Q1 2023 Avid Technology Inc Earnings Call
Strategic focus on the music creation space and are gearing up for a very important product release plan for the second half, we announced a new pro tools program called Sonic drop which provide subscribers access to our monthly mix of new samples loops and instrument presets.
I am really excited about the new pro tools innovation that is coming from music creators and we look forward to unveiling. It later this year as we strongly believe that extending pro tools deeper and wider into the music creation space should drive meaningful acceleration in subscriber growth.
Adoption of enterprise subscriptions continues to trend very well, increasing our confidence in the growth trajectory of our overall subscription business and <unk> <unk> per subscription seek continued to improve as enterprise subscriptions becomes a larger portion of the business.
Two weeks ago at the <unk> show in Las Vegas, We announced a new agreement with Televisa and Univision to collaborate on moving the content production workflows across their portfolio of international media properties to Google cloud as part of their strategic innovation plans, enabling them to meet spikes in content demand and maximize cost efficiency by lever.
<unk>, our flex subscription offerings in the cloud.
I believe that this announcement offers another proof point of our market leadership and first mover advantage as the media industry is starting to move to cloud based workflows and SaaS solutions.
As I mentioned earlier, we did continue to see good customer demand and bookings for integrated solutions in Q1.
While integrated solutions revenue increased slightly this quarter to $28 7 million our backlog does remain elevated due to the remaining supply chain constraints and continued good demand and we ended the first quarter with a backlog of over $20 million.
Still expect to resolve the current situation over the next couple of quarters and expect to end 2023 in a more normalized state.
And as I highlighted before during the first quarter, we did experienced greater gross margin headwinds that we anticipated with our audio hardware products specifically gross profit on audio hardware was adversely impacted by temporary higher costs of producing these products as we worked through resolving the impacts of the macro supply chain situation on this spin.
Civic portion of our business.
The impact on the audio hardware gross profit did have a flow through impact to EBITDA EPS and free cash flow in the quarter.
As I discussed previously we are currently taking a further proactive cost savings measures and working diligently to mitigate the effects of the global supply chain situation on our business and drive the financial performance of the company.
Also back in April we announced the MTR X two audio interface that was very well received by the market, which replaces the current MTR interface that has been one of the products that have had significant component supply issues.
New MTR X, two which utilizes newer FPGA technology that is less expensive and has better availability expected to begin shipments during Q2 and should improve volumes and margins in this important product area.
While we experienced issues with our audio hardware. We saw continued success in solid financial performance with our strategic with our storage business.
New product offerings to new markets as well as the cloud and on Prem software subscription options that we now offer have driven sustained success in this area of the integrated solutions business.
Last month, we announced the availability of avid nexis cloud near line storage for our on demand SaaS offering, bringing highly cost efficient near line storage to cloud based content creation workflows as well as unveiling the new Nexis F. Two SSD storage solution for Ultra high resolution and Ultra high performance video workflows.
Both of which were very well received by customers and prospects at the recent Nab show.
Our enterprise subscription agreements are quite valuable for the company, especially with the multi year contractual commitment as well as the resulting uplift and increase the IRR that we are realizing this.
This has motivated us to accelerate the end of life of our remaining perpetual software license options, which is the right business decision for the company. So it does create a bit of a near term comparative headwind for us.
As a management team that is quite experienced and proven at navigating various macro headwinds over the past few years, we remain hyper focused on delivering improved earnings and free cash flow in 2023, and as such are proactively managing our cost structure.
As previously mentioned, we offered a voluntary early retirement program during the first quarter and along with other significant cost savings initiatives that we're executing on this quarter. We have confidence that we can offset the temporary margin shortfalls that were currently experiencing to help ensure that we stay on track to deliver on our profitability and cash flow targets.
For the year.
And we're making the right cost decisions to also protect and help self fund our strategic innovation and digital transformation as part of our long term growth plan.
Ken will offer some specific financial details on the additional cost savings plans that we're currently currently implementing during his comments.
Extending on my earlier remarks, we're seeing sustained strength in our opportunity funnel and sales pipeline and continued to see strength in our overall bookings in the quarter, which were up more than 20% year over year.
One of our global routes to market is through our channel partners and as we've talked about previously we have established an agreement called the strategic purchase agreement or SBA as a premium level of the avid reseller program, which is only available to our highest performing most engage and investment partners.
