Q4 2021 Avid Technology Inc Earnings Call
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Okay.
Good afternoon, ladies and gentlemen, and welcome to habitat out excuse me avid technology's fourth quarter and full year 2021 earnings call. Today's call is being recorded if he would like to ask a question on today's call. You may do so by pressing star one on your Touchtone telephone star one for questions now.
Now, let me turn the call over to our host for todays call well at rapid <unk> VP of Investor Relations at avid. Please go ahead.
Thank you operator.
Good afternoon, everyone and thank you for joining us today for avid technology's fourth quarter and full year 2021 earnings call for the period ending December 31, 2021. My name is Whit, Rob Paul Evans, Vice President corporate development and Investor Relations with me. This afternoon are Jeff <unk>, Our Chief Executive Officer, and President and Ken Gay, Ron Our Chief Financial Officer.
And edp.
In their prepared remarks, Jeff will provide an overview of the 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 <unk> com and a replay.
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 the appendix to our earnings release today, and our Investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational metrics used on this call.
In the presentation.
Unless otherwise noted all figures noted by management during the call are non-GAAP figures, the lesser except for revenue, which is always gap.
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 materially from these forward looking statements for more information, including a discussion of some of the key risks and uncertainties associated with these forward looking statements. Please see our press release issued today and our most recent annual report on Form 10-K , and quarterly reports on Form 10-Q filed with the SEC.
With that let me turn the call over to our CEO and President Jeff Rosen for his remarks.
Great and thank you for joining us to review Avon's fourth quarter and full year 2021 results.
Delighted to report that we ended 2021 with strong fourth quarter performance and good momentum heading into 2022 during the fourth quarter, we continued to exceed our expectations for adoption of subscription solutions by our enterprise customers and we continue to see solid growth in subscriptions for our creative tools.
The strength in our subscription business combined with the growing storage and all you integrate solutions revenue and stable maintenance revenue allowed us to deliver continued improvement in profitability and strong free cash flow.
During due to our strong Q4 performance, we beat our 2021 guidance for both subscription and maintenance revenue and total revenue and delivered non-GAAP EPS towards the high end of guidance, which I believe it shows that our strategy is clearly working and will continue to provide benefits as we move into 2022.
Let me now share some of the details with you.
During the fourth quarter, the three key takeaways of our business performance were the following.
First we had a very strong subscription quarter with accelerating enterprise subscription, which exceeded our expectations along with continued steady and robust new subscriber additions for creative tools.
Next the healthy demand for our solutions by new and existing customers combined with our good overall execution sustained our overall revenue growth trends.
And finally, the strong revenue performance combined with our continued focus on the business fundamentals and profitability resulted in very healthy EBITDA margin net income and free cash flow.
Overall, the strength in our subscription business combined with the growing sales of storage and all your integrated solutions and stable maintenance revenue enabled us to end 2021 with strong Q4 performance and good momentum heading into 2022.
Now, let me digging a bit more and provide some specifics on each of these three areas.
We delivered a great quarter again for enterprise subscriptions was which is now driving the second leg of growth for our overall subscription business continued to exceed our expectations, increasing our confidence that.
Our enterprise customer base is ready to make the move to subscription and motivating us to make several additional products available our subscription during 2022 ahead of our initial plans.
Q4 was also another solid quarter for creative tools subscription growth with steady net subscriber adds as we continued to enhance the products to refine our go to market tactics and improve our customer experience capabilities.
Overall, our net increase in subscription count accelerated in the quarter to over 21700 with growth in all our product lines, including a healthy contribution from both media composer enterprise and media Central Flex based on delivery of some key customer requested enhancements as.
As one customer example, NBC universal began their migration to subscription for both media composer and media Central which among other things were used in their production of the recent Winter Olympics and Super Bowl 56.
This was just one example from many customers successes around the globe in the fourth quarter.
We do look forward to sharing details about additional customers as we were able to.
During the first quarter fourth quarter, we delivered $119 1 million in revenue and 14, 2% year over year growth continuing the trend with our fourth consecutive quarter of revenue growth.
Overall customer demand was healthy as the recovery of our end markets across all geographies strengthened benefiting all business areas and product segments.
We realized steady performance from maintenance with improved renewal rates for both software and integrated solutions maintenance.
And the benefit from the price increases that we implemented earlier in 2021.
We experienced very healthy demand for integrated solutions, including our best quarterly storage revenue since 2019.
And for our audio integrated solutions was also strong including control surfaces audio I O and lifestyle consoles.
However, along with many organizations around the world, we have had to contend with global supply chain challenges.
Our team has done a good job navigating the situation in Q4, and we were thus able to meet our plan for integrated solutions in the quarter, while protecting and optimizing our gross margins by implementing certain proactive price increases late in 2021.
