Q3 2022 Avid Technology Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to avid Technology's third quarter 2022 earnings conference call for the period ended September 32022. My name is Whit, Rob Paul Evans, Vice President for corporate development and Investor Relations. Please note that this call is being recorded today November eight 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.
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 avid dot com and shortly following the conclusion of this call a replay will be available on our IR website for a limited time.
Yeah.
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 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 the forward looking statements. Please see our press release issued today and our most recent annual report.
On Form 10-K, and quarterly reports on Form 10-Q filed with the SEC.
With that let me turn the call over to our CEO and President Jeff <unk> for his remarks.
Thanks, Whit and my thanks to everyone joining us today to review average third quarter results.
Overall, we're pleased with the results that we delivered in the third quarter, including strong earnings despite revenue headwinds being caused by the overall global macro conditions that are challenging so many companies today.
Also clear that our strategy is working and delivering results. Despite the more challenging environment, we're operating in globally today.
Let me dive right into the details.
Let's start with the three main takeaways for average performance during the third quarter.
First we're very pleased with the strong growth of our software subscription revenue in this quarter driven by very robust enterprise subscription results and the reacceleration of our creative tools, including terrific performance from pro tools, all resulting in record subscription net adds this quarter.
Next even though demand remained quite healthy for the integrated solutions portion of our business. We did realize slightly lower results than we had expected. While we successfully resumed production of certain audio hardware products late in the quarter a recovery from the constraints caused by the current global supply chain situation is happening slower than we had anticipated.
And finally, because of our continued prudent business management and proactive cost controls, we delivered improved profitability. Despite the headwinds associated with the macro conditions that so many global companies are facing including worsening foreign exchange rates difficult supply chain conditions and cost inflation pressures through.
Through all of this on a year over year basis, we delivered strong earnings per share growth and on a constant currency basis, we delivered a solid overall revenue growth for the quarter.
Now, let me dig in a bit more and provide some specifics on each of these key points.
With robust adoption of subscriptions by both new and existing customers both for our creative tools and enterprise offerings, we delivered strong growth in our overall subscription business this quarter.
We realized net additions of 32600 subscriptions, which is an all time record and we delivered over 24% year over year growth in a number of overall cloud enabled software subscriptions.
Our creative tools remain an essential part of our subscription growth and during the third quarter, we had our largest number of creative net additions since the beginning of 2021, largely driven by strong performance of pro tools and media composer subscriptions.
We realized a quite strong sequential increase in pro tools subscription into Q3 built on the momentum from our Q2 launch of the new pro tools artist and studio tiers, we continue to innovate and further grow the pro tools business to attract more of the next generation of music creators and audio professionals.
In September we delivered our latest release of pro tools with several new capabilities to enhance our users' music creativity and expand our existing audio ecosystem.
We continued the trend of successfully converting a substantial number of enterprise customers to our subscription offerings in Q3, helping to deliver stronger than expected subscription revenue growth in the quarter, especially when comparing on a constant currency basis.
In Q3 avid secured enterprise subscription agreements with a number of media companies around the world, including large media and broadcast companies Y L E, Finland, and Z F of Germany.
Admittedly the enterprise subscription performance in Q3 was helped by favorable timing of a couple of key customer contracts that closed earlier than what we had expected and as such Q4 will not track sequentially to our typical seasonality pattern.
That said for the second half in total on a constant currency basis, we expect that the subscription revenue to be on track to our previous guidance range and which is also tracking nicely to our long term model.
We also continue to expand our portfolio of high value enterprise subscription offerings, which is additionally, contributing to our subscription revenue growth and in the quarter. We saw continued uptake in our new Nexus subscription storage offering and with media composer enterprise.
Together. These factors resulted in a reported 49, 2% year over year subscription revenue growth in the quarter.
And on a constant currency basis subscription revenue grew 56, 2% year over year.
During the third quarter healthy demand for our customers and strong commercial activity continued across our business, resulting in 6% year over year revenue growth in constant currency.
As a sizable portion of our average business is traded in Europe , the UK and Japan, increasing foreign exchange headwinds as I mentioned earlier had an impact on total revenue results as reported.
While in the past, we have southern talked about the impact of foreign currency exchange on average results as the euro pound and yen currencies have gotten progressively much weaker as this year has progressed, we're compelled to highlight the impact because we do not want the current FX headwinds to obscure the underlying growth and profitability. We are seeing in the business.
Customer demand for integrated solutions continued to exceed our ability to supply in the quarter, resulting in a further increase backlog.