In the first quarter of 2023, we now have over 70 channel partners around the globe, who are on SBA and these strategic partners are playing a key role in helping drive strong bookings growth.
Now, let's talk about where we see things going forward from a business perspective.
We expect continued strength in subscription and an increase in IRR going forward as I mentioned on the call last quarter. We believe <unk> is really the right metric for investors to understand the real underlying growth trajectory of our subscription and SaaS business.
With our shift to subscription and SaaS, we do expect maintenance revenue to trend down over time. However, we do expect increased hardware shipments planned pricing adjustments and solid renewal rates to contribute to stabilizing maintenance revenue during the remaining quarters of 2023.
We will continue investing in innovation and digital transformation, which are important to our strategic growth plan, while very carefully managing our overall cost structure as I mentioned earlier, we will focus on self funding our growth initiatives through specific restructuring efforts and proactive cost management and controls.
As this management team has done multiple times previously we are committed to taking appropriate actions to deliver profitability throughout business cycles, and we're taking the actions to do so again as we navigate the current macro environment.
With an improving line of sight to resolving the current supply chain challenges, which admittedly have been a bit more stubborn to resolve than we anticipated. We do fully expect the supply chain conditions temporarily impacting audio hardware shipments and margins to gradually improve starting in Q2 and through the second half.
With the planned cost savings measures along with planned price actions to address our audio hardware concerns.
I am confident that we have the necessary action plans in place to mitigate these issues by the second half of 2023.
While we are taking a cautious stance for Q2, we remain confident in the overall performance and trajectory of the business and with the continued strength of our subscription business and bookings trends combined with the proactive measures, we're taking to manage costs in order to protect against near term macro headwinds. We continue to have full confidence in our long term growth strategy and the outlook.
For the year as I mentioned in my opening comments, we are reaffirming guidance for the full year.
So with that let me now turn the call over to Ken to review some of the financial details taken away again.
Thank you, Jeff and good afternoon, everyone.
The first quarter, we continued our strong performance in our core subscription business and growing our recurring revenue.
Our focus for the remainder of 2023 will build to further build our high margin subscription revenue proactively manage our costs and continue to stay on track with our long term model.
We expect these efforts to result in improving profitability as we move through 2023.
Given this we are reaffirming our annual guidance for fiscal year 'twenty three.
With that let's now turn to the details of our first quarter financial results.
Annual recurring revenue based on the <unk> of subscription and maintenance bookings was $247 million in the first quarter, an increase of $19 million or 8% year over year, and 9% year over year at constant currency.
Growth in <unk> was due to subscription <unk> growth of 30% as we continue to convert maintenance customers to subscription revenue at healthy uplift, while adding new customers.
Constant currency subscription <unk> increased 31% year over year.
Additionally, the unshipped integrated solutions backlog, which was $20 million at March 31 negatively impacted the maintenance IRR as the unshipped orders would've contributed about $2 million to maintenance <unk> negatively.
Negatively impacting our growth by 1%.
Absent this our <unk> growth would have been in excess of 10% year over year at constant currency.
We continue to focus on growing our recurring revenue from subscription maintenance and other revenue under long term agreements to drive greater predictability in our business.
As of the end of the first quarter LTM recurring revenue was 85% of total revenue up from 79% a year ago and in line with our long term model.
Now, let us look at the results of the first quarter of 2023, beginning with subscription.
We are encouraged by the continued growth of our subscription base.
Our total active paid software subscription count reached approximately 526700 at the end of the first quarter, an increase of 22% year over year.
Creative subscription growth was healthy and solid and enterprise subscription performance in the first quarter continue to exceed our expectations.
We added approximately 13300, new creative subscriptions for a growth of 14, 8% year over year led by a sequential increase in both pro tools media composer net adds and continued growth and Sibelius.
We now have over 100000 media composer subscriptions and important milestone for the company.
Overall, we are highly confident in the consistent growth of our creative tools subscription business.
But expect to see strong improvement in license growth in revenue in the second half with the introduction of our music creation applications in pro tools that Jeff mentioned earlier.
Moving to our enterprise business media Central subscriptions grew to approximately 53300, an increase of about 7400 during the first quarter representing year over year growth of 176%.
The increase in enterprise subscriptions furthers, our confidence in the transition of our existing customer base to subscription.
We believe we have converted about 40% of media central maintenance customers to subscription as of March 31, and still have a large opportunity in media central ahead of us plus over $40 million of storage video server and graphics maintenance that will move to subscription over time.
