Q2 2019 Earnings Call
Thank you operator, good afternoon, everyone and thank you for joining us today Rabid technologies second quarter 2019 earnings call.
My name is Apple added technology ever technologies, Vice President corporate development and Investor Relations.
With me. This afternoon are Jeff Rosica, Chief Executive Officer and President.
And Ken Gay, Ron our Chief Financial Officer and VP.
In their prepared remarks, Jeff will provide a strategic overview of our business and then Ken will provide a detailed review of our financial and operating results.
Followed by time for your questions.
We issued our earnings release earlier this afternoon, and we have prepared a slide presentation that we will refer to on this call. The press release and presentation are currently available on our website at IR Dot added dot com.
And the replay of this call will be available on our website for a limited time.
During today's call management will reference certain non-GAAP financial metrics and operational metrics.
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 measures used on this call and in the presentation.
Unless otherwise noted all figures noted by management during this call our non-GAAP figures.
In addition, certain statements made during today's presentation contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward looking and that pertain to future results or outcomes.
Actual facts future results or occurrences may differ materially from these forward looking statements.
For more information, including a discussion of some of the key risks and uncertainties associated with these forward looking statements. Please see our press release issued today and our 10-K for the year ended December 31, 2018 as filed with the SEC.
With that let me turn the call over to our CEO and President Jeff Rosica for his remarks.
Well, thanks, Whit and thanks, everyone for joining us today.
Average Q2 results show that we did face slight revenue headwinds due to some constraints from our supply chain transition.
Were taken into account in our cautious Q2 outlook noted in our Q1 earnings call, which did bring our results in at the lower end of our guidance that said in spite of these challenges were actually in the first half fully in line with our own internal planning and I'm pleased that avid is entering the second half better position than we have been in many years.
Today, along with the CFO can gain Ron will discuss the factors in our performance and the consistent indications of average strategic plans and business execution have us on a good trajectory for the second half and the full year. We'll also review progress on our major operational initiatives the success of new product introductions and momentum with customers and partners.
So let's start with my Q2 observations.
Despite revenue headwinds that we encountered during the quarter impacted our results yet we're confident these factors don't change what we see as a company is improving longer term trajectory no. Our view of the full year 2019. In fact, we're continuing to see significant year over year growth in average key financial metrics, including adjusted EBITDA and free cash flow and net income per share in Q2, both revenue and gross margin were up year over year, but only fractionally.
Towards the end of Q2 as I, just mentioned because of our supply chain transition, we did face some constraints due to order timing and product mix, which kept us from fulfilling orders for certain audio and video hardware products.
Our continued strong growth in software subscriptions and the addition of new and extended long term agreements during Q to give us confidence in our performance trajectory.
We also continued to realize additional benefits from our smart savings initiatives and have achieved 13 million in opex savings on an annualized basis as of the Q2 close.
We are looking forward to achieving the remaining $7 million in Cogs savings in 2019, as we realize the benefits of our supply chain transition.
ABS is now completed the exit from our former supply chain partner in Asia, and we're presently ramping up production at our new partner in the Americas.
Inventory on hand will bridge to the new supplier and we are prioritizing, bringing up the production lines. According to forecasted demand.
We will have to carefully manage this process as were seeing strong demand in certain audio products that could create some constraints as we ramp up.
While we have encountered issues that can be typical when undertaking such an extensive transition we are starting to achieve our targeted cost savings and reduction in inventory and don't anticipate any short term disruptions. If any are encountered in the near term would change our outlook on a full year basis.
We've also continued to make significant progress in our work with large media companies and studios to support their own efficiency initiatives, bringing their crucial workflows into the cloud, including remote editing backup of work in progress archiving and disaster recovery.
As discussed last quarter the solution for these major reference customers include our cloud based Mediacentral platform and Nexus cloud storage, which are running on the Microsoft Azure cloud.
While the revenue from these projects was small in Q2, we're looking forward to the revenue to ramp up in the second half of the year and beyond as we continue to bring more of these demanding media workflows into the cloud for these and other clients.
Additionally, avid has recently secured additional long term agreements with major customers and partners.
Among these is the renewal in early July of our multi year agreement with the organization that produces the live television radio and digital coverage of the most watched international sporting events.
Disagreement continues a successful relationship between our organizations, which started back in 2012 and last until the summer of 2022 to provision production capability and services to support their international summer and winter sports events that are broadcast globally.
