Q2 2022 Avid Technology Inc Earnings Call
Two earnings conference call for the period ended June 32022.
My name is Whit, Rob Paul Evans, Vice President corporate development and Investor Relations. Please note that this call is being recorded today August <unk> 2022 at 530 P M Eastern time.
With me. This afternoon are Jeff <unk>, our Chief Executive Officer, and President and Ken <unk>, Our Chief Financial Officer and EVP.
In their prepared remarks, Jeff will provide an overview of our business and then Ken will provide a detailed review of our financial and operating results followed by time for questions. We ask.
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 the events and presentations page of our Investor Relations website at IR Dot Abbott Dot com and shortly following the conclusion of the call a replay will be available on our IR 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 <unk>.
Operational metrics used on this call and in the presentation unless otherwise noted all figures discussed by management during the call are non-GAAP figures, 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 1095.
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. These forward looking statements are based on our current beliefs and information available as of today.
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 <unk> annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the SEC.
With that let me turn the call over to our CEO and President Jeff <unk> for his remarks.
Thanks, Whit and my thanks to everyone joining us today to review average second quarter results. So let me dive right in let's start with the three main takeaways for average performance during the quarter first we delivered strong subscription growth, including another good quarter for enterprise adoption, where we added 3800 media central flex subscriptions in Q2.
And we continue to deliver sustained growth with another solid quarterly performance from our creative tools subscriptions.
Next we continued to experience strong overall market conditions and healthy customer demand for our software and integrated solutions. However, as expected the global supply chain constraints that impacted our first quarter continued through the second quarter and we were not able to ship a significant portion of the customer orders that we received for integrated solutions in the first half.
And finally, even with these limitations, we still delivered year over year total revenue growth and expanding gross margin and adjusted EBITA margin, which together drove continued year over year improvement in profitability.
Overall, we ended the quarter seeing continued strong market demand for our solutions and we have a higher than normal level of unshipped orders for integrated solutions, which together give us confidence in our trajectory as we enter the second half.
Now, let me dig in a bit more and provide some specifics on each of these areas.
With sustained growth or excuse me with sustained strong adoption of our subscriptions by both new and existing customers for both our creative tools and enterprise offerings, we saw strong growth in our overall subscription business in the second quarter we.
We realized net ads of 18500 subscriptions and delivered year over year growth of 22% in the number of overall subscriptions.
We continue to expand our portfolio of higher value enterprise subscription offerings, which are contributing to revenue growth.
We launched <unk> flex with our virtual file system software as a subscription and saw initial success with dozens of customers in the second quarter.
Virtual file system is a software solution that runs on either our nexis storage appliances or on our next as cloud storage to deliver the same media storage performance, whether using on premises or cloud based storage or both.
We also launched the F series upgrade to our <unk> appliances in July .
And our per seat pricing continues to improve as the higher priced enterprise subscriptions becomes a larger portion of the business.
Our creative tools remain in central piece of our subscription growth and during the second quarter, which is historically, our seasonally weakest quarter for this part of our business. We had good net adds across all three of the creative tool product lines.
We continue to innovate and further grow this business to attract more next generation creative.
In late April we introduced pro tools artist, a new lower priced tier directed at the music creation community initial results from pro tools artists are encouraging and we look forward to continued growth from this new tier.
Together. These factors all resulted in 58, 7% year over year subscription revenue growth.
During the second quarter healthy demand from our customers and strong commercial activity continued across our businesses, resulting in year over year revenue growth in the quarter.
Business activity with our enterprise customers remains strong and we continue to see healthy uplift when we convert customers to subscription we.
We COVID-19, new enterprise subscription agreements, including with such notable brands.
<unk> news and Warner Brothers Discovery.
Due to the ongoing global supply chain constraints that I mentioned earlier and as we discussed on our previous earnings call. We realized a year over year 10, 6% decline in grade solutions revenue in Q2, as we continued to face challenges in delivering customer orders for certain parts of our integrated solutions portfolio.
While we continue to see strong demand for our products the expected supply chain constraints that we're facing and are impacting production levels and our ability to meet this healthy demand.
As a result of the lower shipments in the first half of the year due to these constraints.
Fulfilled contractually committed orders for integrated solutions, where more than $20 million above typical levels of unfulfilled orders at the end of the second quarter.
We are making progress in working to resolve these issues and based on what we're seeing today from suppliers combined with the great work of our teams we anticipate the impacts of the global supply challenges on our business will be gradually resolved over the next several quarters starting during the second half of 2022.
Our third takeaway is our business fundamentals and profitability remained strong.
Our subscription and maintenance revenue grew 19% year over year in the quarter to $62 million based on strong subscription growth across our businesses.
As expected and as we have previously discussed our success in converting enterprise customers to subscription as a resulting in a reduction in maintenance revenue.
However, there is a significant growth in our total subscription revenue continued to drive double digit subscription and maintenance revenue growth and also resulted in strong 14% year over year growth in <unk> and 46% year over year growth in subscription <unk>.