As our enterprise subscription business continues to become a more meaningful part of our subscription mix.
It is continuing to positively impact our overall price per seat.
As the price of our enterprise seat as a multiple of the price per seat of a creative seat.
The impact is helping to drive a six 7% year over year increase in subscription <unk> per active paid software subscription.
The consistent growth in the number of paid subscriptions drove continued growth in subscription revenue during the first quarter, which reached $39 4 million an increase of 19, 5% year over year and 21, 2% on a constant currency basis.
Yes.
Now moving to subscription plus maintenance.
During the first quarter maintenance revenue was $22 6 million down 20% year over year.
Many maintenance contracts are renewed around year end, we have seen an associated decline in software maintenance from Q4 to Q1.
As we continue to successfully convert our enterprise customers to subscription offerings at healthy uplift in excess of 150%, we expect to see a reduction in the related software maintenance revenue from those customers.
However, we expect hardware maintenance revenue to improve due to the price increases plus expected higher hardware revenue and associated maintenance beginning in the second quarter.
As we expect our backlog will be depleted to normal levels by year end.
As a result, we believe total maintenance revenue will be stable at $22 million to $23 million per quarter for the remainder of 2023.
Supported by the current $97 million in maintenance <unk> at the end of Q1.
Okay.
Total subscription and maintenance revenue increased year over year by one 2% in the first quarter and four 1% on a constant currency basis, driven by the strong subscription performance offset by the decline in maintenance software and temporary headwinds on maintenance hardware that should reverse going forward.
Our subscription and maintenance gross margin was 85, 9% in the first quarter up 320 basis points year over year.
Okay.
Now, let's look at our integrated solutions performance.
In the first quarter integrated solutions revenue was $28 7 million an increase of one 8% year over year as we continue to work through the remaining supply chain issues that have hindered our audio hardware production capacity we.
Ended the first quarter of 2023 with $20 million of contractually committed backlog at March 31.
Our integrated solutions gross margin was 29, 2% in the first quarter down 200 basis points year over year.
As Jeff said, although we made some progress in resolving the supply chain challenges, we did see an impact on audio hardware gross margins in the first quarter.
Approximately $1 5 million of the year over year gross profit decline was due to purchase price variation in the cost of components for audio hardware.
$1 1 million was due to the shipments of audio hardware in the quarter from age backlog at old sale prices, but higher components costs.
And 900000 was due to a higher mix of lower margin audio products in the quarter and higher production costs.
Together these impacts caused a $3 $5 million year over year gross profit declined in the quarter, which flow directly to operating income and EBITDA.
We are driving additional pricing decreases to recapture margins, including surcharges on aged backlog and we expect to see an improvement in our key component costs.
As a result, we are highly confident that our integrated solutions gross margins will improve in Q2, 'twenty three and get back to more normal levels of 40% plus in the second half of the year.
Now moving to the rest of our revenue.
Perpetual license revenue was a half a million dollars in the first quarter of 'twenty three a decrease of 89, 5% year over year as we continued to deemphasize perpetual software and moved to subscription software as we execute our plan to end of life perpetual solutions.
The large amount of perpetual revenue in the prior year made our year over year comparison more challenging in Q1, 'twenty three but moving forward as the amount of perpetual revenue in our prior year periods will be much less of an issue for year over year comparisons going forward.
In the first quarter, our professional services and training revenue was $6 5 million, an increase of nine 4% year over year, and 12, 5% year over year on a constant currency basis.
During the fourth first quarter. We also continued to make progress with our projects to make our solutions available on AWS and Google Cloud, which continues to track to our plan.
Now, let us look at the rest of our results for the first quarter of 2023 <unk>.
Total revenue in the first quarter was $97 8 million down two 8% year over year and flat at constant currency, reflecting the strong performance across subscription as well as the perpetual decline.
non-GAAP gross margin was 64% for the first quarter down 280 basis points year over year and down 180 basis points at constant currency.
This was due to the decline in integrated solutions gross margin despite strong margin improvement from our strategic subscription and maintenance revenue as discussed previously.
non-GAAP operating expenses were $52 2 million in the first quarter.
$2 $5 million increase year over year.
As part of our efforts to control our spending while preserving our ability to invest in high growth areas. We have taken several actions.