The global supply chain constraints that are impacting our business, which we do believe were temporary in nature continued to affect production levels for our integrated solutions and thus revenue for this part of our business.
While we've made good progress resolving some of these challenges, including resuming production of our Essex and S. Four control services.
As well as our lives some consoles in late Q3.
<unk> is moving slower than we had expected and the lingering challenges we're facing are continuing to impact deliveries for certain parts of our integrated solutions portfolio.
As a result of these constraints unfilled contractually committed orders for integrated solutions grew to more than $25 million above our typical levels of unfilled orders as we ended the quarter.
Again, we are making progress in working to resolve these temporary issues and based on what we're seeing today from suppliers combined with the magnificent work of our teams we have visibility into further improvements expected during Q4, though at this point, we anticipate that the recovery will likely extend into the first half of 2023, and we anticipate that.
We will be exiting 2022, with a heightened level of unfilled backlog of customer orders for certain parts of the integrated solutions portfolio.
With all of this said and to be quite clear none of these near term headwinds change our view of the long term opportunity for this business or the success of our strategic growth plan.
Our third takeaway is that despite the temporary headwinds produced by the macro conditions mentioned previously we continued to improve profitability and our overall business performance remains strong.
We saw continued improvement in gross margin driven by growth of our higher margin software subscription offerings. The growth in total subscription revenue continued to drive double digit subscription and maintenance revenue growth and resulted in on a constant currency basis over 13% year over year growth in <unk> and approximately 37% year over year.
Growth in subscription <unk>.
We produced improved year over year profitability with our continued focus on proactive cost management, while also continuing to be making prudent investments 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 an adjusted EBITDA margin of over 20% for the quarter and we delivered non-GAAP EPS growth of 40% year over year.
Let me now share with you, where we see things going forward from a business perspective.
While we face challenging macro conditions and global economic uncertainty ahead of us as do almost all businesses across the globe I'm confident that we will navigate the conditions appropriately and we believe that we're very well positioned with strong customer relationships, a solid growth strategy and continued innovation plans to help capture future market opportunities, which day.
<unk> gives us confidence in the trajectory of the business and a positive long term outlook.
Supply availability and production capacity are improving but not expected to fully normalize before the end of this year.
The availability of many standard components is improving we're still facing constraints on some of our more specialized components.
I am pleased with the team's accomplishments in the area of product redesign to support alternative components and to quickly and efficiently produce and ship products as components and new designs become available.
We will continue to deliver a stream of valuable software releases develop innovative solutions and forge partnerships that will contribute toward our strategic growth plan.
I am encouraged by the additional new offerings and innovative enhancements in our development pipeline to meet the market and customer demands that we see and to help drive our growth.
In October we introduced pro tools intro, a new free version of pro tools to help introduce more next generation user creators to our products and providing new offerings of third party vendors to offer in the box to their customers, giving us a nice on ramp for new users to try protocols for free before converting to a paid subscription.
Just a couple of weeks ago, we also announced the official release and availability of the innovative Nexus edge software subscription solution that uniquely enables more powerful and flexible remote editorial and distributed post production workflows.
In New York City last month at the Aes show, we introduced two brand new audio products for the next generation of music creators.
<unk> studio desktop interface and the pro tools carbon pre expansion and have been receiving strong reviews from the community on these new solutions.
As always we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on for the past few years. While we will also continue to make strategic investments in new innovations as well as our digital transformation and support of our long term strategic growth plan.
For the fourth quarter and full year, we believe we are well positioned to deliver earnings growth. Despite revenue headwinds from the impacts of foreign currency exchange and the temporary supply chain constraints and we are confident in our ability to continue to deliver strong profitability and cash flow generation. Despite these factors.
While we are needing to adjust our full year 'twenty two guidance to reflect these macro conditions. We are now facing our adjusted EBITDA and non-GAAP EPS guidance range is narrowed but within our previous guidance provided in August .
With that let me now turn the call over to Ken to review more of the financial details taken away can.
Thank you, Jeff and good afternoon, everyone in the third quarter. Despite FX headwinds avid delivered over 40% earnings growth that was at the high end of our guidance range. Our financial performance was driven by robust performance in our subscription business, including an all time record net increase in paid subscriptions.
During the quarter and prudent management of our cost base.
As we enter the fourth quarter, our focus will be to further expand our high margin subscription revenue and.
Prove our profitability and cash flow and remain on track with our long term metrics.
With that let's now turn to the details of our third quarter financial results.