We will remain diligent looking forward.
As the global supply chain is expected to continue to be challenging in the near term, but I have confidence as our team has shown to be quite effective at managing the situation to this point.
During the fourth quarter strong revenue performance combined with our continued focus on expense controls resulted in very healthy margins improved profitability and strong free cash flow.
The growth of our higher margin software and maintenance business and the improved integrated solutions gross margins and volumes helped to drive an increase in overall gross margin.
As a result of our year end performance and the strong overall performance of our commercial teams. We did spend more on sales commissions and had additional bonus accrual in the quarter.
But at the same time, we still expanded our profitability, while also increasing our investments in technology and product innovation to drive future growth.
Overall, we had a strong adjusted EBITDA margin of 21% in the fourth quarter and a very strong conversion of free cash flow, yielding $25 million in free cash flow in Q4.
Now lets quickly look at the highlights from fiscal year 2021.
Generated strong total revenue growth of 13, 7% with contributions from all of our business and product areas and across all geographies subscription.
<unk> continues to be the main driver of growth and we surpassed $100 million in subscription revenue for the year and we are now at over I should say about 411000 paid subscriptions both of which are key strategic metrics that exceeded our expectations set at the beginning of the year.
Enterprises continue to demonstrate their interest in adopting our subscription offerings with 40, new enterprise subscription agreements in 2021, bringing the total at year end to over 50.
But we still only transitioned to a small fraction of our overall enterprise customer base to subscription with less than 10% transition so far and we expect to be successful in bringing on many more enterprise subscription customers during 2022 and beyond.
We released several important features and updates to our products during the year, we delivered media central updates to fulfill several large customer commitments and new products, such as media central sink for media and metadata backup and media central stream to enable ingest from IP based sources.
And in support of our openness, we delivered the ability to work more closely with Adobe, including Photoshop and after effects on our media central platform.
Our creative tool users, we delivered several important updates to pro tools and media composer addressing shifting market requirements.
Our next generation music notation users, we launched the values for mobile during the third quarter, resulting in new users around the world using sebelius directly from the iOS mobile devices.
With the market dynamics, our customers have experienced this past year, our party with the shift and support their changing technology requirements.
The need for more remote production capabilities and cloud based workflows became our focus with new technology innovations such as average as on demand SaaS base post production solution.
And we have many more exciting innovations planned in 2022, we believe will resonate with the market and our customers.
While we continue our trend of improving business fundamentals, we are making necessary investments to support future growth.
We increased our R&D investment during the year to support our innovation roadmap and.
In 2021, we began our digital transformation journey, starting to update many of our internal systems to enable us to support our business into the future.
We saw the first benefits of the digital transformation investments and our customer experience area with improved support for customer engagement.
<unk>, which is an important element of our subscription strategy.
We did all this while delivering an improved bottom line performance with the.
With $1 25, and non-GAAP EPS, and we generated $55 7 million in free cash flow a year over year increase of 64, 4% and our highest free cash flow since 2007.
As a result, we initiated a share repurchase program in September to return a portion of our free cash flow to our investors given.
Given the confidence we have in our strategy and long term plan, we believe that the share buybacks are a good use of capital at the recent crisis.
During 2021, we repurchased $25 1 million worth of these shares.
Now, let's talk about where we see things going forward from a business perspective as.
As we look to Q1 2022 and fiscal year 2022, we expect continued healthy end market demand driven by growing consumer requirements for high quality audio and video content, creating additional demand for average unique technology solutions.
We've been increasing our investment in product innovation, and we are planning to launch additional innovative subscription and cloud based offerings to tap additional growth opportunities.
We launched <unk> edge during the first week in February a new software subscription solution for remote collaboration for television and film Postproduction teams.
Seen promising initial market reaction to this innovation innovative solution.
We will also be operating next and storage as a subscription later in 2022 separating the value of the storage management software from the base storage appliance along with news production graphics as a subscription just to name a few.
We expect to continue the sustained growth in our subscription business based on the success, we've seen to date with both enterprises and creative individuals.
We expect that many more of our current enterprise customers as well as new enterprise customers will be interested in adopting our subscription offerings and as we've mentioned previously we're planning to expand our enterprise subscription offerings to support this growth across 2022.
We also expect our creative tools will continue their growth to further optimize as part of our subscription business. We're currently investigating new pricing and product tiers for our creative tools as they look to expand our market opportunities and deliver more solutions for attracting more next generation music creators.
Expect more news on this front in the coming few months.
We will continue our discipline in our execution and our spending while we continue to increase certain investments to support needed innovation, new product development and our digital transformation initiatives.
We have an experienced team that is addressing the supply chain challenges to ensure that we can meet our targets for the year.
We are doing these things while looking to continue expanding our gross margin and adjusted EBITDA margin.