Separately also Abbott I have it also signed a new strategic purchase agreement with Q in Q2 with one of the largest you to Usthree tellers of avid music and pro audio products.
Now turning to Q2 performance. We believe avid continues to demonstrate overall that our improvement plans and strategic changes are making a meaningful impact on our profitability and cash flow.
Revenue was basically flat year over year in Q2. It benefited from continued growth of our software subscription business, which was up 17% year over year in the quarter and from certain hardware products, including live sound and storage.
However, as discussed earlier revenue was slightly impacted by supply chain constraints.
E Commerce and software subscriptions also continued to make major contributions in Q2.
Revenue from E Commerce activities grew nicely and was up 19% year over year in the in the quarter software subscriptions continued their strong trend and paid subscriptions surpassed 147000 at the end of Q2, which is up 40% year over year.
Gross margin improved only slightly year over year. During Q2 gross margin was negatively impacted from an adverse mix as the large high margin storage deal, which was discussed on our Q1 call did not repeat during Q2 as we had expected while certain lower margin audio and video hardware products were stronger in the quarter.
We're happy with the overall positive trajectory of gross margins and expect to see additional improvement in margins during the second half from shipping new higher margin products normalization of the product mix and realization of savings from our supply chain transition.
Haven't delivered improved profitability in Q2, as our operating expenses were down significantly due to the success with our smart savings initiatives, we realized strong year over year adjusted EBITDA growth of 78% and had a positive net income per share in the quarter.
Finally, thanks to the improved cost structure and strong execution overall, we delivered improved free cash flow generation during the quarter versus the prior year.
Although to remind you Q2 cash flow was seasonally weak and included the normal 2018 bonus payment as well as expenses for our and they'd be show and connect events.
Overall run a good performance trajectory with consistent improvement in the key financial metrics of revenue adjusted EBITDA free cash flow and net income per share.
Additionally, on the last 12 months basis, we're showing significant improvement in all of these metrics.
We're encouraged that we're exiting the first half of the year on a trajectory to achieve our full year guidance as we enter the seasonally stronger second half coupled with an improving sales pipeline and a more efficient cost structure.
Looking forward, we remain optimistic for HD, who as we begin to realize the benefit of new products that we expect to drive growth later in the second half and beyond.
We also anticipate completing our smart savings initiatives and fully realizing the benefit in the second half.
The entire Opex portion is essentially complete and now we are well positioned to realize the benefits in Cogs from ramping up Ilene based supply chain over the next several months.
Also avid.
Is intensifying focus on delivering a consistently profitable and predictable financial model built on growing recurring revenue driven by our growing subscription offerings and our long term agreements strategy.
Importantly average product innovation is on a strong accelerating pace with several recent strategic introductions in video software and integrated solutions for pro audio and music.
Our all new media composer 2019 dramatically strengthens our category leadership and better positions us to capture the emerging generation of film and TV editors and video creators.
Our next generation cloud enabled platform Mediacentral 2019 addresses the needs of small to medium size media organizations have been seeking multi site collaboration and greater connectivity for their news sports and post operations.
Both of these software products started delivery in late June .
In the second half Avenue will begin shipping new audio mixing products. The Abbott S. One and have it as four which bring the power of our category, leading higher end systems within the reach of smaller studios and independent creators.
Our latest introductions have all been very well received by media creators globally, and we are already experiencing pipeline improvement for the second half based on the new product momentum.
In summary averages continued to focus heavily on optimizing optimizing our operations and driving technology and product innovation in order to support more profitable and sustainable growth and thus deliver greater shareholder value, but we're really just getting started.
So with that let me turn the call over to Ken to provide details on our financial performance for Q2 go ahead Ken.
Thank you, Jeff and good afternoon, everyone.
As noted above Jeff and I are referring to non-GAAP figures unless noted.
For those new to avid seasonality impact sequential comparisons. So it is important to look at our year over year comparisons to assess the performance of our business.
As Jeff outlined earlier, we're making substantial progress on our initiatives to improve our financial performance.
While we continue to see year over year improvements in adjusted EBITDA and free cash flow, we face certain revenue headwinds during Q2 related to our supply chain transition that brought our Q2 results at the lower end of our guidance.
With that said our first half results for 2019 were inline with our plans and we enter our second half with a strong foundation to achieve our 2019 annual guidance.
Let's now get into the details.
Turning to the income statement GAAP revenue revenue of $98.7 million for the quarter was fractionally up $100000 year over year.
We continue to see good growth in our e-commerce and subscriptions business for pro tools media composer and some bayless and had a strong quarter in our Mediacentral perpetual software business.