We are encouraged by the continued growth of our paid subscription base. We ended the quarter with our largest ever sequential increase of cloud enabled software subscriptions or.
Our total subscription count reached approximately 483000 at the end of the third quarter, an increase of 24% year over year.
Growth in enterprise subscriptions continue to be healthy and solid and we saw reacceleration of our creative tools.
We added approximately 20000, new creative subscription users our best quarter for net adds since Q1 2021.
Reflecting growth of four 7% sequentially and 17, 7% year over year.
We had terrific performance in pro tools, which saw strong acquisition enabled by the exceptional performance of our pro tools artist here.
We launched pro tools artist in late April 2022, and this was the first full quarter with the new tier which had robust acquisitions in the quarter we.
We also had a strong quarter with media composer subscriptions that had an acceleration in net adds.
Moving to our enterprise business media Central subscriptions grew to approximately 35600, an increase of about 12500 during the third quarter representing year over year growth of 290%.
The increase in enterprise subscriptions furthers, our confidence in the transition of our existing customer base to subscription.
As our enterprise subscription business continues to become a more meaningful part of our subscription mix is positively impacting our overall price per seat as the price of an enterprise seat as a multiple of the price per seat for our creative tools.
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 third quarter, which reached $41 8 million, an increase of 49% year over year and 56% on a constant currency basis.
Total subscription and maintenance revenue increased year over year by 18% in the third quarter and 22% on a constant currency basis subscription and maintenance saw 16% growth for the first nine months of the year and 19% at a constant currency basis, which is slightly above our long term plan.
Maintenance continues to be a solid part of the business during the third quarter maintenance revenue was $27 3 million down 11% year over year.
As we continue to successfully convert our enterprise customers to subscription offerings at healthy uplift in excess of 140%. We are seeing a reduction in the related software maintenance revenues from those customers.
However, hardware maintenance was up 8% year over year due to continued improvement in renewal rates and higher pricing.
Total combined integrated solutions perpetual and professional services revenue was $33 9 million in the third quarter, driven by lower integrated solutions and the continued transition away from perpetual software licenses.
Integrated solutions revenue was $26 3 million in the third quarter, a decrease of 16% year over year. Despite healthy demand for avid solutions. Several integrated solutions products were impacted by the global supply chain issues limiting our production capacity and our ability to meet customer demand at the end of the.
Quarter, we ended the third quarter with over $25 million unfilled contractually committed orders for integrated solutions.
The unfilled orders, which grew $5 million over the prior quarter are primarily related to the availability of certain chips and power supplies for pro tools hardware audio control surfaces and lifestyle and consoles.
We are working to resolve the issues through finding alternative sources of supply selective redesigns and other means as Jeff mentioned, we made progress in resolving some of these challenge in the quarter, but overall our capacity remains below the demand we experienced in the first nine months of 2022.
We expect to deliver more integrated solutions revenue in the fourth quarter. However, 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 of the year.
We have factored these risks related to the macro supply chain headwinds as we understand them today into our full year 2022 guidance.
Perpetual license revenue was $1 8 million a decrease of 69% year over year as we continue to emphasize perpetual licenses and focus on strategic subscription revenue.
Even with the declining perpetual revenue total software revenue from subscription and perpetual licenses increased year over year by 29% in the quarter, our subscription revenue growth significantly exceeded the perpetual revenue decline.
Now moving to annual recurring revenue.
<unk> recurring revenue and annual contract value from long term agreements.
Annual recurring revenue based on the utilization of subscription and maintenance bookings was $237 2 million in the third quarter, an increase of $21 5 million or 10% year over year, and 13% year over year constant currency growth.
Growth in <unk> was due to subscription and a growth of 33, 2% as we came to drive a favorable conversion of maintenance revenue to subscription revenue plus adding new customers to our subscription base at constant currency subscription <unk> increased 36, 9% year over year.
Subscription revenue growth year over year outpaced subscription <unk> growth.
Primarily to strong third quarter 2022 enterprise subscription revenue, which has different revenue recognition characters under ASC 606 also the lower integrated solutions shipments in the first nine months negatively impacted the maintenance IRR at September 30th as the Unshipped orders would've contributed approximately.
<unk> $1 million in maintenance.
Negatively impacting <unk> growth by 1%.
Our focus on growing recurring revenue continues to drive healthy gross margin as of the third quarter LTM recurring revenue was 83% of total revenue up from 77% a year ago and in line with our long term model.