In closing, we expect continued strong margins profitability and free cash flow conversion, we will continue our emphasis on execution and a focus on operational improvements while already factored in our best estimates of the potential impacts of supply chain constraints into our planning for 2022.
With that let me now turn the call over to Ken to review more of the financial details takeaway can.
Thank you, Jeff and good afternoon, everyone overall.
Overall, we are very pleased with our business and financial results as we exit 2021.
We closed the year with a strong fourth quarter with revenue performance ahead of expectations.
We made substantial progress in driving our higher margin subscription and maintenance revenue during the fourth quarter. This growth combined with improving integrated solutions gross margin enabled us to deliver strong profitability and free cash flow in the fourth quarter and positions us well as we enter 2022.
Our focus for 2022 will be to build our high margin subscription revenue and continue to stay on track with our long term model.
With that let's now turn to the details of our financial results.
We are encouraged by the continued growth of our paid subscription base as we had 21700 net additions in the fourth quarter, an acceleration from the prior quarter's creative.
Creative subscription growth was healthy and solid and enterprise subscription performance in the fourth quarter continued to exceed our expectations.
Our total cloud based software subscription count reached approximately 410600 at the end of the fourth quarter, an increase of 28, 3% year over year.
Subscriptions for our creative tools increased by approximately 17700 during the fourth quarter subscription growth was strong for all creative tools with an average year over year growth of 24, 5% across our suite of tools.
Media Central subscriptions grew to approximately 13200, an increase of about 4000 during the fourth quarter. We continue to be very pleased with the market acceptance of the media central subscriptions.
We believe we have converted about 5% to 10% of the existing media central perpetual customers to subscription during the first year of availability.
Now moving to the composition of our revenues.
The continued growth in a number of paid subscriptions drove continued growth in subscription revenue during the fourth quarter, which reached $34 1 million an increase of 38, 8% year over year.
And we continue to see an increase in our per seat revenue as the enterprise subscriptions have higher have significantly higher per seat pricing than the creative tools.
For the full year subscription revenue was $108 4 million up 48, 9% year over year.
Maintenance continues to be a strong part of the business and during the fourth quarter, we saw increased renewal rates and benefits from the maintenance price increases we implemented earlier in 2021 as part of the strategy to encourage subscription conversion.
Maintenance revenue was 31 4 million during the fourth quarter up one 4% year over year.
For the full year maintenance revenue was $122 4 million down one 4% year over year and was steady throughout the year at roughly $31 million in each of the quarters for 2021.
Total subscription and maintenance revenue increased year over year by 17, 9% in the fourth quarter and by 17, 2% and the full year 2021 combined subscription.
Subscription and maintenance revenue came in above our guidance for the full year and we are tracking favorably to our long term model.
Perpetual license revenue was $5 2 million a decrease of 22, 3% year over year in the fourth quarter and a decrease of 14, 6% for the full year 2021, as we continued to deemphasize perpetual licenses and focus on strategic subscription revenue.
Even with the decline in perpetual revenue total software revenue from subscription and perpetual licenses increased year over year by 25, 7% in the fourth quarter and by 31, 3% in 2021 as our subscription revenue growth exceeded the perpetual revenue decline.
Total combined integrated solutions perpetual and professional services revenue was $53 6 million in the fourth quarter up nine 9% year over year.
And $179 1 million in the full year 2021 up nine 6% year over year.
Starting with the fourth quarter of 2021, we have changed the presentation of our revenue on our 10-K income statement to separate these revenue types from subscription and maintenance revenue.
Our integrated solutions business remained healthy with integrated solutions revenue up of.
$42 4 million in the fourth quarter, an increase of 17, 9% year over year and 35, 9% sequentially.
The year over year growth was driven by solid performance in control surfaces live sound consoles and storage.
Leo control services revenue increased nicely year over year as many large studios continued to add new capacity.
Lifestyle product revenue was up year over year as well due to the improving demand as many venues and concerts have opened.
Revenue from our storage products products was also up slightly year over year and was our best quarter for storage revenue since 2019.
Integrated solutions revenue for full year, 2021 was $131 1 million, an increase of 16, 1% year over year.
The balance of our revenue comes from our professional and learning services businesses professional services revenue was $6 million a decrease of one 9% year over year in the fourth quarter, but an increase of six 7% for the full year 2021.
Now moving to recurring revenue and annual contract value.
Our strategy in recent years to focus on recurring revenue sources continues to pay off and it is driving improved gross margins and greater predictability in our business.
As of the fourth quarter LTM recurring revenue was 78% of total revenue up from 74% a year ago.
The LTM recurring revenue percentage increased due to the strong subscription revenue growth and higher revenue from our long term agreements in 2021 compared to 2020.