We continued our focused on proactively managing our costs, while also investing in technology innovation and digital transformation to fuel our strategic growth plan.
The revenue growth combined with year over year improvement in gross margin and sequentially stable operating expenses enabled us to deliver adjusted EBITDA margin of 17% for the quarter.
And we delivered non-GAAP EPS growth of 4% year over year.
Now, let's talk about where we see things going forward from a business perspective.
We've seen the healthy demand for our products and solutions continue into the third quarter and we expect for this trend to continue based on the market signals that we're seeing.
We had several customer events recently that have reinforced this view in.
In July we had an additional voice of the customer event in the UK with dozens of European members of the avid community Association.
Discussions help us inform us on our customers' priorities and ensure that our product roadmaps will meet our customers needs and investment priorities.
In addition during these recent meetings, we were happy to hear from our customers that they expect to continue to invest in the technology solutions that they need to help deliver the increasing volume of high quality content that consumers are expecting and to drive their own strategic priorities, including greater content supply chain efficiencies, which our solutions help clients address.
Earlier today, we announced an important agreement between Amazon Studios and avid to help advance Amazon's content production in the cloud and to enable their editors and other content contributors to use media composer nexis storage and the media central platform in a globally scalable studio in the cloud solution running on AWS.
In the news release Amazon Studios spokesperson stated that they see avid as a central component of their studio in the cloud vision to provide a fully cloud based tool set to their creative teams across the globe.
We're really excited about this new agreement with Amazon Studios as we believe that further demonstrates our unique position and our market leadership and helping move the immediate and entertainment industry to the cloud.
We will continue to innovate with new technologies develop new solutions and forge partnerships that will contribute towards our growth plan.
I'm encouraged by the additional new products in key product enhancements in our development pipeline to meet the market and customer demands that we see and to help drive our growth.
As always we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on the past few years, while also continuing to make strategic investments in new innovative solutions as well as our digital transformation and support of our long term growth plan.
As I said earlier, we currently expect that the global supply chain conditions that have been impacting our integrated solutions shipments will moderate over time and.
And in fact, we are expecting to significantly increase production and shipments of integrated solutions in the second half compared to the first half.
However, based on the current healthy demand overall for our solutions, we don't expect to fully catch up this year and we expect to end the year with some elevated amount of unfulfilled orders that said this expectation is fully factored into our 2022 guidance.
Our experienced supply chain operations and hardware design teams continuing to work to mitigate the effects of the global supply chain situation on our business and we will continue to be diligent in managing an ongoing risk present from the macro supply chain environment and to maximize our business performance in 2022.
Through all of this for the full year 2022, we expect to deliver continued revenue growth and healthy profitability.
We expect continued strong performance from our growing subscription business and as such we are maintaining our full year 2022 guidance targets for subscription maintenance revenue.
However, while on the one hand, we are also seeing healthy market conditions and strong overall demand for integrated solutions the impact on the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full year 2022 business plans as a result, we are prudently.
Widening our range for our full year 2022 revenue guidance, while keeping the same midpoint to better reflect the range of possible outcomes for the year. We are adjusting our full year guidance for adjusted EBITDA and non-GAAP EPS to reflect this wider revenue range.
We are also adjusting our free cash flow guidance for full year 2022, as a result of several factors first we're seeing more rapid adoption of enterprise subscriptions globally, which are strategically important for the company and are positive for our long term model, but they have different near term cash conversion characteristics than our individual creatives subscription business.
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Second the expected timing of the integrated solutions manufacturing recovery happening later in the second half will likely lead to some cash collections from the shipments falling into early 2023 and.
And third to the extent, we can our plan is to temporarily build up our inventories to a level that will provide us sufficient buffer and greater flexibility to better navigate the variability and anticipate supply chain conditions over the next several quarters and most importantly to better meet the stronger demand that we're seeing.
With that let me now turn the call over to Ken to review more of the financial details takeaway Ken.
Thank you, Jeff and good afternoon, everyone in the second quarter, we continued our profitable growth driven by robust performance in our subscription business and our growing <unk> are.
Our focus for the second half of 2022 will be to further build our high margin subscription revenue and continue to stay on track with our long term model.
We expect these efforts to result in continued improvement in our key financial metrics.
With that let us now turn to the details of our second quarter financial results.
We are encouraged by the continued growth of our paid subscription base. Our total subscription count reached approximately 450000 at the end of the second quarter, an increase of 22% year over year.
Growth in both enterprise subscriptions and creative tools continued to be healthy and solid.
Media Central subscriptions grew to approximately 23100, an increase of about 3800 during the second quarter, representing a year over year growth rate of 209%.
The increase in enterprise subscriptions furthers, our confidence in the transition of our existing customer base to subscription.
Subscriptions for our creative tools performed as expected in the traditionally seasonally weaker second quarter, increasing by approximately 14600 subscription.