Now, let's look at our operating results for the third quarter total revenue in the third quarter was $103 million up 1% year over year and up 6% at constant currency as a reminder, 51% of our revenue is in the Americas, 36% is in Europe , the Middle East and Africa and 13.
<unk> is in APAC and.
And we collect approximately 20% 22% of our revenue in euros, 7% in British pounds and 4% in Japanese yen.
Due to the continued weakness of all three of these currencies versus the U S. Dollar there was a more meaningful impact to the difference between our reported revenue growth and our growth under constant currency.
We saw continued robust market demand, but total revenue was constrained in the quarter from weakness in foreign exchange rates and an increase in unfilled contractually committed orders for integrated solutions.
Unfilled contractually committed orders for integrated solutions was over $25 million more than normal in the third quarter.
The currency headwinds had not occurred and if we had shipped all of these integrations solutions orders in the quarter total revenue would have been in excess of $130 million in the quarter.
non-GAAP gross margins was 68, 3% for the third quarter up 300 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 through robust growth in our subscription business.
non-GAAP operating expenses were $51 5 million in the third quarter of $200000 increased year over year due mainly to investments in support of our product innovation to drive our long term model.
The impact of FX did favorably impact our operating expenses by $1 8 million in the quarter as our global cost base does provide a partial head <unk> inflation.
Adjusted EBITDA was $21 million in the third quarter up 20 to 23, 5% or $4 million year over year, driven by the improvement in both revenue and non-GAAP gross margin adjusted EBITDA margin was 24% in the third quarter, an increase of 360 basis points compared to the prior period.
When adjusting for the FX impact to both revenue and cost adjusted EBITDA was negatively impacted by $2 million in the quarter and $3 million for the first nine months of the year.
Finally, non-GAAP earnings per share was 38 for the third quarter up 11% year over year.
Now, let's look at the rest of the results for the third quarter.
Our strategy of investing in innovation to drive higher quality recurring revenue together with effective cost controls has resulted in a sustained trend of margin expansion and profitable growth.
Free cash flow for the quarter was $6 6 million down seven $4 million year over year due to lower product deliveries in our audio hardware business and an increase in inventory that will provide a buffer stock of supply of components to meet the healthy demand we are seeing in the business.
During the third quarter, we repurchased 758000 shares for $18 $6 million. Additionally.
Additionally, during the fourth quarter, we also repurchased 254000 shares for $6 4 million, bringing total repurchases to two 8 million shares or $75 1 million under the $115 million authorization announced in September 2021.
We will continue to deploy capital prudently and 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 nine times.
Also in October .
October we amended our credit facility, increasing the revolving credit facility from $70 million to a $120 million and adding $20 million incremental term loan on favorable terms and no change to pricing.
This provides avid more financial flexibility with over $150 million and liquidity to execute our growth plans in our capital deployment strategy as we work to enhance returns for avid shareholders.
Let's now turn to guidance.
As Jeff said, we are confident in the underlying strength in our business, including the healthy demand for our solutions that we are seeing.
We expect continued strong growth in our subscription revenue from continued solid performance in our creative tools and enterprise subscription business.
We expect increased contribution from recent new subscription product offerings, including pro tools artists and our nexis storage subscription offerings.
However, the strengthening U S. Dollar continues to create a headwind year over year comparison against our plan for the full year.
We expect headwinds from FX on our total revenues this year will be $12 8 million for the full year with $6 9 million in the fourth quarter.
In addition, the ability to procure certain specialized components to meet the current healthy demand and backlog of unshipped orders is taking longer than we had expected.
As a result, we expect to have an elevated level of unshipped orders of audio hardware and our backlog as we complete our fiscal year.
As a result avid is adjusting its full year 2022 revenue guidance our guidance for 2022 total revenue is now $412 million to $424 million.
As we look at bridging our prior guidance that we had with a midpoint of $440 million in total revenue for 2022. The change is an incremental $9 million in foreign exchange headwinds, which we cannot recover from with the remainder of the gap from lower product sales in our audio hardware business related to the macro supply chain issues.
Yeah.
At this time solely as a result of foreign exchange headwinds avid is modifying its full year 2022 guidance for subscription and maintenance revenue we.
We expect the headwinds from foreign exchange on subscription and maintenance revenue. This year, it will be $6 million for the full year with $3 million of the headwinds expected in the fourth quarter.
Our guidance for 2022 subscription and maintenance revenue is now $260 million to $268 million, a range, which represents year over year growth of 14% at the midpoint and 17% excluding the FX impact at the midpoint.