Additionally, we saw a favorable growth in our audio business related to our lives sound product lines.
But we had lower maintenance revenue in the quarter with our continued shift in our business model from perpetual to subscription.
Gross margin was 59.4% for the quarter up 20 basis points year over year.
The Q2 increases due to 140 basis point improvement in our software license and maintenance margin offset by a 170 basis point decline in our hardware in an integrated software gross margin from adverse product mix during the quarter.
We expect to see more favorable gross margins moving forward from our supply chain transition in a more normalized products mix in the second half.
Operating expenses for the quarter were 51.8 million down $4.2 million from Q2 2018.
The improvement in operating expenses resulted primarily from the realization of $3.2 million from our smart savings initiatives that we began in the third quarter of 2018.
Through June 30, we have realized $13 million of annual operating expenses savings year over year and have largely accomplished the expected operating savings targets, we set last year.
We expect these lower levels of operating expenses to continue throughout 2019.
Net income per share increased to two cents in Q2, 2019 up 12 cents from a loss of 10 cents in Q2 2018, primarily due to the improvement in operating expenses.
Adjusted EBITDA of $9.4 million for the quarter was up $4.1 million or 78% year over year, primarily from lower operating expenses.
Adjusted EBITDA margin of 9.5% was up 410 basis points year over year.
Free cash flow was negative $4.5 million in the second quarter of 2019 compared to negative $8.7 million in the second quarter of 2018.
Excluding the impact of cash bonus bonus payments of $6.4 million in Q2, 2019, and $8.3 million in Q2, 2018 free cash flow would have been $1.9 million in Q2 2019.
$2.3 million year over year.
Now moving to annual contract value in recurring revenue.
The percentage of revenue that is recurring has steadily increased providing us more confidence in the predictability of our business.
For the 12 months ending June 32000.
Adding new long term agreements.
We reaffirm our goal of reaching 70%.
LTM recurring revenue in the next two to three years.
ACB was $246 million at the end of the second quarter up slightly year over year, driven from our strategy to focus on higher margin software subscriptions and long term agreements.
Offset by lower maintenance revenue.
We expect to see continued growth in HCV overtime.
Given our strategy towards signing more long term agreements and growing our subscription business plus stabilization of the maintenance revenue.
The decline in maintenance was related to the ongoing transition from perpetual to subscription for our creative software products as well as the impact of lower maintenance from certain customers as they upgrade their storage systems.
We expect net maintenance is stabilized during the remaining quarters of 2019 as stronger hardware and integrated software revenues that started in the second half of 2018 should provide a catalyst to our maintenance business as these maintenance contracts start renewing.
Now moving to the composition of our revenue.
And the second quarter of 2019 revenue from high margin software licenses and maintenance, which includes both subscriptions and perpetual licenses was $50 million down $1.4 million year over year due to the decline in maintenance.
Partly offset by the increase in subscription and perpetual software licenses and maintenance was 51% of our revenue during the second quarter.
The gross margin for software licenses and maintenance was 85.2% during the second quarter up 140 basis points over Q2, 2018, driven by the growth in subscriptions.
We expect this category to grow modestly and continue to produce software gross margins of 85% plus.
Moving to the next revenue line.
Hardware and our integrated software, which we also call integrated solutions had revenue of $41.7 million in the second quarter up 6% year over year on the strength of our lives sound product hardware and integrated software contribute 42% of total revenue in the quarter.
These solutions, which combine hardware with high value high margin software generate attractive margins.
In Q2 gross margins from hardware and integrated solutions was 36.5%.
Down 170 basis points from Q2, 2018, due to adverse product mix in the quarter with a higher mix of lower margin audio and video hardware sold in Q2 2019 versus the prior period.
Although gross margins in hardware integrated software were lower in Q2 2019 versus Q1 2019, we expect to see gross margin improvement in this area in the remainder of 2019 as a result of one a more normalized products mix second introduction of new products in audio and video in 2019 that have stronger margins.
Third expected benefits from the transition to our new supply chain vendor that will result in cost reductions in freight and overhead.
The balance of our revenue comes from professional services, which is a small portion of our business professional services revenue was 7 million in the second quarter down 10% year over year as we are more strategic and selective in the professional services business we take on.
With that said gross margin of professional services, 11% in Q2 up 810 basis points.
At June 32019, we had cash of $51 million down $9.2 million from June 32018, primarily from the use of cash to repurchase our convertible notes.