Subscription growth was solid for our creative tools with year over year growth of 18%.
Now moving to the composition of our revenues.
The consistent growth in the number of paid subscriptions drove continued growth in subscription revenue during the second quarter, which reached $34 1 million, an increase of 59% year over year.
The shift to enterprise subscription customers continues to increase our per seat revenue at <unk>.
Trend, we expect to continue.
In addition, the launch of the new Nexis Flex subscription that Jeff discussed contributed a small portion of the subscription revenue growth.
Maintenance.
<unk> continues to be a solid part of the business <unk>.
During the second quarter maintenance revenue was $27 8 million down 9% year over year.
As we continue to successfully convert our enterprise customers to subscription offerings at a healthy uplift in excess of 140%. We are seeing a reduction in the related software maintenance revenue from those customers.
In addition, hardware maintenance was up 4% year over year, mainly due to price increases even as the lower integrated solutions revenue in the first half also reduced associated first year maintenance revenue.
Total subscription and maintenance revenue increased year over year by 19% in the second quarter.
Subscription and maintenance saw 15% growth for the first half of the year in line with our 2022 financial model and long term plan.
Total combined integrated solutions perpetual and professional services revenue was $35 8 million in the second quarter, driven by lower integrated solutions and the continued transition away from perpetual software licenses.
Integrated solutions revenue was $28 million in the second quarter, a decrease of 11% year over year.
As was the case in the first quarter. Despite continued robust market demand several integrated solutions products were impacted by the global supply chain challenges limiting our production capacity and our ability to meet customer demand at the end of the quarter.
We ended the second quarter with approximately $20 million more than normal of unfilled contractually committed orders for integrated solutions the.
The unfilled orders are primarily related to availability of certain ships and power supplies for approach tools hardware audio control surfaces and live sound consoles.
We expect to deliver significantly more integrated solutions revenue in the second half, but given the strong demand. We're seeing we don't expect to fully catch up on the production and shipments before the end of the year and as a result, we expect to have an elevated level of contractually committed orders at the end.
2022.
As we also indicated during our first quarter earnings call risk remain for macro supply chain headwinds. So the recovery could be uneven and we have factored. These risks as we understand them today into our Q3 and full year 2022 guidance.
Perpetual licenses revenue was $2 7 million a decrease of 53% year over year as we continue to deemphasize perpetual licenses and focus on strategic subscription revenue.
Even with the declining perpetual revenue total software revenue from subscription and perpetual licenses increase year over year by 35% in the second quarter as the subscription revenue growth significantly exceeded the perpetual revenue decline.
Now moving to annual recurring revenue LTM recurring revenue and annual contract value from long term agreements.
As our business model continues to rapidly move towards subscription we introduce annual recurring revenue as a new key metric at our Investor day in May.
Annual recurring revenue based on the annualized <unk> of subscription and maintenance bookings was $231 million in the second quarter, an increase of $28 4 million or 14, 1% year over year.
Growth in IRR was due to subscription <unk> growth of 46% as we continued to drive a favorable conversion of maintenance revenue to subscription revenue plus adding new customers to our subscription business.
As expected subscription revenue growth is not always look going to track subscription <unk> growth based on a few factors first subscription revenue growth for a quarter can vary based on the size and number of enterprise subscription deals and we had a favorable comparison.
This quarter as the second quarter of 2021 had weaker subscription revenue on the enterprise segment second as we discussed at our recent Investor day. The revenue recognition of multiyear enterprise subscription deals under ASC 606 impacts the timing of the subscription.
And create some unevenness that affects comparisons with <unk>.
Also the lower integrated solutions shipments in the first half negatively impacted the maintenance IRR at June 30th as the Unshipped orders would have contributed about $2 million to maintenance IRR from the first year of maintenance that is bundled with the product sale.
Impacting 100 basis points of the IRR growth.
Our focus on growing our recurring revenue continues to drive healthier gross margin and greater predictability in our business.
As of the second quarter LTM recurring revenue was 80% of total revenue up from 76% a year ago and in line with our long term model.
The annual contract value from our long term agreement was $96 million at the end of the second quarter up 13% year over year, excluding the subscription and maintenance portion, which is already captured an IRR.
This growth is a result of increased ACB from strategic purchasing agreements with our channel partners.
With the addition of IRR, we are going to deemphasize the total ACB metric moving forward, but we have included it and in the appendix for reference.
Now, let's look at the operating results for the second quarter of 2022.
Total revenue in the second quarter was $97 7 million up 3% year over year.
We saw continued robust market demand, but total revenue was constrained during the quarter as we ended the quarter with unfilled contractually committed orders for integrated solutions that were approximately $20 million more than normal if.
If we had shipped all of these integrated solution orders total revenue would have been in excess of $115 million for the second quarter.
non-GAAP gross margin was 65, 5% for the second quarter up 160 basis points year over year.
