have exact numbers I would hate to say something on the call that is not accurate, but I'd say the fill rates are a little bit longer but I'm not sure. If I got the data to really give you a precise answer but happy to circle back on that.
Awesome well thanks.
And again, congrats on a great quarter.
Thanks, Thank you.
Yeah.
And so at this time I will now turn the call back to our presenters for any additional or closing comments.
Yes.
Thank you operator, and thank you to everyone for your participation and your questions.
We have and everyone at avid I want to extend our best wishes for the continued safety and health of everyone, who follows and Collaborates with us.
Deeply grateful for your continued support so goodbye for now.
And again that does conclude the call we would like to thank everyone for your participation you may now disconnect.
Yeah.
Yes.
Yeah.
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