Our cash balance at June 30 excludes $9 million of restricted cash.
Including the eight and a half million of cash that was used to collateralize. The letter of credit issued in favour our former supply chain vendor as we discussed above we completed the exit from this vendor during Q2.
And we received the eight and a half million dollars of cash back as unrestricted cash in July 2019, this will be reflected in our Q3 balance sheet.
Cash balances down $4.3 million from March 31, the negative free cash flow in the quarter, which was expected as this is our seasonal low point in free cash flow for avid.
We ended the second quarter with 58.6 million of accounts receivable up $10.9 million from June 32018, signifying the growth in the business.
Our DSO was 54 days at June 32019, due to the timing of billings later in the quarter, we expect our DSO to normalize back to the mid Fortys as we move further into 2019.
Inventory was 34.1 million at the end of the second quarter up $2.3 million over to June 32018 inventory levels remain elevated as we are completing the supply chain transition and are expected to decline in the second half of 2019 as we burn off the remaining inventory from the prior supplier.
Contract assets totaled 18.5 million at the end of the second quarter.
Up from 15.5 million at June 32018, as a result of growth in our subscription business.
Deferred revenue was 93.5 million at June 32019 down $4.2 million from June 32018, due to the amortization of $5 million in noncash revenue.
Contracted committed backlog was $351 million at the end of Q2.
Up $1 million year over year on increased long term agreements.
Contracted committed backlog was down $7 million from the end of Q1 as our billings from backlog exceeded new agreements, we expect that the strong pipeline of new long term agreements, including the ones, Jeff mentioned earlier, which have already been signed during the third quarter will contribute to increased contractually committed backlog going forward.
At the end of the second quarter long term debt was 200.2 million down $30.5 million from June 32018, due to the repurchase of convertible notes from the additional term loan proceeds from the May 2019 refinancing.
Additionally, long term debt was further reduced by $29 million as the convertible notes due 2020 were reclassified as a current liability as of June 32019.
As we have previously disclosed during the second quarter, we completed a tender offer to repurchase $74 million of principal value of our convertible notes due 2020 through the addition of additional term loans that mature in 20 may 2023.
These refinancing transactions resulted in a small increase in our total debt principal of about $5 million, while reducing the term loan interest rate.
At the end of the quarter, we were compliant with our leverage covenant ratio and have significant cushion with our required covenants.
We expect to retire the remaining 29 $9 million in convertible notes due June 2020, when they mature.
And we have sufficient cash on hand, plus $22.5 million of Undrawn revolver.
Capacity in additional free cash flow Thats expected. So we are comfortable with that level of maturity.
As we finished the second quarter of 2019, we are pleased with the progress we are making.
With that said, we are completing the supply chain transition and that transition contains inherent risks. So we remain appropriately conservative in our third quarter guidance.
In the third quarter, we expect GAAP revenue to be between 101 million to $109 million showing year over year growth at the midpoint.
In the third quarter of 2019, we expect adjusted EBITDA to be between $13.5 million to 18.5 million.
We are also reaffirming our 2019 annual guidance.
Our 2019 revenue guidance remains $420 million to $430 million.
Our 2019, adjusted EBITDA guidance remains 60% to $65 million.
Our 2019 free cash flow guidance remains 12 million to $17 million.
Also as our business strategy is showing clear signs of improved profitability. We are adding guidance for full year 2019, non-GAAP net income per share of 60 cents to 72 cents.
Assuming 43 million shares outstanding.
With that I'd like to turn the call back to Jeff for closing commentary.
Actually I think we turn it back to the operator.
Thank you actually separate that concludes our prepared remarks, we are now happy to take your questions. Operator. Please go ahead.
Thank you, Sir and ladies and gentlemen for any questions. Please signal by pressing star one on your telephone keypad.
And if you just make sure that your mute function is turned off to allow us to receive that signal.
Once again at this time that star one for any questions and we'll pause for just a moment.
All right and first from Jefferies, We'll hear from some odd Simona.
Hi, good afternoon, Thanks for taking my questions or maybe I'll start off with Ah. Thanks, I'll start off with that thanks for all the color on that the supply chain transition and I think that's really helpful for us to understand and you guys get caution us last quarter that that you know there could be some risks around it but maybe if we could double click on that a little bit more and just understand it. So theres no more risks related to the legacy partner, but as you think about what could what the risks are as you ramp up your new partner could you, maybe just highlight that a little bit more for us and maybe what parts of the product portfolio might have risk associated with that as well that would be helpful. As we think about the back half of the year.