Our high margin subscription business made up a large share of revenue, resulting in the improved gross margin.
We expect improving gross margin and our long term model as we continue to drive robust growth in our subscription business.
non-GAAP operating expenses were $49 6 million in the second quarter of $2 $5 million increase year over year due mainly to investments to support product innovation to drive our long term business.
Adjusted EBITDA was $16 5 million in the second quarter up 4% or 700000 year over year, driven by the improvement in both revenue and non-GAAP gross margin.
Adjusted EBITDA margin was 16, 9% in the second quarter, an increase of 20 basis points compared to the prior year period.
Finally, non-GAAP earnings per share was 26 for the first quarter up <unk> year over year.
Now, let us look at the rest of our results for the second quarter of 2022.
Our strategy of investing in innovation to drive higher quality recurring revenue together with the effective cost controls and reduced interest expense has resulted in a sustained trend of continued profitable growth.
Free cash flow was $3 2 million in the in the quarter down $2 $4 million year over year due to a $3 1 million increase in capital expenditures associated with our digital transformation and innovation investments as well as the pressure of lower product deliveries, which resulted in lower collections.
During the second quarter, we repurchased approximately 560000 shares for $14 $1 million, bringing total repurchases to $1 8 million shares for $50 million under the $115 million authorization announced in September 2021.
We will continue to deploy capital prudently in the most responsible way to drive long term shareholder value.
We ended the quarter with a strong financial position with net debt to EBITDA of one eight times and a healthy liquidity profile up $95 million, consisting of our cash balances and unused borrowings under our revolving credit facility.
Finally, let's now turn to guidance.
As Jeff said, we are confident in the underlying strength in our business, including the healthy market conditions and strong market demand for our solutions that we are seeing.
We expect continued growth in subscription revenue from expected strong performance in enterprise subscription and solid performance from our creative tools.
We expect contribution from recent new subscription product introductions, including the first full quarter of pro tools artist.
Plus our new Nexus subscription offerings.
For the third quarter of 2022, our total revenue guidance is $100 million to $112 million a similar size range as was provided for our second quarter of 2022 solely related to the supply chain risks to integrated solutions revenue we discussed earlier.
Our guidance for third quarter of 2022 subscription and maintenance revenue is 67% to $70 million representing at the midpoint 16, 7% year over year growth in the third quarter.
Our guidance for third quarter 2022, non-GAAP earnings per share is 27 to 39.
Assuming 45 million shares outstanding.
Our guidance for third quarter 2022, adjusted EBITDA of $17 5 million to $23 5 million.
At this time, we are also reaffirming our full year 2022 guidance plus subscription and maintenance revenue based on the strong demand we're seeing for these solutions.
While we are seeing also seeing healthy demand healthy market conditions and strong demand for our integrated solutions the impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full year 2022 business plan.
As a result, we are keeping the same midpoint, but widening the range for our full year 'twenty two revenue guidance to better reflect the range of possible outcomes for the year.
Our guidance for 2022 total revenue is now $425 million to $455 million.
Our guidance for 2022 subscription and maintenance revenue remains 266% to $274 million.
A range, which represents year over year growth of 17% at the midpoint.
Our guidance for 2022 non-GAAP earnings per share is now $1 37 to $1 53, assuming $45 2 million shares outstanding reflecting the wider revenue range. Our guidance for 2022, adjusted EBITDA is now $83 million to $95 million, reflecting the wider revenue range.
Yeah.
We are adjusting our guidance for 2022 free cash flow to $45 million to $59 million due to the factors that Jeff mentioned previously which include first we're seeing more rapid adoption of enterprise subscriptions across our global customer base.
While enterprise subscription is strategically important for the company and is a positive for our long term model. It does have different near term cash conversion characteristics than our individual creative subscription business.
Next given that we expect the recovery in our integrated solutions to be later in the second half. We currently expect that some of the cash collections from these shipments default into early 2023.
And third where we can we plan to temporarily built up inventories to add buffer stock and provide us greater flexibility to better navigate the variability and anticipated supply chain conditions over the next several quarters and most importantly to better meet the strong demand that we're seeing for our products.
With that I would like to turn the call back to wet.
Thank you Jeff. Thank you Ken that concludes our prepared remarks, and we're now happy to take your questions.
Yes.
Our first question is from Jack Vander <unk> from Maxim to be followed by Josh Nichols Jack. Please go ahead.
Hold on.
Hang on Jack will come back to you.
Our next question will be from Josh Nichols from B Riley to be followed by Jack if we can get them.
Josh. Please go ahead.
Yeah. Thanks, So as Glenn you can hear me Okay, Yes, we can thanks Josh.
Okay. It seems like the subscription business is doing as good or better than people kind of thought rates are some lingering headwinds on the supply chain side, but.
But before we dive into that I just wanted to.
I had a little bit more color.
On the Companys SaaS business I know, it's relatively small but has been growing and I think you said at the Investor day was around like.