During the first quarter, we implemented a voluntary early retirement program, which is expected to reduce costs by approximately $2 million in fiscal year 'twenty three in the second quarter. We are implementing a restructuring was which is expected to reduce costs by an additional $13 million in fiscal year 'twenty three.
As a result of these actions and other cost savings efforts, we expect our operating expenses to decline in the second half of 2023, resulting in operating expenses of approximately $215 million for fiscal year 'twenty three.
There is buy in across the entire senior management team on managing our cost base, while protecting investment in our subscription business to drive improved profitability and long term value creation for our shareholders.
Adjusted EBITDA was $12 7 million in the first quarter down $6 $5 million year over year, reflecting the lower gross profit from integrated solutions and higher operating expenses as discussed.
Finally, non-GAAP earnings per share was 15 <unk> for the first quarter.
<unk> 18 year over year, reflecting the lower adjusted EBITDA and higher interest expense due to increase in base rates.
Free cash flow was negative $6 5 million in the quarter down $11 million year over year due to the reduction in adjusted EBITDA and.
And higher inventory to support the planned increases in integrated solutions shipments starting in Q2, 'twenty three plus timing of receivables collections at the end of the Q1.
We ended the first quarter of fiscal year 'twenty three in a strong financial position with net debt to EBITDA of two one times.
As discussed during our fourth quarter and fiscal year 2022 earnings presentation on March one.
We'll continue to invest in our growth initiatives to drive our subscription revenue.
But we'll be very prudent in our overall expense management to improve our free cash flow in 2023 <unk>.
Also we expect working capital to be more of a benefit in the second half of 2023.
Which should assist free cash flow along with the improvements we expect to see in our profitability.
Finally, we continue to execute corporate actions to enhance long term shareholder value during the first quarter, we repurchased 16000 shares for $400000, reflecting an average price of $26 74 per share, bringing the total repurchases to two 9 million shares or $78 4 million.
Under the $115 million authorization.
We will continue to deploy capital prudently in the most responsible way to drive long term shareholder value.
Let's now turn to guidance.
As Jeff said, we are confident in the underlying strength of our business.
We expect continued strong growth in our subscription business and a positive trajectory given the strength in our bookings for the last two quarters.
Additionally, with the improvements in our cost structure, we expect to see significant growth in profitability and cash flow in the second half of the year.
We also continue to expect to see gradual improvement in the integrated solutions gross margins beginning in the second quarter of 2023 that will eventually return to 40% plus margin levels in the second half of the year.
In terms of guidance for the second quarter of 2023, our guidance is as follows.
At the end of the period of $246 million to $251 million.
At the midpoint this reflects 8% year over year growth and approximately 30% year over year growth for subscription IRR.
Sequentially. The <unk> growth is slightly ahead of Q1 2023.
Total revenue guidance of $101 million to $111 million at the midpoint. This reflects eight 5% growth year on year.
Adjusted EBITDA guidance of $13 million to $20 million.
And non-GAAP earnings per share guidance of 15 to 30, assuming $44 1 million shares outstanding.
At this time, we are also affirming our guidance for full year 2023 that was discussed during our fourth quarter and fiscal year 'twenty two earnings presentation on March one.
Our guidance for 2023 <unk> at the end of the period remains $270 million to $280 million, a range, which represents year over year revenue growth of 12, 3% at the midpoint.
We believe <unk> will accelerate in the second half with improving growth from pro tools continued transition of media central maintenance customers to subscription.
<unk> of our first cohort of media Central <unk> enterprise customers, a positive uplift in the second half of the year and.
And a rebound in our hardware maintenance revenue.
Our guidance for 2023 total revenue remains $447 million to $472 million, a range, which represents year over year revenue growth of 10, 1% at the midpoint our.
Our guidance for 2023 subscription and maintenance revenue remains 292 million to $302 million of range, which represents year over year growth of 13, 7% at the midpoint.
Our guidance for 2023, adjusted EBITDA remains $95 million to $105 million.
Our guidance for 2023, non-GAAP EPS remains $1 53 to 102 to $1 75, assuming 45 million shares outstanding.
And our guidance for 2023 free cash flow as adjusted remains $50 million to $60 million, which includes $7 million in cash restructuring charges. Our 2023 free cash flow guidance reflects the improvement in profitability and an improvement in working capital slightly offset by higher cash interest expense due to higher base.
<unk> and restructuring costs with that I'd like to turn the call back to Whit.
Thanks, Ken Thanks, Jeff.