Yes, I think I came across I'll take this one so I think.
When we look at the back half of the year I don't think we see overall risk in the back half obviously, there could be some timing characteristics between Q3 and Q4 as you bring up new production lines, but there is we don't foresee any risks today that would risk our second half in totality. That's why we made the comments, we made and really what we're talking about is as we did as we've said before.
Built up inventory to handle the transition of one supplier to another the risks are really only that.
It's pretty normal to have some production supply chain.
I don't come issues, but as you could bring in the new product lines up we can encounter things that we have to deal with but more importantly, we forecasted.
Our audio product strength and to be honest, it's audio is performing better than we expected. So.
It will ultimately put pressure on on inventories because we are selling it's such a good clip on the audio products.
But it's being managed and we'll manage through it and it will be we don't see any issues in the second half. That's why we've we've still got good confidence in our trajectory to delivering on our full year guidance and the products that are affected are basically audio not all audio products, but certain audio products.
Thats the only lines, we were moving over between June July and August .
Okay, Great Ken maybe a financial question for you or more numbers related but as I think about the you noted that there is a couple of things that were headwinds to maintenance that transition to subscription and then some customers taking lower maintenance could you maybe help us understand the magnitude of those two and then just as we think about the transition to subscription should we see the benefit of that in the country. The contractually committed backlog number or where should we start to see that in the in the metrics. The company is reporting.
Yes, so so and maintenance maintenance revenue was down.
Approximately.
$4 million Q2, 19 versus Q2 18.
The shift to.
The business model from perpetual to subscription is one of the leading drivers of that plus.
As we move from Isis to Nexus that said, we still believe that the maintenance.
It's going to be.
Better performer for us.
With risk in the second half.
And the reason is we had stronger product sales.
The integrated solutions business has performed well for us over the last year.
And is that maintenance comes up the first year is free as those products come up for renewal.
With that with those stronger volumes that will be ahead, a tailwind to our maintenance business.
And also we're starting to see.
Stronger renewal rates.
Overall.
In certain certain areas. So those two will be tailwinds to our business.
And it will help us.
I would say have better revenue from maintenance in the second half of the year.
Great and then if I could squeeze in maybe another one.
How should we think about the strength of the product refresh cycle from the.
From the new products should we think about that as a six month type of product cycle, 12 months or longer duration, and maybe could you help us understand.
What the kind of percentage uplift is and moving over to the new storage product into and then your proxy relates.
Well, so I'll try to answer them.
And when you say product cycle, you mean, the cycle between announcement or launch and when we see revenue or what how do you mean on the cycle question, Let me first clarify that.
Yes, so from released when we start to see the impact to add to the business.
So on the on the software products it depends on where it is on the enterprise product like Mediacentral that does have a few months.
Kind of germination before becomes revenue one because when we get the orders we've got actually deliver on the system and then we've got to obviously turn that to revenue which can take.
Some time, so I'd say, you know things can happen as fast as two or three months and something that can take as long as a year on big projects. So it depends so though there has been a lot of project work going on even though the product wasn't released yet so.
I think it gradually starts delivering results. It will mean mediacentral will deliver results in the second half the new the new Mediacentral on the.
On the New media composer example, that we'll start having results right away in the second half on the hardware products. It converts to revenue fairly quickly because that's heavily channel. So as soon as the product start shipping we start delivering to channel when they start taking delivery and delivering them to their customers. So the churn there can start within the quarter. It really is about how fast we can ramp up production on the new products.
And then last one and I'll hop out, but just today, but clearly there is there's a lot of noise going on from a macro perspective Sop earnings have been a little bit mix at least as far as what we've seen I'm. Just curious if there's any change in behavior at your customers from a high level or if there is any increase either caution or if it's business as usual just as from a macro view that you've gotten in terms of feedback from customers.
I wouldn't say that's any different I think we it's pretty much like we've said all along I think the video creative the content creation business is really doing quite well and people are really adopting those tools pretty quickly the enterprise customers. As we've said before is a bit lumpy quarter to quarter I don't because any change in trajectory on that is about the same we actually benefit from having a couple of dozen customers.
In our facility last week, who was on the strategic summit with us talking about market dynamics and are they looked at our product plans and I could talk about just because were very public with this on on social media. So it's not like people wouldn't see that we were promoting it and so are our feedback from at least a sample of our customers is pretty fresh and I think we've got a pretty good view is I wouldn't say anything significantly as change in our views from what we've talked about the last couple of quarters.