$7 million on a trailing 12 month basis, how is that growing so far what's the opportunity to build that up over the next.
12 months is like the third leg of growth for the.
Subscription or SaaS piece, I think hi, Josh. This is Jeff. Good question I don't think we're going to unveil any more numbers and Ken already estimated at the Investor day, but I will say this AEP you saw today's announcements.
You might've suddenly it happened it came out earlier today that we've signed a multiyear agreement with Amazon Studios.
That is not in our numbers yet.
Turning that system on until late this year.
But.
I think we're still as you know we're on the early cusp of this third leg of growth for us.
We see some pretty robust growth in this part of our business over the next three years and so we're very happy with where it's going and we're pretty excited about the agreement with Amazon Studios today, because that's going to be a pretty good.
I think it's a pretty big deal in the eyes of Hollywood in the entertainment community.
And just just to add to that obviously the growth algorithm we put.
Publicly.
Related to our cloud business as well as our subscription business.
The growth algorithm for our creative business, our enterprise business and our cloud business is still holds and as Jeff pointed out the Amazon.
Announcement.
We will likely accelerate.
Cloud <unk>.
Pollution so.
We're obviously pleased with the performance of that high margin subscription business.
I was going to follow up about the Amazon deal congratulations great great to see a win like that multifaceted.
Are you able to filing a bit more detail on the color as far as like this or this.
Sizing the breakdown of the revenue of that or if not do you think the deal is.
It really more emblematic of opportunities to grow across other platforms given our dominant.
It's become over the last few years as far as.
Our media and entertainment company in a production.
Production company.
Yes, it's a good question I think look we were not revealing with Amazon the size of the project or the size of the deal.
I'll say it's substantial.
It's not just symbolic it actually has a meaningful.
<unk>.
Agreement that we have with them directly because what we're doing is actually helping them outfit their own production capabilities to be deployed globally for a lot of their production. They are doing for prime video.
It is going to be I think a fuel to help.
Fueled a Hollywood transition obviously, it's a big piece of news that Amazon Studios is made.
It also obviously, it's Amazon so we are going to deploy it on the AWS environment.
We're working together with Amazon to do that deployment, they actually are helping to invest in that cost of that deployment. So we're in the midst of working on that now that development has been going on for several months and but now.
Publicly announced this has been going on and.
Later this year as I said and as it release said our plan is to start to bring that system live for Amazon Studios.
But it is a multi it's a sizable multi year agreements that we've signed with them.
Mhm.
And then last question.
Honing in on the guidance a little bit again wider range understandable given.
What's going on supply chain for the hardware piece of the business.
At least.
Can you help quantify like.
What's the delta as far as that you've kind of factored in a potential hardware range for the.
For the third quarter and do you have a lot of visibility into how long it will take to get this.
Right sized our earliest largely right size, because historically you've done a lot more hardware business like late in the fourth quarter and is that kind of still the expectation for this year, it's likely going to be even more heavily fourth quarter weighted.
I would say that.
At this at this time, our seasonal pattern that the fourth quarter is strongest for the company will continue.
We'll have much stronger integrated solutions and hardware revenue in that quarter, just given the seasonal pattern.
We did widen the range on revenue given.
The current supply chain conditions, we do expect.
Gradual recovery in.
I would say that the recovery is more weighted towards the second half of the year hence.
The change in the guidance, we still feel strong about the market demand for our solutions.
But we need to temporarily.
Bring up some inventories if we can to meet that demand.
Which which along with the.
The timing of the recovery on integrated solutions.
Plus.
The growth that we're seeing in enterprise, which has set.
SLE different shorter cast characteristics as the reason why we're changing the cash flow guidance again.
We feel good about the long term our long term model.
We're right, where we want to be in terms of our subscription and maintenance business.
And we feel good about the long term cash flow of the company in terms of the conversion rate.
Maybe I can just add Josh you ask a question about the timing we are always fourth quarter loaded for a lot of reasons, we will see that this year for sure and we're not necessarily laying out exactly what the numbers are the variability we see I think you can see by the implied change in.
In guidance, what the what the variability that we see in the business.
The number is pretty clearly.
The team is making good progress we are seeing some great results and we're seeing some good plans for the second half, but we're going to be careful again. This is this is not I want to say this is not about our suppliers and our factories. Our factory production capacities are there where we need it really is about getting the ample chip supply and other components supply that we need to meet the demand.
As seen in.
We are to be clear, we are seeing healthier demand than we originally expected this year.
And that does provide some help just to maybe simplify my question. If you have a $20 million.
Backlog that rate or above normal at the end of <unk> is your expectation that at the end of the year, that's more like that.
$5 million backlog of $10 million backlog or any type of estimate that you have built into your <unk>.
Guidance for here just to get an idea for how much that may flow through well I wouldn't say that we would necessarily give that that number Josh because it really depends on bookings American commercial team can book more than we expected and we could take a b and even bigger backlog into into Q into 2023, while we have modeled is our expectation for increased production that's going to happen.