Annual contract value was $352 1 million at the end of the fourth quarter up 17% year over year.
<unk> benefited from strong year over year growth in subscription revenue stable maintenance revenue and a greater contribution from strategic purchase agreements with our channel partners.
Now, let's look at the rest of our results for the fourth quarter and full year 2021.
Total revenue in the fourth quarter was $119 1 million up 14, 2% year over year and full year 2021 revenue was $409 9 million, an increase of 13, 7% year over year and above the high end of our guidance.
At constant currency, our fourth quarter 2020, 'twenty revenue increased 14% year over year.
non-GAAP gross margin was 66, 2% for the fourth quarter up 310 basis points year over year.
Our high margin subscription business made up of a largest share of revenue in the year in integrated solutions gross margin increased sharply year over year, resulting in improving gross margin.
non-GAAP gross margin was 65, 3% for the year up 160 basis points compared to 2020 benefiting from the same trends as were experienced in the fourth quarter.
non-GAAP operating expenses were $55 8 million in the fourth quarter, a $9 4 million increase year over year due primarily to sales commissions and bonus accrual from the stronger revenue performance non-GAAP operating expenses were $204 million for the full year 2021 by 20.
$9 million increase year over year from 2020 levels, which reflected temporary cost saving efforts, including furloughs put in place at the beginning of the pandemic.
non-GAAP operating expenses were 48, 9% of revenue in 2021 down from 49, 8% of revenue in 2020.
non-GAAP operating expenses are coming down as a percentage of revenue over time, which helps drive our adjusted EBITDA margin.
Adjusted EBITDA was $25 million in the fourth quarter up 15, 3% or $3 $3 million year over year. Adjusted EBITDA margin was 21% in the fourth quarter, an improvement of 30 basis points compared to the prior year period.
For the full year 2021, adjusted EBITDA was $75 5 million up 28, 7% driven by the improvement in both revenue and non-GAAP gross margin.
Adjusted EBITDA margin was strong at 18, 4% for the full year 2021, an improvement of 210 basis points over 2020.
non-GAAP earnings per share was <unk> 46 for the fourth quarter up 13 cents year over year, reflecting the increase in operating income non.
non-GAAP earnings per share was $1 25 for the year up 92, 3% and towards the high end of our annual guidance, reflecting the improved operating income and lower interest expense during the full year 2021.
Now, let's turn to free cash flow and leverage.
Avid has now delivered five consecutive years of improved free cash flow and significant improvement in the conversion of adjusted EBITDA to free cash flow.
Our strategy of investing in innovation to drive higher quality recurring revenue together with effective cost controls and reduced interest expect continued the trend of growing free cash flow.
Free cash flow was $25 million in the quarter down $5 6 million year over year due to a smaller contribution from working capital compared to the fourth quarter of 2020 for the full year 2021 free cash flow was $55 7 million an increase of 64, 4% year over year due to improved non-GAAP .
Operating income and lower non-GAAP interest expense.
Free cash flow conversion from adjusted EBITDA reached 73, 8% in 2021 up from 57, 8% in 2020.
We believe avid is well positioned to drive further improvement in free cash flow due to the continued movement in our business to more predictable and higher margin recurring revenue streams and more effective management of our business.
Our strong free cash flow and growth in adjusted EBITDA resulted in net leverage of one five times at the end of the fourth quarter.
From two two times at the end of 2020.
As a result of the significant improvement in our leverage and our strong free cash flow generation, we were able to amend our credit facility last week to reduce our interest rate by 25 basis points and improved certain other terms of the credit agreement.
Overall, we are pleased with the health of our balance sheet as the reductions to our long term debt and net leverage provide the company more flexibility to operate and grow its business and to explore capital allocation alternatives to drive long term shareholder value.
During the fourth quarter, we repurchased approximately 462000 shares for $13 9 million.
And through February 28, we have repurchased a total of $1 2 million shares for $35 million under the $115 million authorization announced in September 2021.
We believe that repurchasing our shares at these prices is a good use of capital to enhance shareholder returns given the confidence we have in our long term business model.
We will continue to deploy our free cash flow responsibly, we will look at strategic tuck in acquisitions as well as share repurchases as ways to drive long term shareholder value.
Let's now turn to guidance.
As Jeff said, we are confident in the underlying strength in our business as we enter 2022.
We expect continued growth in our subscription revenue from expected strong performance in our enterprise subscription business sorry.
Solid performance from our creative tools.
And contribution from new subscription product introductions in.
In addition, we expect continued healthy performance in integrated solutions revenue.
For the fourth for the first quarter of 2022, our total revenue guidance is $100 million to $106 million, a range, which represents year over year revenue growth of 9% at the midpoint.
Our guidance for first quarter of 2022 subscription and maintenance revenue is 60% to $64 million.