For the full year avid is tightening its guidance for non-GAAP EPS and adjusted EBITDA.
Our guidance for 2000 22022, adjusted EBITDA is now $83 million to $87 million, reflecting a tighter range aligned with our smaller band on revenue.
The decrease from our prior guidance at the midpoint of $4 million is solely as a result of foreign exchange headwinds are impacting our 2022 adjusted EBITDA by approximately $6 million.
Excluding the FX headwind of $6 million avid would have exceeded the midpoint of its 2022 EBITDA guidance by $2 million.
Our guidance for 2022 non-GAAP earnings per share is $1 40 to $1 50.
Assuming $44 8 million shares outstanding.
This reflects a midpoint of $1 45, which is unchanged from the initial guidance given in March 2022, reflecting prudent management of the business in spite of the headwinds in foreign exchange and global supply chain conditions that are temporarily impacting our hardware business.
We are adjusting our guidance for 2022 free cash flow to $38 million to $43 million due to foreign exchange headwinds impacting adjusted EBITDA by approximately $4 million 3 million of higher interest expense due to a higher base rate and other working capital items, including an expected higher amount of inventory.
With that I would like to turn the call back to Whit.
Okay.
Thank you, Jeff and Ken that concludes our prepared remarks, and we're now happy to take questions.
Our first question is from Jack Vander <unk> from Maxim.
Good day helps oxy Jack Please go ahead.
Okay, Great can you hear me okay.
Jack.
And plastic okay, great guys.
Great to see the strong subscription business momentum continue.
Thank you for taking my questions.
Jeff maybe Jeff or can I could start with just in general because I think I missed it but.
You mentioned you want a number of new enterprise subscription agreements during the third quarter.
How many of those agreement did you win if you did provide that or disclose that and then where do you where do conversions of existing avid enterprise customers or new avid customers entirely.
Good question Jack No we didn't disclose the number and I think we're not disclosing the number this quarter, but it is a significant number and clear a couple of very large ones that we closed in the quarter.
I'd say, it's a usual pattern we've seen it's a majority of it is customer conversion. So theres a couple of new customers <unk>.
The expansion of our customer.
In that mix and it's about the <unk>.
Additional mix we've seen ongoing.
As I said before we did have a bit of work.
Helped in Q3, a little bit because some of the deals we expected in Q4 did close early in the sales team was able to get them done. So we obviously said gets get them done in off the street.
But overall, what we're seeing for the second half is right in line to what we expected.
Okay, Great and you kind of touched on a follow up I had which is in terms of just looking at the total enterprise subscriber seats.
That ticked up quite a bit of 12500, or so whereas last year in the third quarter it actually.
Net adds than enterprise subscribers were actually get from the second quarter. So it was good to see this time around.
It picked up.
Exponentially or a multiple of it how many of how much of this is related to <unk>.
Existing enterprise subscribers, expanding the number of seats throughout the enterprise.
First is just winning the new enterprise subscriber agreements or agreements. This is a bit of both Jack there is obviously a conversion to subscription of the state's peers also expansion. It usually goes along with with these contracts when we when we cut these deals.
Enterprise license agreements or enterprise subscription agreements with these customers.
So it's a little bit of both in the third quarter as I said, we did have some great success with a number of deals, including some a couple of very large ones and so its good obviously, you'll see the continued momentum, but we did.
Close quite a bit in Q3, I will say this as we've said I think and I've said this before the enterprise part of our business.
It might traditionally be lumpy right, depending on how many orders you get in how many of the deals you closed a given quarter. It can move around a bit. So we have a tendency to look over a few quarters to really make sure we understand the growth trajectory of the enterprise business and what we're seeing is right in line.
For fully in line with our guidance, obviously, considering the impacts of FX.
And Jack I would say besides having.
Healthy demand from enterprise customers for our for our subscription offerings.
We're moving those customers.
To subscription, we're seeing very healthy uplifts.
<unk> with what we said at our Investor day, if not slightly positive to that and obviously, we're adding new customers so that.
That model is continues to progress nicely and we are.
Aligned with delivering high teens subscription and maintenance growth as we move forward.
Okay Fantastic and then maybe just one more question and I'll hop back in the queue. Just question on your overall pricing strategy and pricing activity across the entire portfolio. So when thinking about the impact on.
Including the FX impact that you are experiencing.
Have you have you or are you planning to make any major or.
Material pricing changes to any of your product offerings, whether it's subscriptions for individuals or enterprises, where your integrated solutions products, yes.