In the second half that increased production will be a lot more closer to our normal levels of production. It will be heavily weighted to Q4, but there will be.
Improvements in the second half from a total production at the end of the semester.
But the combination of just catching up to what our normal production levels are is not enough. We've got to try to go beyond that because supply or the demand is running even harder than our original expectation for supply requirements.
Thanks, and I'll hop back in the queue.
Alright next we have Nick <unk> from Northland Securities to be followed by Paul Chung Neyhart. Please go ahead.
Thank you guys.
And nice strong subscription revenue growth as well as our growth both of them accelerate so that's awesome.
And it sounds like it.
Enterprise subscription that's driving that.
And that's a little bit surprising given what you get.
Described in the past typically seasonally weak conversions from maintenance.
Friction during the June September quarters for Enterprise, and then also a weakening macro backdrop.
Given the <unk>.
Negative.
<unk>.
Whats driving.
He has really strong enterprise result.
Well I think first of all.
Thank the offering we've put together and brothers tiny houses, Jeff the offering we've put together.
Is very competitive and I think it's really helping solve a lot of business problems and operational problems that our customers have when you say the macro obviously, we can all read the news and see that.
The opinions on the macroeconomic conditions were not seeing anything yet ourselves in the customers' buying patterns that is weakening across the enterprise customers. We're seeing still continued strengths with them and I think the offering that we've put forth on our enterprise subscription offering is very attractive for enterprise customers because they've got their own.
The challenges of trying to be more efficient with our content supply chain, how they're going to produce more content for basically not the same amount of money for sometimes last year same amount of money. So they've got their own strategic priorities that they're dealing with.
As a longer shifting I think we have a very attractive toolset. There has got a very attractive offering for them and our commercial team is.
I would say that our commercial team has built a really great engine on how to take customers to subscription and I think it's all shown up to be great success for us.
And you're right typically maintenance to subscription conversions are best in Q4, and Q1 period, but I think for all the reasons I just said we are seeing strength.
Throughout the year lately and that's again for all the reasons I laid out for him.
Okay separate question.
Hi.
Yes.
<unk> disruptions extended different product lines within an integrated solution.
Well so the situation has been hitting across the board I can't say that there.
There isn't but our team is dealing with issues across almost every product we make some of those issues are able to be mitigated quickly to resolve quickly.
Others are tougher to solve for so I don't want to leave you with that.
Our team is dealing with with issues across the board.
But again, some are slower to recover from or more difficult to recover from.
I see and.
What was the actually the unfilled order level above normal levels for the March quarter.
Well if you remember we said it was in excess of 10, when we left Q1 and when we left Q2, we're making clear that its well over $20 million today.
Great. Thank you very much.
Alright. Thank you. Our next question is from Paul Chung Jpmorgan to.
To be followed by Steve Frankel Paul. Please go ahead.
Alright, Thanks for taking my question.
So just on the enterprise and is there any kind of seasonality that impacts adhere assume they can be lumpy at times, but how do we think about that pace of adds through second half and Q.
And kind of respective impact on pricing I know its still small percentage today, but any insight on enterprise trend as we move into 'twenty three.
Well I think Paul Good question, I think I would say from a business perspective, I'll, let Ken maybe speak to more of the financial element, but from business perspective traditionally for customers, we're converting from maintenance to subscription in Q4, and Q1 are traditionally the strongest quarters that we seasonally have to convert them to that model, where the team is fine.
<unk> is that because customers are looking at their business and look at their strategic priorities. We're finding that we're getting customers to move anywhere in the year and our team has been very very good at coming to them with with offers that can expand our footprint in these customers. So.
There will always be seasonal strength in Q4, and Q1, but I think we're seeing some goodness across the year I mean Q2 was great.
We saw great conversion I think as we look forward, we see strength in this in this part of our business for sure.
We're also <unk>.
We're also expanding the offering originally started with media just media central we've expanded to now allow we can add to that media central subscription around Nexus, we're going to be soon adding graphics.
Products into that offering so we're continuing to expand that offering.
As we go.
And then can you expand on the cash impact now.
With kind of determine the different now.
Timing I guess.
CERN enterprises paid during certain quarters.
Yep.
Paul.
Yes, so we typically.
Obviously bill.
If it is let's say a two year deal one year, we build first year and there'll be a second on the second year.
So for example on a two year deal so we're getting the cash over over.
Two years versus.
Creative which we may be billed on an annual basis, where they are paying upfront annually. So as strategically we move to the enterprise, which is important from a strategic element because it's stickier revenue higher <unk>.
As we build the business.
Near term cash characteristics.
Our longer than a creative individual that debt assigned in the year and then you typically is paid upfront in the year. So.
That's what we're seeing in the cash.
Then.
When should we start to get some visibility into the <unk>.
Multiyear agreement with Amazon.