Our guidance for first quarter 2022, non-GAAP EPS is 30 to 38.
Assuming 46 million shares outstanding.
Our guidance for first quarter 2022, adjusted EBITDA is 18, 5% to $22 5 million.
At this time, we are also providing guidance for the full year 2022.
Our guidance for 2022 total revenue is $430 million to $450 million.
Our guidance for 2022 subscription and maintenance revenue is $266 million to $274 million, a range, which represents year over year growth of 17% at the midpoint.
Our guidance for 2022, non-GAAP EPS is $1 40 to $1 51, assuming $46 2 million shares outstanding.
Our guidance for 2022, adjusted EBITDA is $84 million to $94 million.
And our guidance for 2022 free cash flow is $60 million to $67 million, which includes an increase of roughly $10 million and capital expenditures to support our digital transformation efforts, which will help us scale our subscription business.
With that I'd like to turn the call back to Whit.
Thank you Ken Thank you Jeff.
That concludes our prepared remarks.
We are now happy to take your questions. Operator. Please go ahead.
Ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad star one for questions. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment.
Taiwan for questions, we'll pause a moment to assemble the queue.
We will take our first question from Josh Nichols with B Riley. Please go ahead.
Yes, Thanks for taking my question and great to see such strong execution in the fourth quarter and throughout 2021.
Curious you talked about some new investments that the company is going to be making to further move along this growth path in <unk>.
SaaS subscription adoption trajectory.
Could you highlight like one or two of what you think kind of the bigger opportunities are on that front for 'twenty. Two is it going to be moving storage more towards a subscription model and is that where most of that $10 million of additional capex is going to be going towards.
Hi, Josh no. So let me a couple of things one is.
A lot of the Capex is going through our towards our digital transformation, which is really enabling.
Their technology upgrades that we're doing in back office and front office tools and platforms that we use to support our e-commerce subscription and cloud businesses.
And so a lot of that is really a lot of upgrading the technology.
And upgraded it capabilities to be able to support.
All of the plans around subscription and.
And cloud based or SaaS based offering so it goes across all products.
The R&D investments that we're making this year, we are increasing our R&D investment to is around a number of areas of subscription you mentioned storage and I mentioned it in my opening remarks, we are bringing a new offering we have a new offering planned for 2022 around subscription where we're going to bifurcate the value of the real software value of our storage solution from the commodity off the shelf hardware.
So we'll be bringing that offering as a subscription but we're also launching teams offering we've done creative individuals and we've done large enterprises. We also have a mid market product called teams Thats coming out in 2022, and I mentioned graphics and servers and other areas. So we have a number of areas that were both.
Lean into growth on continuing to really drive an even better growth on the enterprise subscription offering our business and we're also doing a mid market product around teams is a couple of the big areas, but the digital transformation investment is meant to support all of our growth plans not just for this year, but over the next several years as part of our strategy. If you remember we laid.
Back in May of last year.
Yeah, Thanks for clarifying that and I mean, I'm looking at the <unk>.
Gross margin the company did this is about as good at least as I can remember over the last several years.
Could you talk a little bit more about like I guess, how should we think about the expectations going forward for the gross margin line coming off such a strong finish to 2021.
I'll, let Ken answer that.
One thing I Should've said too around DTA as it is.
Not just about enabling our business models. Josh. We're also Ken are very focused on how we continue to drive operational efficiency of the company and so it will it will not exactly we will do some.
[noise] helped this year, but over the next few years it will continue to contribute towards improvements in our efficiencies and thus the margins of the company, but can you wanted maybe.
So Josh in terms of the gross margins.
The company's strategy that we've set out for the past three years has been to drive our recurring revenue or subscription revenue.
And you're seeing the improvement in our recurring revenue percentage in our subscription revenue as a percentage of the business.
Our margins were up.
Substantially this past quarter and year on year.
We continue to drive the innovation that Jeff mentioned in terms of new subscription products, we continue to.
Drive our media central business and our solid creative tools, we will continue to have gross margin improvements that's what we expect.
Our 2022 numbers as well as our long term model and right now we're tracking.
Ahead of certain of those areas, including the subscription revenue and right aligned in terms of our.
Gross margins so the company's historical performance in terms of.
Substantially increase in gross margins year over year, we expect that to continue in our long term model and we're very confident in that outlook.
Thanks, and then last question for me just.
Thinking about the model I mean.
Bump in sales and marketing expense I assume that was for some of the bonus payments like what was the dollar amount for that payment and then.
Thinking about if you just have a high level target for R&D since youre going to be investing a little bit more in terms of sales or anything like that for 'twenty two.
Yes, so in terms of.
The sales and marketing and bonuses.
Operating expenses were.
$5 million to $6 million higher than what we initially thought at the beginning of the year.