Our software business is very healthy some odd and you can see that in the user base continues to be up over 40%.
On the growth in and we're we're obviously.
Seeing a lot of demand and that's one of the reasons why we actually took an action to increase prices that will also benefit us in the second half.
Yes, good point.
Thanks, a lot for your questions my questions.
And next from Maxim Group, we have in the haul trucks.
Yes. Thank you.
So.
I think there is typically September quarter seasonality in that seems what you're guiding to can you just remind us what are the drivers of that seasonality.
Well I mean, you've got you've got both good and bad I mean, you've got on the tailwind side a lot of our products not all but a lot of our products are announced in the first half and so Q3 benefits from from those products at the same token it's summer in Europe . So there is a headwind obviously, we're managing through summer in Europe , and then finally, we have our big European Convention.
IVC in September , which actually does help us because it allows us to bring a lot of the stuff weve unveiled in the first half and clean it ended being connect allows us to put it in front of a lot of the media enterprise customers in Europe .
September so again, there is there a seasonality it goes both ways, but we pretty much know our seasonality of the business and obviously Q4 is a very big quarter for avid it always is always going to be that way, it's never going to change.
Okay.
So the reason why I ask is that I think that the guidance and that's.
A typical level of seasonality that you see from June quarter September quarter, and given that the supply chains transition is now over.
I would have expected that the.
Little that softness that you saw in the June quarter due to supply chain transition would produce an above seasonal September quarter guidance. So that's that's what I'm really trying to drive out here so any color on that.
Potential concerns there.
No just other than what I want to clarify.
One point there is that the transition out of the partner in Asia is complete and in fact, I know Ken mentioned that Weve actually even returned our letter of credit has been released so that you can have really has been put back we'll we'll be back on our balance sheet. In Q3, we already received in July but it will be in our Q3 balance.
When we report Q3.
So thats done with the ramp up of the production and the move to lean supply chain is a several month activity. So there is still activity will be doing bringing up new production as I mentioned before supply chain. In Q3, we're just going to be we're going to continue to be as we were before cautious.
On the current quarter, but.
As we all said we still are feel good about our full year guidance and we're on the right trajectory to deliver on them.
Got it Okay I understood and then can you already pointed out once that.
He saw very good software license revenue growth up 20% year over year.
That is a significant acceleration relative to the March quarter, where it was flat in the prior quarter.
Is there a narrative behind that acceleration.
Yeah, just on the subscription side we.
Nice.
More growth on the subscription side across all areas pro tools.
So bayless and the new media composer and media composer, which was announced at any fee had a nice uplift.
In June .
So we're excited about that as we look at the second half and also we had.
Very good growth in the perpetual side related to Mediacentral.
With a with that new release. So those are really that's the really the color behind the.
Better growth in Q2 versus Q1.
Okay.
Got it.
And then you guys talked about.
You have a very nice pipeline for your long term agreements it sounds like though that in the current quarter. There wasn't significant progress in terms of new long term agreements being signed.
Hey is that correct and B can you give us some color as far as how big is that pipeline, perhaps maybe relative to what's already in your contractually committed backlog backlog.
Well I don't know if I could share with you kind of a ratio off the top my head, but I mean, the pipeline is a bit better than we track the pipeline every quarter year on year. So the pipeline is better.
It's quite I would say comfortably better we like what we're what we're seeing from a trend.
We did not get all of I notice I commented about one of the renewals of agreements that we did in July as we've said before we're really not focused on bookings were focused on on really the deliveries and the and the energy and the revenue and the other metrics around the company. We do look at the bookings from a standpoint of the business, we need for a quarter and we also obviously look at the booking when it's time to renew an agreement in the cases agreement I mentioned on the call about that was signed in early July we didn't push for it to be signed in June because as I think I've shared before on the call. We want good behavior from the sales team and so we're we're not incentivizing them to get stuff in early we're making sure they get in on time, but we're not we're not using critical boundaries for contract negotiations that's a bad place to be put in ourselves as a company, but we are making the progress we want to see we saw a slight uptick in in.
In the HCV and recurring revenue this this.
Quarter remember last quarter is a little bit down we saw a little bit of an uptick this quarter were happy with well keep focusing on on hopefully delivering an uptick in the second half, yes, I would say we feel good about the forward looking metrics.
First our LTM results through June 30 show, we're we're really.
Close to the low end of our annual guidance. So the trajectory of the business, but when we look at the new product releases, both at an a b in April .