Yes, no it's a great question.
I would say that we've been.
A monitoring obviously.
The customer demand as well as.
I would say input costs for certain materials.
It has a very good position with or with our customer base.
That said, we've been able to take pricing actions in certain areas of our integrated solutions as well as our maintenance to drive to drive incremental revenue growth and profitability and we've been selective looking at certain software offerings as well.
Both subscription and perpetual.
Drive further growth and profitability. So it's an active piece of the business that Jeff Hi.
Business unit leaders, obviously work on every day.
Thanks, Jack So I think <unk> is having technical issues, so we're going to skip to.
Some odd Samana from Jefferies. Please go ahead.
Hey, guys can you hear me all right.
Sure Ken.
Great. Thank you. So much this is Jeremy Sandler person on tomorrow.
So I guess just to start off on.
On the integrated solutions backlog can you maybe size.
How much of a hit Youre seeing to subscription as a result of the hardware shortages like our customers holding off on signing contracts or what are you seeing there.
I know it's very.
Good question. Thank you so the integrated solutions backlog.
Does when we when we deliver those solutions it does pull in subscription and software revenue as part of it. So the way we think about it the $25 million backlog.
Would have had probably $2 million.
Follow on subscription revenue as that was sold through additionally that integrated solutions backlog, if it wasn't points subscription probably would've had some maintenance to it so as I've said before it does impact our R. A R. R.
As we look as we look at those numbers and so I think you have a $1 million is what we saw on the on the making.
It's maintenance side as well.
Understood that makes sense.
Yeah.
So it's good to see that constant currency subscription growth and we appreciate the color on the currency breakdown.
I guess on a constant currency basis, which geos are you seeing I guess particular strengthen.
Has that changed at all versus historically.
I can answer that it does it does change it paint on on which contracts are deals we're working on around around the world I would say that this past quarter. We first of all we've had strength around all of our regions are pretty good strength.
A lot of the business comes from the Americas, especially North America and Middle East.
In Europe , the Middle East this quarter, we had really strong success in Europe Middle East, but we also had really great success in America. So I think it's a little bit of both.
So I wouldn't as I wanted to pick out one region I think the teams are doing a really good job.
Even even we're now seeing APAC, starting to pick up pretty well, but APAC is probably the laggard on this.
But we are seeing really really good performance and haven't seen good performance both through.
Especially in North America and.
And Europe Middle East markets.
Gotcha. Thank you guys for taking my questions I appreciate it. Thanks, Jeremy So now we have found may hold back into queue.
Talk to you from Northland to be followed by Steve Frankel. So Neyhart. Please go ahead.
Thanks, a lot.
And yes, thanks, Ken for that detailed John both the makes it the subscription ticked down as well as the free cash will take down that's pretty clear.
Also great to see.
<unk> share buyback, that's a strong signal that <unk> strongly believe in the fundamentals of the business a couple of nuances here.
Maintenance revenue on a year over year basis decelerated from a negative 9% to 222, 2% and 322 is that purely due to the <unk> backlog.
Yes, I would say that the unshipped backlog.
With.
As having a headwind on maintenance.
In terms of the attach rate that we've seen from that from those shipments.
Additionally, I would say also we're getting a little more success on continuous success in enterprise subscription.
So that's also impacting it but in general our subscription and maintenance numbers.
Continued to track to the to the long term plan that we've had but we probably would have been a little bit slightly ahead of it if we had that unshipped backlog.
Being delivered and the attachment with respect to maintenance.
Got it okay I understand.
And then your incremental subscription.
In the quarter was $10 million.
It was $15 million a year ago quarter.
I'm trying to.
And why is there a tick down in the incremental air are despite a six quarter high and creative net subscriber adds and the stronger than expected.
Enterprise subscription as well.
Talk about that there.
Yeah, No I would say that.
<unk> continues to be solid I think your point on kind of the differences between quarter on quarter as Joe pointed out.
We did have some strong successive enterprise subscription and.
The enterprise subscription.
As you know has different revenue recognition characteristics.
When those deals were entered.
Additionally, foreign exchange had an impact this quarter.
When we look at the numbers by three.
<unk> three percentage points.
On the total <unk> side so.
The foreign exchange headwind did impact.
That number.
So let me just look at the number raw number so quickly.
Okay. So, yes that would represent probably around $7 million and incremental air are okay that makes sense. Thank you.
Thanks, Dave.