Slight correction share count for the EPS guidance for the full year is 44 zero million.
Yeah.
That concludes our prepared remarks and we.
Now happy to take questions. Please limit yourself to one question and one follow up.
Our first question is from Josh Nichols with B Riley to be followed by Terry Tillman Josh. Please go ahead.
Okay.
Yeah.
Hi, Thanks for taking my call Josh we can hear you now good perfect got it.
So I mean, clearly you're working through a couple of lingering issues on the hardware side. It sounds like you expect that to ramp up.
In <unk> into the rest of the year, but subscription revenue growth has been quite resilient here I'm wondering if you could elaborate a little bit.
You have this new.
Pro tools offering thats going to support that growth acceleration in the second half.
So anything thats coming on the SaaS front.
<unk> is going to be driving accelerated growth, whether thats work with AWS or anything else. If you could give us a little bit more color on that yeah, Hi, Josh This is Jeff.
So yes actually it was a few things others, the we haven't announced it yet but there we have at least told the market as you know that there is a new innovation coming around pro tools for music creation that is going to announce in the second half and will have impact in the second half.
And especially in that music creation space, where a lot of the work that we're doing now with some drop in some of the new like grew seven seven play so.
The work, we're doing like on the hearing with the artist protocols artist all of that is basically readying the.
Plainfield for for what we're going to launch here in the second half. So that's that's going to help US protocols is already performing quite well I think that's going to give us another boost and lift in the second half. We also do have more things coming around our subscription offerings on the enterprise there is new releases and media central on some <unk>.
Applications of our modules coming with that there is.
We're extending more with a we just recently showed a preview of a subsequent call stream Io. We're also doing some new things around storage subscription and that includes some of the cloud deployments I can't give you specifics on I'm not allowed to give specifics yet on cloud by cloud, but let's just say that that is that is all coming in the numbers. So we have a number of things that's going to help.
US in the second half and we're looking forward to that.
Well to answer the question.
Jos I should say one more thing there also as we have tech pre million I just remembered we can say something because it was tech previewed at Nab.
Is and we know we have added on demand right now we do have a more expanded version.
We call production on demand or avedon demand, we haven't nailed the name, but we did it we didn't show it in preview at <unk>. So I can't talk about it and that is coming out before the end of the year also.
And that's a that's a very much enhanced SaaS offering.
Thanks, Josh next question is from Terry Tillman at Truest to be followed by Paul Chung Terry. Please go ahead.
Yes, Thanks, Jeff Kennon with.
Can you first of all can you hear me Okay. Yes, we can Terry perfect. Eric You said I can have a question on a follow up one of these questions may potentially there must be a two parter, but I'm going to I'm going to give it a go.
On for Jeff One thing I'm curious about is it sounds like youre going to have your first cohort cohort of media central renewals in the second half of the year, So sounds like an important milestone.
Are those conversations going and what kind of visibility do you potentially have around either product or subscription expansion and then the second part of this first question is was the 20% bookings growth about where you expected or above your expectations love. Some color on that and then I had a follow up for Ken. Thank you, yes, perfect Hi, Jerry so.
On the question regarding the cohort cohort does start in the in the second half. It's Nir is late Q3 and into into Q4. The customers that are in that cohort, we know them pretty well they are very stable and sticky customers I believe.
Those discussions are just starting so I wouldn't want to get ahead of it just talking about what precisely expect but we've got a pretty good handle on what we believe is possible and what is likely in the in the opportunities for those customers. So I'd say for us. It's a good thing coming and we're excited about it.
So I wouldn't want to get ahead of that obviously also on a public call.
I think on the.
In General I think that's kind of where we see it on the bookings trends it was a little bit better than we expected initially.
It's driven a large.
What about our strategic purchase agreements, which are with some of our biggest end and let's.
Let's say highest performing channel partners, they really had a heavy hand around the around the world and driving growth through their their programs and so we're really seeing some great performance from those partners and it did perform a bit better than we'd expected. So it was nice to to start the year.
With that.
The gate certainly and then Ken just a follow up. Thank you just as a follow up Ken is just on free cash flow and not trying to pin you down to something like pinpoint but.
Is it a positive free cash flow in <unk> or is it just going to be a modest burn just trying to I know, it's clearly going to get it's supposed to get better in the second half, but just trying to kind of bridge <unk> to the second half. Thank you.
Yeah. Thank you Terry for your question, we expect it to be a modest burn in the second half, we expect second quarter than the second quarter.