I talked about media composer, having a nice benefit in June that's that's moving moving forward.
We have new products that were just introduce at the summer NAMM conference we have price increases we have.
The.
The improving pipeline that Jeff mentioned, which I'm very optimistic on granted it's not in contractual revenue.
Or is new customers a significant portion of that pipeline.
No. It's both I mean, we're running about the same.
Percentage, we have Ben from a from a new new customers standpoint.
The pipeline is all the above its its upgrades of existing customers. This new project existing customers its new customers.
It's also new products that were that were unveiling, which give us the additional pipeline.
And a lot of art a lot of our channel business is new customer not all of it there is a lot of recurring customer there, but a lot of our channel business does deliver a lot of the new customers to the company.
Okay, and then can you mentioned a couple of times on the call.
Raise prices, which products disease refer to.
These are our creative cloud products and accretive software graphic software.
This is pro tools, Okay, poser and the Bell, yes, yes.
It's basically in response to Adobe, having raised prices for creative cloud.
Well it wasn't no was not really response to them obviously, they did something similar a couple of months before us but it wasn't response is looking at.
The business model as we move forward. We are we're trying to also make it very attractive for people to get on subscription or perpetual.
And just general some adjustments that we made based on lessons learned on the business, but those price adjustments that we made I shouldn't say, they're all increases some actually there are some neutral there are couple they went down or a few that went down we basically adjusted but we will see.
A tailwind in our software revenues for the creative tools because of those price adjustments.
Gotcha. Thank you.
Thank you.
[noise] extra authority, we have Steven Frankel.
Hi, good afternoon. Thank you I'm trying to connect a couple of thoughts.
So you've seen this maintenance.
Revenue decline and you are hoping it bottoms and you talk about.
The storage products that were bought last year.
Coming into a year or two and helping to turn that around.
And I look at the gross margin that you talked about was a mix issue in Q2 does that say that the the new storage cycle has has quieted down for the moment.
No.
And that's why we didn't see a lot of high margin storage in Q2, and what's the outlook for storage between now and the end of the year.
So let me let me take take that so in the first quarter, we specifically called out there was a large storage deal that.
It was high margin that occurred in the first quarter of 2019.
Those multimillion dollars in that likely wouldn't reoccur.
So as a result, our margin was slightly higher in Q1.
In Q2 with that storage deal not recurring.
The margin the margin decline, but we're still optimistic on storage.
It just it just a mix issue some quarters you sell you sell more higher margin product like we did in Q1 in Q2.
The mix was less higher margin storage and more live sound audio, which typically has lower margin and as you know the lifestyle business is related to the concerts and that's very.
If I can just storage up year on year in the second quarter.
Storage year on year was.
It was up about yes. It was it was up.
Actually year on Q2 year on year was slightly down but for the first half we're up.
Double digits.
Right.
And then.
There was a comment earlier in the call about maintenance being impacted by this the shift to subscription I understand that in the tier three side, but.
Could you give us a flavor for kind of where is the tier one core long term avid customer on shifting from perpetual to subscription.
Hey, Steve its Jeff so.
This on the tier one level, let me say tier three obviously is doing lots of different tier two it's growing in subscription in that space too that's more the small to medium size enterprises can be production companies are post production companies that is also growing pretty well, we're launching a new team offering, which we've announced which will be delivered in the second half, which will make team subscriptions, which will help a bit more attractiveness in the kind of a tier two market in the really big media enterprises in tier one that has started to as we've said before there is a few customers that have gone to subscription we've only taken a few customers into subscription in the area, mainly because our back office systems aren't ready for it but we have taken a few big customer there and we will probably continue to take a few more but we haven't really launched aggressively in that space as of yet.
Okay and.
Ken in the past you've given out a subscription software number and I did see it on the.
The Datasheet this quarter.
In terms of the user base I, just want to make sure no revenue number.
Yes.
So we have it in the.
And the earnings slides, the we do break out subscription.
Actually on the earning side this with software license and maintenance on the.
Earnings.
On the IR datasheet it should be there.
We'll we'll make sure it's posted for you Steve.
I Didnt I didnt see it it could it could be there.
Yes.
It's in the 10-Q that will be done we'll be coming out I think in the next 15 minutes as well.
Okay, and then in terms of the TV is kind of stalled out is it your proposition that when you get the.
The console cycle.
Running in the back half of the year, we should start to see HCV growing again.