The impact on revenues and margins sounds pretty material and provide some nice kind of upside to two sons and margins and cash flows I assume so.
Start to accelerate in Q4 or early next year.
I wouldn't I wouldn't say that I mean, obviously Q4 is always a strong quarter for us.
But.
When you say material and then look at the sizable contract I think like many of our enterprise customers, they're sizable contracts, it's similar to some of the other bigger agree.
Agreements that we have for the enterprise subscription business.
This will be a similar to that.
We're not we're not stating numbers, but it's an important contract I think also it's another example, I think it is going to help move the industry help motivate the industry to move faster.
What I've seen just today from the response I'm getting myself, even on email or text from customers.
It resonated.
In a big way today across the entertainment business.
Awesome and then lastly any of that.
FX impact in the quarter and through the year. Thank you, yes. So FX was a headwind of one 5 million in the quarter.
For for for for.
For this quarter.
In terms of revenue and.
At this point it is impacting us negatively in Q3 as well. So it is it is a headwind on revenue I would say, we do get the benefit on Opex on an FX, but.
From an EBITDA and net income perspective, it is negative.
Thank you Youre.
Youre welcome.
Alright. Our next question is from Steve Frankel at Rosenblatt Securities to be followed by some odd Simona.
Hi, good afternoon, and thank you.
Steve Jeff on the hardware backlog are you missing or losing some opportunities or market share from customers that need this equipment around events.
No not not yet Steve I think it's a good question.
The team has done a great job first of all this problem is hitting a lot of.
You're talking about the event business, if you're talking about like lifestyle and some of the event business.
All of the suppliers are facing issues across the board on this so I think.
It's kind of uneven situation with the big suppliers.
I'd say that we are we are starting to see some movement of production on the lifestyle. As an example for events business for the summer and so we're starting to move some of that you'll see more of that moving in Q3.
But so far I would say.
We've seen really strong demand advanced continues we are building a pretty significant contractually contracted backlog for immediate delivery as soon as we can build so.
So far we're comfortable with it.
As I've talked to our head of commercial.
They're losing business, it's miniscule theres nothing major there losing at this point.
Okay, and then on the perpetual business, which dropped much faster than at least I had modeled is that the new normal and that reflects these enterprise conversions or was there something else going on in the quarter that caused a significant sequential drop in perpetual.
Yes so.
I would say that.
On the perpetual business.
In terms of moving forward I would say that the level that we have there is probably likely in that range within a $1 million per quarter.
Half a million dollars per quarter.
In terms of that range.
We will be looking to optimize price and perpetual them appeal to subscription.
There was one.
Yes.
I would say product area that we that we did and the perpetual.
That had a little bit of a headwind this quarter, we don't expect any big.
End of life of the perpetual.
In the next couple of quarters. So Thats why I think this area, you're going to see within a half half a million to a $1 million.
Okay, and then to just drill down on the.
The creative net adds were.
The smallest number in quite a while are you confident that that's the bottom line do you have mark.
Getting programs and other things in the works to help mature that snaps back in Q3 and Q4, yes. So first I think.
The creative net adds there if you go back.
Several years Im going back to even 2019 Q2.
As is typically.
A downturn in terms of the net adds versus Q1 and that as it relates to the education cycle, we actually saw in Q2, the lowest sequential drop.
When you look when you look back three years.
So.
So I just want to put that perspective that said we are looking at driving.
I would say we did a retiring on pro tools that we mentioned we are optimizing our go to market to drive better performance and I do expect that the creative net adds will will improve.
In the second half of the year versus versus the Q2 performance.
Okay, great. Thank you.
Thank you Steve.
Next we have some odd samana from Jefferies to.
To be followed by Jack <unk>.
Please go ahead.
Great. Thank you and it's.
It's good to hear from you, Jeff and Ken.
They're doing well maybe one.
On the Amazon deal.
Totally hear you on the timing as far as.
How it impacts your business, but maybe is there.
Is there anything else under the Hood there in terms of well avid be using AWS for your own hosting or you're already using it is there a potential gross margin tailwind that we can see as part of this I don't know if there is any.
Thats involved beyond just the Amazon studio side of the deal.
Yes no.
Is just a.
A deal between Amazon Studios and avid we are deploying the avid technology stack in the AWS environment as you know today, Microsoft Azure as our strategic partner they continue to be our partner our preferred partner, they're our partner for all of our SaaS offerings like Ed on demand run from the Azure environment, but certain customers are going to work.
Want to deploy in an AWS environment, obviously, Amazon studios wants to deploy an AWS environment No question there.
So we were working with them to get these systems that they want to deploy which are basically our core production environment, whether it's media composer media central and Nexus. That's all being as you know Nexus was being is running <unk> file system is running in the Azure system. When we're done here with Amazon Studios the Nexus <unk>.
Our system enemies central platform running natively in the AWS environment for Amazon Studios.
There'll be other customers that want to deploy an AWS environment.