We have.
Obviously built up some working capital and inventory.
And we did announce our cost.
Reduction in costs in our cost plans, but we're only going to get a partial.
Savings of that in the quarter, because theyre going to be impacting really in mid may.
So cash flow will be much.
Much stronger in the second half of the year and that's historically what Abbott is delivered.
Just given the seasonality.
In terms of some of the business so.
The cash flow generation will be more in the second half second half of the year.
Yes.
Thanks Terry.
Our next question is from Paul Chung of Jpmorgan to be followed by Jack Vander Ark. Paul. Please go ahead.
Alright. Thanks, Thanks for taking the question. So just wanted to follow up on the guidance can you talk about the confidence to kind of reiterate.
Fiscal year 'twenty three guide what are some key drivers that could maybe provide some upside there and.
And is the variability mostly on the hardware side, that's causing.
Some uncertainty and then.
Where are you seeing maybe some step ups in subscription maybe across enterprise. It gives you more confidence.
Yes, so why don't I take it and then Jeff can follow up so we feel really highly confident in hitting the 2023 guidance.
Given the bookings strength that we have and the plans that we have for improving our audio hardware margins and the improvement in the operating expenses.
So I think that's in general in terms of the revenue we have talked about the improvements that we can that we're going to have in our creative tools business with pro tools.
That will drive additional revenue and we will then have additional revenue growth in media central.
From continued new customers and converting the existing base plus renewing the cohorts plus additional revenue in storage.
And servers, whereas those move to subscription so we feel good about the revenue growth in subscription and strategic revenue.
We also have the backlog that will be shipped in the second half of the year, So that will drive the the revenue towards.
The mid point.
The guidance levels that we have to achieve the higher end, we need to have probably over perform on the on the pro tool side or have better.
Uplifts on the media central given those are two of the biggest revenue components in subscription.
As that drives.
The growth that will that will drive improving gross margins for the company.
And with the Opex that we have a clear line of sight to we.
We feel really good about the the EBITDA generation based on that revenue growth.
That will be incremental to what we see.
Today in the first half so we have a clear line of sight to the improvements in the P&L that will that will allow us to hit the guidance and then generate the positive free cash flow from the improvement in EBITDA and working capital as we go through the year great. Thank you. That's very helpful. And then a follow up just revisiting.
The long term growth model to 2025.
Where do you think we are on plan across the segments and where do you think we can see kind of a better improvement in your view across the line items and that's it for me. Thanks.
Yes, I think in general the.
We continue to be if you think about the top line revenue we continue to be.
In line with the long term plan with the creative subscription growth.
Kind of being in the 25% area.
We expect to achieve that.
As part of as part of as we look out given the innovations and the creative tools and the large Tam that we have in both pro tools on enterprise subscription we have a lot of maintenance to continue to convert and media Central and are also are our.
Storage servers and graphics products that will go to subscription. So thats. All all ahead of us So we expect that to.
To continue to deliver on our enterprise subscription, which has been which has been.
Good.
Growth engine for the company.
So those two areas, we feel very confident on.
And we expect those will drive higher gross profit margins as we look out and.
Our ability to get a little bit of operating leverage in the cost base as we drive that growth.
We expect to see improving EBITDA margins over time, so we feel really good about the long term plan.
<unk>.
Obviously Q1 was a little bit of an issue on the audio hardware, but we expect to recapture that lost margin as we think about the second half plan.
I think I would point you just asked the question about.
The opportunity to reform, we were as we communicated at Investor Day, we were more careful and prudent about our SaaS projections.
The timing really understanding the timing of the industry's transition we've been careful with that so.
I'd say, that's probably an area where as the industry progresses, we will be able to look at that very carefully and see how we can accelerate that further but we wanted to see how that plays out over the next year or so.
Great. Thank you.
Thanks, Paul.
Our next question is from Jack Vander Ark at Maxim to be followed by Hitachi Jack. Please go ahead.
Hey, guys can you hear me, Okay, Yes again Jack.
Okay great.
I appreciate the update it sounds like you're doing a good job navigating the.
<unk> macro environment with that to maintain 2023 guidance.
So good job there.
Enterprise subscription conversions it sounds like about 40% are converted so still a lot of runway there.
Jeff can you talk about what Youre hearing from your enterprise customers that are not on a subscription model currently and kind of what sort of percentage of them sound like they're they're looking to convert.