But we also drove significantly higher top line revenue and.
Both.
Both on the subscription side and we actually had very strong obviously maintenance revenue. So that's why we.
Those two areas, where we were over guidance over guidance on.
Also total revenue so that drove basically the $5 million to $6 million over performance, which was not only sales commissions, but also the company's corporate bonus.
Thanks, I'll jump back in the queue.
Thanks, Josh.
We will take our next question from Neil Chukchi.
With Northland capital markets. Please go ahead.
Yes, Thank you and congrats on the solid results, especially the free cash flow would be.
The free cash flow guidance, especially in the context of the $10 million incremental capex, that's really impressive congratulations.
Thanks Neil.
Yeah, absolutely so for calendar 'twenty, two you have given a maintenance and subscription growth of 17%.
Can you parse that out.
What are your expectations from me for maintenance versus subscription in terms of those growth rates.
Yeah.
So so we guide on the combination of subscription and maintenance.
You're absolutely correct that the midpoint is 17% growth we do.
I can just tell you directionally, we do expect our maintenance revenue.
To come down.
Over over over next year, as we move more of our customer base to subscription.
I see.
Directionally you can look at maintenance revenue coming down probably in the $5 million to $7 million area year on year.
So that said the growth of the business is all going to be in the subscription business. We have obviously tremendous momentum on the enterprise subscription the media Central we've got solid growth on our creative tools and then.
Later in the three new products that Jeff mentioned graphics servers, and obviously, the nexus product that will contribute additional revenue growth through the subscription business. So those three areas, we feel very good about driving.
Continued growth in our subscription revenue and <unk>.
As I said before we're tracking slightly ahead in certain areas in our long term model in the subscription business is one of them.
Also thats Super helpful.
So I'm actually kind of surprised that you expect the maintenance to come down given that you saw improving maintenance renewal rates here.
Can you just review why does it make.
Make sense or roll rates and it sounds like youre not expecting further improvement here.
No I mean, our team has done a tremendous job in executing.
In terms of the renewals of.
I would say product revenue that's under maintenance that's integrated solutions.
The team's done a great job we're back.
<unk> to levels that we that we had.
Pre COVID-19 and we're actually seeing even some improvement over that given the execution of the team.
That said there is some software maintenance debt.
Will.
Obviously.
Off our revenue streams as those customers move to subscription models. That's the reason why we think that there'll be a slight decline in the maintenance revenue.
Over time, and that's what we modeled in our long term model. So that's what we expect at this point. So I'm guiding you that the subscription business. The subscription revenue is going to be the key growth driver.
For that subscription and maintenance revenue stream.
Okay, Great and then.
Although free cash flow very impressive rate of free cash flow return almost 50% of free cash flow generation.
What are your thoughts on what is the rate of free cash flow chart I realize that's partially dependent upon the stock price. So let's make a planning assumption that avid continues to trade at just <unk>.
<unk> free cash flow are basically there's $30 per share price here that you have right now.
Yes, so I would say in terms of capital allocation.
We have a tremendous board that works with Jeff and I and the rest of the management team on capital allocation.
We are going to be looking at opportunities to return the best.
Value to shareholders.
Whether it be through strategic M&A or share repurchases.
We're going to be evaluating both obviously you mentioned, 50% of the free cash flow, which was last year's free cash you want to share repurchases.
This coming year I cant give you a solid number.
Because things could change during the year, but we're going to be looking at both M&A and share repurchases and that these price levels. It's an attractive ROI given the confidence we have in our business and where we expect.
Those returns to be.
Excellent. Thank you.
Thanks Neil.
Excuse me, we will take our next question from Samad Samana with Jefferies. Please go ahead.
Hey, good evening and thanks for taking my questions. So maybe first I'll kind of ask a follow up on the on the guidance Ken I know.
For the first quarter, you guys gave subscription and maintenance as well, but just the seasonality.
Audi has bounced around a little bit for subscription in the past years from <unk>, just any dynamics, we need to know about as we think about that.
Nice sequential uptick from <unk> to <unk> and how we should consider that in terms of the guidance from <unk> from a seasonal standpoint on subscription.
Yes, so great question. Thank you.
We obviously had very very good performance.
The fourth quarter as we said around the calendar year fourth quarter tends to be our strongest quarter.
First quarter will also be a strong quarter.
And then typically in Q2 and Q3 are our weaker quarters, that's generally because of the way that conversion rates happens from maintenance to subscription. So we provided guidance for Q1.
On subscription and maintenance revenue of $60 million to $64 million.
That implies very good growth year over year in our subscription business.
And at this point.
We feel good about.
The outlook.
In terms of our R.
Our business.
So somebody does that.
To help answer your question yes.
Yeah definitely definitely and then I guess, maybe just.