Our next question is coming from Steve Frankel at Rosenblatt to be followed by Josh Nichols. Steve. Please go ahead. Good afternoon. So you had a very strong quarter in the consumer side of subscription as well, but I wonder I wonder underneath the surface.
Have you seen or do you anticipate that.
Recession is going to impact churn in this side of the business.
I see this is Jeff.
Obviously, we're keeping an eye on on macro economic conditions and like everybody. We're trying to keep our eyes down the road, we haven't seen anything yet.
And that way are actually our churn numbers have been very stable and in fact, our teams are working very hard to continue to improve our churn and retention numbers.
But I would say so far we haven't seen any weakness as Q3 showed us we saw a lot of strength it surprised us in a very pleasant way. So so far we're not seeing anything and there is no indicators indications. We're seeing obviously, we've got the holidays in front of US, we'll see how that goes.
Right now Theres no indications, we're seeing but we are keeping our eyes wide open and paying attention to the macroeconomic environment.
And you've typically had a large component of <unk>.
Annually paid upfront.
In that bucket.
Is most of that in Q4. So that's we have a big renewal period coming up or is that.
Early Q1, when do you see that.
I think we're seeing them all year long.
And especially on the enterprise side. The teams are really trying to move customers as fast as they can they're very motivated to get customers to move away from a pure subscription.
Annual upfront those happen across all quarters, as we've said Q4 because of holidays for the pro Sumer space in Q1, a little more for the creative tools on the enterprise space, we will see a little bit more than some quarters, but.
I think overall, we're seeing strength quarter to quarter, Okay, and with your success in the enterprise conversions.
Where do you think you are in converting that base and where do you think.
And maybe where it can be by year end.
I don't think I would give an exact an.
An exact percentage, it's probably we're in the 25% to 30% range. So far I'd say we're in the.
And the second inning third inning is kind of what it would probably be the way to talk about it. We've obviously converted a lot of the large customers. We still have more of those large customers to go but we're now working our way down where we'll be working a lot more of the mid tier and some of the small to medium sized businesses over the next year or two.
Great.
Yes.
Any thoughts on <unk>.
Cost structure expense levels, given the global economy, and the pressures youre seeing on the topline from FX, Yes. It's a good question. Obviously, we're being careful we were careful obviously as we saw things, especially we saw FX starting to unfold as we went through August and got into September .
That plus just keeping our eyes on the macroeconomic situations, we have been very careful with cost. So far we're spending far below what our original plan was partially because of FX, partially because of the supply chain situations. We don't want our cost to get ahead of.
Where we are from a revenue and margin standpoint, so we're keeping our I'll say I'm keeping an intense keeping his hands on the chilled very carefully to make sure. We're managing those costs that said, we were going to keep prudently investing in the innovation and prudently investing in the transformation work that we're doing but we're being careful we're being very selective as we go and obviously.
Ensuring that we continue to show earnings performance and cash flow is important for us.
Great. Thank you I'll jump back into the queue. Thanks, Steve Thanks, Steve.
Our next question is from Josh Nichols of B Riley to be followed by Paul Chung Josh. Please go ahead.
Yes, thanks strong enterprise and consumer.
Consumer subscription adoption.
That continues to outpace despite what's.
It's historically been slower quarters, I guess I wanted to get a little bit better handle on the integrated solutions backlog I know that it's taken a little bit longer to work through than you thought.
Ending the quarter with $25 million.
<unk> is typically a seasonally strong quarter for the hardware business.
Based on the current guidance like what are you kind of implying as far as where youre going to end the.
For the year in terms of the backlog and how much of that is going to bleed into the first half of next year.
So maybe I'll take that one Josh so.
<unk> integrated solutions backlog is higher than than than Q2.
It did grow $5 million.
That said we are seeing.
Gradual improvement.
And our team is doing a great job managing through that.
We do have I would say.
Two areas that we're that we're driving to improve.
Conversion of that backlog to sales.
We are working hard at those areas too.
Drive that revenue by kind of mid 2023.
And it's going to take a few more quarters to.
Drive that drove that backlog to revenue.
But we do expect to have higher backlog at the end of the year than we initially thought.
A couple of months ago.
But we are confident about mid 2023.
That backlog will start to be.
We will start to be lower.
And just to clarify a little bit. So do you think that the backlog is going to be down sequentially in the fourth quarter or could it be.
Flat or up.
I think in terms of giving you I think we see gradual improvements the issue is we're seeing healthy demand.
So we are seeing improvement, but at the same time, there's a lot of demand so.