In the near term thanks.
Good question, Jack and how you can talk to you.
Naeem.
The amount that we've converted on a revenue basis is obviously in the numbers you spoke about.
A number of customers.
It's a smaller number have converted because it's the larger customers who are in the more sophisticated larger customers have gone first in many cases.
We're now working we still have some larger customers to go but we also are working down through more what I'll call, the small and medium sized businesses and that.
That is a heavier channel play.
We do in that space, and we're working hard to really enable and get our channel really capable and subscription.
Growth in subscriptions and our channel is one of our faster growing segments and subscription. So we are really working hard to enable them and get them very good at subscription conversions I'd say, so far I would just add.
I just came back from <unk> and I think I think most enterprise customers understand that the world is a subscription economy now and they already have subscribed to Microsoft office or S FTC or.
Payroll systems I mean, it's pretty common today. So we don't really get a lot of pushback I think it's just more going through the sales motions that our teams have to do around the world to convert customers to time things with that customer's needs.
It is a software upgrade when they move to the new software subscription. So it's really more timing around our customers and projects, but I think people like the value, they're getting from our subscription offerings and the flexibility that they get and we have a lot more planned in value that we're putting into our subscription offerings over the coming not just this year, but even as we go forward to.
For the coming years.
I hope that answered your question Jack.
Yes, that's great color and just one more for me on the creative tool side.
Sounds like that continues to grow well pro tools media composer and even rebellious returned to growth I think I heard.
Can you just talk about the premium models.
I guess with with pro tools, and maybe even media composer.
Can you talk about the conversion opportunity there and I think last quarter. You mentioned is very encouraging outlook and I'm just wondering if theres any updates there.
Sure Ken Jack So let me put them in two buckets on the media composer side that product as you know we're not trying to compete in the real down market opportunities, we leave that to other players in the space, where really the tool used by professionals and in media companies and in that space. What we did announce something which you probably saw the press release.
<unk> from a few weeks ago, we announced our we've moved our student program for media composer, just we've talked about many of those are here to a free student program for any student or teacher for their own individual use that not necessarily the institution, but we do have a program around the institution also will give a free for students program that.
Launch, that's gotten really rave reviews and the whole goal of that is really two.
Quickly grow the funnel, even larger for people, who are coming out of school and they know our tools. So that they can get hired into the enterprise customers that really is a play into our enterprise customer market not just our large enterprises, but small to medium size businesses up to large.
On the music or music site audio side pro tools Sibelius have.
Premium products <unk> has first and pro tools has what we call intro.
New.
New interim product from <unk> is the new product. This is where we when we retired the whole pro tools product range back in.
Spring summer of last year last year April last year about a year ago.
We brought the <unk> product in last summer I think last numbers weren't delivered.
And that product has so far the downloads were getting and the conversion we were getting from that product have been very very successful I will say. This intro is also part of our strategy around music creation. So this is a lot of the groundwork youre seeing from us the intro product the artist price points all of the new place outgrew sales since the <unk>.
Sonic dropped program all of the work that we're doing even some of the features and functions we have been bringing into pro tools is.
All laying the groundwork for what is coming in the second half with our new.
Let's say innovation around music, so, but we're like what we see in the conversion.
In the past we produced first has been a great performer for US we think.
<unk>.
And that can be an even more important acquisition tool for us on that end and Sebelius continues to.
Performed well in that regard.
Fantastic I appreciate the color. Thank you, yes, thanks Jack.
And our final question is from <unk> <unk> at Northland.
Go ahead now.
Thank you can you hear me, yes, I can.
Alright, great.
Alright, so 20% year over year bookings growth Thats, a really strong number, especially given the macro.
How does that compare to the year ago period.
Yes.
I don't think I've got that number right in front of us.
The growth in bookings growth in Q1 last year versus a bookings growth this year.
Yes, I just want to make sure it's not off of an easy comp basically.
I don't know I don't think its off of an easy comp would not be that.
I don't have the precise number in front of us. So we can get that to you.
Neil.
Okay great.
And what are your expectations on that bookings growth at the beginning of this quarter.
I think.
My expectations and the forecast there are places we had was to have let's say low to mid double digit growth. It definitely outperformed our expectations on that regard it was it wasn't bit better.
And what was the driver of that outperformance to and again back to back to what I said earlier. It really I mean, there was a different era areas, obviously subscription generated because theres always a bookings were subscription, but it was really subscription bookings and it was a lot of.