Longer term or bigger picture question.
I think about the newer products that Jeff called out.
I'm, assuming those are probably baked into the long term outlook at the analyst day or at least we're in the back of your guys' minds, but I don't want to make that assumption.
And be wrong, so or those kind of factored in in an already on the road map should we see them as incremental how should you see that fitting into kind of the progress the company's made and to your point tracking ahead of maybe some of the targets towards that long term outlook.
So were tracking slightly ahead I would say that we had innovation as part of the roadmap in terms of the long term model, obviously in terms of R&D spend and new products being introduced.
This I think will keep us ahead of that long term model.
Say that these new products are exciting and these are these are things that we're that we're going to we're happy to to deliver this coming year as part of our roadmap. So they were.
There was an assumption of new product introductions in the long term model.
Great and just one last one if I could squeeze one in quickly Ken when I think about the gross margins with maintenance, maybe coming down a little bit with subscription having some newer products. The mix, maybe just how should we think about that.
That software and subscription and maintenance gross margin trending maybe with us puts and takes.
No I would say that.
The maintenance and subscription margin subscription margin was actually slightly higher than than maintenance.
And we're getting nice uplift so I would say that the software margins to continue to be strong.
Our gross margins should continue.
To move up.
Mike We've had done we have done historically so.
We believe that the debt.
Transition to more of the subscription business is going to continue to add to margins and profitability.
And cash flow as well and provide us a lot of options as we as we move forward.
Great. Thanks, so much for taking my questions.
Thank you so much.
We will take our next question from Jack Vander Ark with Maxim Group. Please go ahead.
Great Hey, guys. Congrats on the solid results and strong outlook.
Great quarter, Thanks for taking my questions.
As far as Jack just a couple just a couple of housekeeping ones.
Yes.
New official segmentation.
Be clear I don't think it does but does it change any historical revenue data or any change to your non-GAAP metric calculation historically and looking forward.
No no change to any historical numbers.
No change to any revenue revenue numbers.
What we're doing on the 10-K is we wanted to just to break out our subscription business our maintenance business.
More clearly for investors versus having it be product and services.
So that's kind of the main thing and then we also had our.
Our integrated solutions and.
Other.
Which then has our perpetual subscription revenue our integrated solutions in our pes business in that area.
Okay, Great. That's helpful and then another housekeeping item.
On subscription and also.
Jack just on one of <unk>.
Page 22 of the appendix.
Kind of kind of maps.
From from what was an historical.
10-K's in 2020 call it to the new version for 2021, we just think that this is more consistent with software and SaaS companies. This presentation and we wanted to make sure that the 10-K.
Was being adapted to how we speak about the business on earnings calls.
Sure that makes sense.
And then if I can.
Just another housekeeping question subscription side product I think on slide 12, we provide this bar chart here.
I think just to provide pro tools media composer Elliot.
Equipment growth rate I don't think you did this time.
If there is anything to read.
There is.
Did you or can you provide that or not.
Kind of refocusing going forward you won't provide that yes, I would say hey, they all remain healthy they're all over.
20, 20% I think you can see the.
The charts there but.
We have we have.
We've had good performance in.
As we all talked about we expect solid performance going forward and our creative tools business.
Okay great.
Yes.
Enterprise subscribers of the media Center reflects.
Scripting to tick up.
I guess.
It was a nice pickup from last quarter.
I do a rough calculation it looks like the Asps did tick up quite a bit as well sequentially.
Up slightly year over year I think.
Is it fair to assume the enterprise subscriptions are driving the majority of it.
The increase or is there some nuance involved with it.
Mix shift in annual paid upfront.
Monthly.
Just provide color there.
Yes, the bulk of it is the mix shift towards really the enterprise business as enterprises significant multiple in terms of price.
Price per seat that is higher than the create a basic creative tool. So that's the majority of it and we have also solid performance in price per seat of our creative tools as well.
But it's really the move to enterprise and we expect that to continue given the large opportunity we have on the enterprise business.
And especially with some of these new product introductions that Jeff mentioned in his comments.
You should expect to see nice improvement in price per seat or <unk>.
As we move forward.
Okay, Great and then just one more question for Jeff.
Wondering if you could provide some more color on the NBC sports transition to subscription model what.
Kind of led to their decision.
That and then how does that kind of impact if there is any.
Major impact.
Number of subscribers and financials for the first quarter of 22.
So that was.
Was a Q4 willing to change so that was a Q4 deal with NBC. So look the reason NBC again, I can't speak for them completely but I think they like many customers are going moving to this model because there's a lot more value that we bring to them through the subscription model and they get a lot more.