But no it doesn't change our strategic partnership with Azure, which assures who host all of our enterprise environment runs in Azure.
Great and then maybe Ken.
The double click on that FX question I know you gave the consolidated amount can you just for our focus tends to be on a subscription line most and so as I think about where that actually hits you.
How much of that is maybe isolated to subscription like maybe what's the genomics there versus the overall revenue revenue mixes, which we announced in the filings, yes, So a million and a half is the total of subscription is.
And the 400000 range of that of that million and a half $3 50 to 400000 range.
Okay. Okay, Great and then maybe just one more and then I'll pass the baton, but just Jeff when I think about the changes to that.
Premium model and.
Im curious what Youre seeing now we've had enough time is there a change to maybe the top of the funnel that's worth calling out is there a change in navy that the retention of who you are converting just any anything that you can share now that we've had enough time that maybe Susan patterns, there I'd say convert numbers.
The conversion numbers are still looking very good for us and they are quite good and I would say retention is still what we expect in the business on the <unk>.
Freemium model isn't acquisition acquisition tool and.
We have been lean into trial I would say what I can say publicly is we're looking at all of that very carefully to understand what our strategy is on the freemium level.
I would just say stay tuned.
Maybe some more news coming on that.
Understood I will stay tuned thanks, gentlemen, thanks, so much.
Alright, and next we will come back to Jack Vander Ark, Jack are you there.
Anyway.
Jack here can you hear me Okay. We can thank you.
Alright, great alright, sorry for plugging the microphone earlier, but.
Okay.
Yes.
Maybe just a quick question for clarity on integrated solution back orders.
About $20 million at the end of the quarter and I think I recall, a similar dynamic last quarter, I think about $10 million of backlog.
It is an apples to apples comparison.
Its accumulated you recognize some of that $10 million during the second quarter or is this.
Sure.
Was that $10 million versus building it.
Yes, it's building up but remember it's kind of like a bucket, we've got water coming in one science water going out the other.
Obviously, a lot of what we carried over from Q1 some of that was resolved during Q2, but we also got a lot of new orders in Q2. So the demand the best way to think about it is the demand is moving faster than our ability to move the supply up that's why it went from $10 million aggregate to $20 million.
It built over the course of Q2 because of the demand for the products is coming in faster than we could ship.
And so that's that's good news and that demand is very high obviously, we don't like carrying.
Over $20 million.
And unfulfilled contractually obligated orders. It these are customers who want immediate delivery. This is not backlog for future deliveries. This is stuff that traditionally Jack we carry about one or $2 million that we can't fulfill in one quarter to another that's about our traditional pattern. This is obviously a significantly more than that because of the production levels.
Sure.
Okay got you that's helpful.
Since I have the microphone to start a lot of my questions were already asked so I'm going to probably more of a final question.
Your topic.
Given your creative.
Yes.
Blockchain Rio.
Sure it could given the IGN meaningful thought or see any obvious compelling opportunities that would make sense.
But.
Yes.
Your perspective.
Back to you Martin.
Paper.
I think yes, yes.
The core competencies of added technology and product offerings.
Your target customer bases are okay and creative.
Is there a place for either.
Great.
<unk>.
With your business given.
You're young creative pro tools users, maybe they want to create an NFC to market themselves just wondering if there's a.
Place in your in your client portfolio.
I wouldn't say I wouldn't I wouldn't necessarily address that directly I would say this our teams are looking at all of these things including.
The steep subjects.
I mean, there's so many subjects were working on including things like web Triolo et cetera, but I think that thats.
Those are innovation plans our team is looking at what our role is and how we could leverage those technologies, but I think a lot of those workflows are still being kind of figure it out as an industry.
Or in that looking at what our role is I Wouldnt give you a direct answer today, but I would say, it's an interesting space and that theres. So many developments technologically.
That gives us some opportunity out there.
Got it and then just maybe one more just to be Crystal clear. The long term plan from your May Investor Day recently that is completely unchanged youre still on track and this Amazon.
Announcement has is not baked into that at all of that is that correct.
No the Amazon.
Not baked into it we consider a lot of things when we look at the when we look at the forecast of where the business is going Amazon and a lot of customers are considered in our in our forecasting of things.
Look we've known about Amazon as a company for several months, we've been doing the R&D with them for over six months. So we've known about this a while this is really just more public information. There is now finally coming out.
Okay got it that's helpful. I appreciate the time I'll hop back in the queue. Thanks, Jeff.
And that concludes the Q&A session I will now turn it back to Jeff for concluding remarks alright.
Thank you for your participation and your questions in closing I do want to reiterate that we believe we will continue to see strong demand across the end markets of our solutions, including our growing subscription business and we are managing through this temporary supply chain headwinds to enable avid to continue to achieve our company's strategy and our long term growth plan and profitability targets as we move forward.
Through 2022, and beyond and with that is when I say I hope everyone has a nice evening. Thanks again thank.
Thank you you may all now disconnect.