International business, driven in international and domestic business driven through our strategic partners that are part of our SBA program.
So our direct business did well but.
A lot of that growth was driven from our strategic channel partners and from our subscription business overall.
With the strategic channel partners those subscription bookings what type of duration is that typically.
Alright, okay.
So it typically three years to be the sweet spot for an enterprise subscription.
We're doing well.
Or on.
On the creative side.
Okay.
And so what I'm trying to get into here is there a total incremental <unk> that was up only $2 million versus $6 million a year ago. It seems like the driver of that lower incremental air are subscription.
So I'm just trying to reconcile this strong subscription bookings with what appears to be a weak incremental subscription <unk>. So.
Can you help me bridge that well I think when I look at the IRR.
It was the maintenance.
<unk> that was more of a challenging Q in Q1.
Subscription IRR was over 30% growth.
And it was the maintenance IRR that.
What was weaker.
And when we looked at it when you think about the components of it the audio hardware challenges that didn't drag maintenance.
Was it was a was a driver.
So I think that's really where that where the challenges are subscription IRR actually performed well.
Got it Okay I guess.
Typically you look at the year over year growth as opposed to the absolute dollar pure Q AOR growth as your key performance indicator.
Okay.
So I look at <unk> growth and year over year subscription growth.
Our growth is what we think is the best indicator for the health of the business that was over 30% and we expect that to be on a year.
Similar yeah on the <unk> basis, we expect that to be similar in Q2 for my comments.
We did drive sequential and we track it sequentially as well, but I'm, just giving you the year on year comparison.
If I can add just to make sure I agree with subscription <unk> was performed very very well. So it's got nothing to do with the subscription growth profile don't.
Don't forget too that there is a timing issue as we're converting people from maintenance to subscription you got to be careful trying to do precise quarter quarter to quarter comparisons because there is timing of when people come off maintenance and when they go on subscription so I would be a little careful on how that flows into that.
That's why we got to look at it more broad metrics.
Okay.
I might just one other question I guess I'm the last person here anyhow.
Any thoughts on the impact of this writer's strike is it do you think it's going to prove to be long long duration and if it is then was a potential impact in terms of production.
Well its good question.
I'm someone who.
I wasn't in this role, but I was a leader in this industry.
Back in 2000, 17008, so I did live through that that previous Writers' strike, which was I think 100 days.
Back then I'm not going to predict I don't have a crystal ball and I don't want to predict the duration of the writer's strike hopefully it's shorter than longer.
I think what I can say from experience in watching this happened before.
It can cause a near term headwind as people start to delay purchases or upgrades or it's interesting.
I saw some people back in the previous strike do all their upgrades during the strike because it had downtime to do it and then other people pushed off their purchases because they wanted to deferred cash investments or whatever in that time I will say that what what I saw then and what we expect to see now is if there is any deferrals they will come back in the year.
I don't expect this to be a year long strike.
Heavily doubt that's what's going to happen again, I want to predict but I don't think its going to be that kind of a period.
But I think whatever we see in any deferrals et cetera. They will they will return in the year because the needs the capacity needs are still out there in the markets.
May be some deferral as part of the reason that in the supply chain.
<unk> headwinds is the reason, we're taking a little more cautious stance on Q2.
How long does it take from a scripts being written.
It impacting post production needs, where you guys are really playing here.
Now that depends on the type of programming it can it can impact a nightly.
Late night show in one day it can impact the streaming show in a few weeks to a couple of months it depends on the type of production the production schedule. How many scripts are already they've already got in there in their pocket.
That's not I don't think there is a precise.
Subscription to that.
It's anywhere from days to weeks, usually I would say roughly.
Great. Thank you.
I'll come back to you on your bookings question. So first bookings as Jeff pointed out was up 20%.
In terms of Q1, we.
We had $15 million of year over year bookings growth versus the prior Q1.
And of that $15 million a growth of $11 million of it is in the subscription business.
So I hope I just wanted to give you the commentary earlier on the call.
Yeah. That's awesome, that's very helpful. So that fits very nicely with the $8 million Q acute increase in subscription are then correct.
Awesome great. Thank you.
Thanks, Neil Thanks Neal.
Alright, so that concludes the Q&A session.
We want to thank you again for your participation Tonight and all your questions have a great evening. Thank you you may disconnect.
They are recording has stopped.