I think our guidance incorporates kind of our view on that but the positive is it's improving.
Take a.
A couple of quarters of resolve some of these certain support supply chain situations and by we think by mid 2023.
The supply chain just much better for us.
Okay.
And then thanks last question I mean, you clearly ramped up the companies.
Buying power here right with the new facility.
Unfavorable credit terms as well like I.
I guess, if you could talk a little bit more about the capital allocation strategy. Besides just stock buybacks, but potential M&A, what you're seeing in the market.
Are you getting a lot of prospects today or I'm, just curious what you're seeing on that front.
No I think.
We had an opportunity given the strength of the business our banks were interested in providing us more capital with no change in rates and favorable terms.
We believe in the long term model, obviously, Jeff and I are very excited about the prospects of the business and we continue to repurchase shares.
We were going to look at repurchasing shares versus just tack on M&A to drive accelerate our plan.
We have a great board to work together with in terms of partnering with us and we're going to do what's best for the interest of shareholders in terms of driving the right returns for the business.
Thanks, that's it for me.
Thanks, Josh.
Our final question from Paul Chung at J P. Morgan Paul. Please go ahead.
Hi, Thanks for taking my questions.
Just another follow up on the integrated solution can you talk about kind of the client.
Dynamics there.
Your competitors are kind of in the same boat. There. So is there any pricing power dynamic adjustments you can make.
And then I guess the second question on the results and free cash flow I assume thats, mostly from a backlog there.
Should we expect kind of more outsized.
<unk> in 'twenty, three and are there any other kind of inputs you see to drive that conversion and free cash flow next year. Thank you Hi, Paul This is Jeff. So first I'll take the first part of your question I'll, let Ken take.
A question on free cash flow side on integrated solutions, and our supply chain situation, where we have seen is that a lot of the more common components, which we were struggling with earlier in this year.
And some of the more common PCB availability that has gotten better or we redesigned around some of those shortages and gotten ourselves to more common components that can help us bring the supply up there are still specialized components. Some of our specialized components certain fpga's certain power supplies to certain designs that we have to work around.
A much more constrained environment, where we're getting a fraction of what we had hoped from a from a supply standpoint, we're aggressively working those areas, sometimes it's about waiting for the supply availability, but more times than not it's we're being proactive in doing a redesign.
Because we're just not willing to risk it and we'd rather have more choices in the in the even in the specialist components. We can get to a situation is getting better but there are still some issues around especially the more lower volume specialized fpga's.
Are there other specialty components for our products, so heading the right direction, but definitely not recovering as fast as we had expected.
But we are heading in the right direction some products have gotten back to production others. We're still we're still struggling to get the redesign is finished and getting the supply available for us.
And on the cash flow point.
Paul our cash flow for our software business is extremely strong remains extremely strong on the hardware side.
Obviously the.
The increase in backlog of unshipped orders as a headwind.
Because there are certain costs that still remain in the business and also we are building inventory, where we can.
Because of the healthy demand, we're seeing so we're kind of in a position where.
We're not shipping the revenue we are building inventory in certain certain components and we're waiting for those for those last components to come in to deliver that product revenue. So there will be an improvement kind of on the integrated solution side of the business from a cash conversion standpoint.
As we look at 2023.
I should say Paul sorry. This is Jeff I forgot to answer your question. Your question on the pricing side of it so as Ken mentioned earlier in one of the earlier questions we have.
Are using I wouldn't just say our pricing power I. Just think it's also that the market understands that costs are going up there is inflationary drivers on the on the supply side.
Including freight and component costs et cetera.
So we are using the opportunity obviously to position our pricing we have done a number of price increases already with academic couple of rounds of price increases some of that will show up as we start to ship products because some of the new orders have come in at the higher prices and so I think we'll see that continue to that and of course, just the volume increase will help really drive better margin profile.
For the integrated solutions part of the business, but yes. We are we are looking carefully at pricing had been taking a number of proactive actions.
Over the next over the last several months.
Great. Thank you.
Thanks, Paul.
All right that concludes the Q&A session I'll now turn it back to Jeff for closing remarks.
Alright, so thank you for your participation and your questions in closing I just want to reiterate that we believe we will continue to see healthy demand across the end markets for our solutions, including our growing subscription business and we are managing through the headwinds caused by the global macro conditions to enable avid to continue to achieve our company.
Strategy and our long term growth.
Profile and profitability targets as we move forward through 2022 and beyond.
I hope everyone has a wonderful evening. Thanks again.
Yeah.
Okay.