What we do as a part of those markets I think we've talked about in previous calls is that we create a much more valuable offering for the enterprise customer that gives them more flexibility. It gives them more capability. It is it is generally a higher wallet share and or a higher uplift. That's why Ken talks a lot about the average uplift that we get from these customers I won't speak specifically the NBC situation, but generally.
When you look at the overall picture, we're getting pretty good uplift, but it's really about value that we offer in those models and I think a lot of enterprise customers are wanting to move to a more opex base and a more flexible model going forward and so this gives them a lot of optionality that they didn't have in the traditional license per device kind of model.
Great and I think that's it.
That makes sense congrats.
That makes sense.
Yes.
I appreciate Jack I appreciate it thanks.
We will take our next question from Steven Frankel with Colliers. Please go ahead.
Good afternoon, Jeff I Wonder if you might give us some insight on some of the LTE as you signed.
In Q4, and what that pipeline looks like in the first half of 2022.
Yeah, Hi, Steve. Thanks for the question. So we don't give specifics on the lta's until our customers allow us to do so because a lot of this is for competitive reasons. They don't necessarily want their competitors to know what they are doing.
But I would say there is a trend we saw in Q4 as you can see the numbers. It was it was very we did very well I think when you think about the enterprise customers. We are continuing to see a really strong performance in what we call. The enterprise Elas suffer Elas. These are subscription agreements for the enterprise customer we are continuing to see a very strong uptake in Q4 for the same reasons, we've talked about in Q3 and Q2.
We are.
And as Ken said I think we both said in her remarks is that we're still less than 10% of our installed base that we've converted from a maintenance, but we're also winning new customers with these offerings. So it's both new and existing customers. So I think we're continuing to see a very strong trend I would say that we've seen previously as far as the funnel, we see a very good.
Funnel, obviously being only 10% into the enterprise customer base, we've got 90% ish ahead of us and so that gives us a lot of opportunity to mine our current customer base to move to subscription what we've seen Steve is that the customers really do like the value that we bringing those models and the customers are really embracing those models pretty strongly so as we've said before.
Say again.
In 2021.
We far outperformed our own internal expectations on an enterprise subscription. So we saw great performance in that regard, we don't see that stopping when you look across the next couple of three years, we think we'll see that trend, but I think the other thing we're seeing is that for new customers at a very attractive.
<unk> offering that we do in our subscription enterprise, which has been a real great tool for US also win new logos new accounts.
And you have been saying in the last couple of quarters that the.
Q4 maintenance renewals is really the opportunity to move those customers over should we expect the same kind of seasonality in 'twenty two with a big bolus of these conversion happening in Q4 or do you think you can.
Provided incentives to get people to move over early.
No I think I think both obviously because theres a lot of Q4 and there is a pretty good number of Q1 Q1 is not as big as Q4, but because at the maintenance real time, it's a great time for our sales team to have that discussion with the customer, but one thing. We did learn in 2021 is that there is opportunities all year long and so they have found a lot of ways to convert.
Customers.
Within the year and we've got tools that the sales team has to say commercially with the whole team to convert customers mid contract. So we do have ways to convert people and upsell them to the contract we're not waiting until the contract expires.
Again, it's a great opportunity when contracts expire to have that discussion when renewal time comes but our team is engaging with customers irrespective of when their contract.
Reduced and Thats, something we learned about and the team has become very effective at that in 2021.
Great and then on the supply chain.
Do you feel like you're positioned well enough to get the components you need to meet that integrated systems demand in 'twenty two or.
Is that a point of stress in the model.
So I wouldn't I wouldn't necessarily say stress.
The supply chain situation for us.
Does probably contain a bit the upside it does control the upside a bit and what's possible from an upside perspective, as Ken said, we've modeled our expectations of the supply chain impacts in our guidance for the year and so we have modeled that adequately into there. We've got our team has done a great job mitigating through Q4 I think they are good.
Impressed me with what they could do during Q4 because of challenges were quite severe in the quarter and I think I've seen a lot of our competitors have pay some very difficult situations, but our team was able to navigate it quite well.
I think going forward. It is going to be it is going to put a governor on how on our upside potential as a business, we're very well positioned across that we have challenges we have to deal with our teams are working day and night to deal with those challenges, but again I think our teams shown to be pretty nimble and be able to adapt the things pretty well again that said, we've got to work through it as we go through the year, but we <unk>.
Model that our expectations into our guidance.
Great. Thank you.
Thanks, Steve.
And ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back to Jeff <unk> for any additional or closing remarks.
Thanks, operator, so let me leave you with this as we begin 2022, we do continue to see strength across the end markets of our solutions. We will continue to make selective investments in new products and innovation to enable avid to continue delivering industry, leading solutions that our customers depend on and to achieve our company strategy as well as our <unk>.
Long term growth and profitability targets.
Thank you again for your participation and your questions have a great evening Goodbye for now.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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