I think we will I think we'll see ACB growing for a couple of reasons hopefully ACB is heavily driven by subscription growth and the second half is first of all seasonally strong. The second point is that of course, the holiday season is important for us to grow that.
The other because lot of our music customer that's a heavy time for music in with the holidays. We also as we're working to signing long term agreements at the high end in tier one and of course renewal of Sps agreements near the end of the year that will also help.
We've got Thats, what our anticipation.
Okay and then.
What's the biggest risk factor to your free cash flow.
Forecast for the full year.
I feel very good about the free cash flow forecasts.
On a last 12 months basis through June were at 10.7 million in free cash flow the guidance is $12 million to $17 million.
Given the new products that we have.
Given the improved cost structure.
And given the fact that with the supply chain conversion, we're going to be able to reduce inventory.
I feel like.
Our free cash flow.
Is we'll be better positioned in the second half than in the prior year. So I think there is there is a lot of.
Clear had clear visibility to improve free cash flow for the for the full year and.
Achieving the guidance if not beating the guidance.
Okay.
Thank you.
Thank you Steve Thanks, Steve.
And once again folks star one if you do you have any questions.
Next from Vws financial we have how much of course on.
Hi, So first off.
On the hardware side of the business.
Yeah, well the last few years, it's usually been the first half of the year is been seasonally weak and then you get this ramps in the second half of this year.
First half is much stronger than prior years. So is there a change in seasonality or is this going to be a study kind of performance and what are you expecting from hardware and second after that were to continue this kind of trend that you're seeing this or this year.
As we've said before I think Ahmed and high by the way.
The.
We had talked about back in Investor day, and we will continue to talk about it is we've been expanding all of our portfolio around the solutions you integrate solutions that we are selling around the creative process and as we expand that portfolio as we did with the remember the original.
Essex sell life sound expansion, which we had a net which we unveiled late last year that really was a was a big benefit in the first half of this year, because we put a lot more live sound products out into concerts and festivals and and in fixed facilities.
And as we continue to expand those also storage has been performing quite well.
And then the second half we have more of those solutions with the expansion with the S. One and S. Four so I think as I foresee it we're going to see even if there may be very near term.
Headwinds from supply chain transition, what we look at the second half and we look at the full year and even into next year. We're encouraged by by how those products are going to contribute we're really getting more of the economic relationship from those customers now than we were before.
And then could you just talk about the so maintenance revenue as it declines <unk>, what's the customer mix like when you go into subscription.
How much of your enterprise customers switched over from maintenance to subscription.
Yes so.
Yeah, again, where were on the enterprise side I would say, we're as Jeff pointed out we're kind of in the earlier days to move people.
On a subscription.
That said we have some.
Big opportunities that we're working through that.
That will be able to.
Talk about as we think about the second half of the year.
Those are things that we're working on today.
In terms of the actual maintenance decline.
The two things that we talked about was you know we are still moving on the other side of the business on the creative side.
I'm from perpetual to subscription so that's that's that's been a headwind as well as.
On the storage as we move from Isis to Nexus Thats also a headwind so that resulted in a decline your year on year on maintenance.
That said when we look forward hum it on maintenance.
Our product revenue, we had as you can as you pointed out we are starting to have very strong product sales.
Our product sales over the last year had been have been fairly strong strong and as a result as those.
Product sales come up for re maintenance renewal because the first year, we provide maintenance free.
That will be a tailwind for us to drive more maintenance revenue as we look forward. So we did decline and we talked about the reasons for that but with the strong product sales that will help us moving forward and also we're starting to see a tick up.
On some of the renewal rates.
That were that were looking at carefully here across the tiers.
So are you seeing a decline enterprise customers that because now you're seeing more subscription coming in from.
Individual professionals.
No our subscription.
Today is mainly the creative professionals.
We are working on in the early innings of moving enterprises to subscription we have some big opportunities.
So that that will that will become more part of the company's revenue streams as we move forward, maybe I can add there may be confusion I'm Ed So yes.
Maintenance doesn't just didnt, just calm or doesn't just come from media enterprises individual creatives have a maintenance stream because when they had a perpetual license we had an annual support program and software maintenance program. So when they see if somebody comes on subscription and goes off from perpetual revenue moves from maintenance Oversubscription right. So and it's not just big enterprises were not losing big enough or we're not.
I don't know of any significant or major even sizable of any kind media enterprises moving off of maintenance on our product or off of Abbott. It relieves us about that that part of the maintenance headwind is all about the move to perpetual and subscription.
Okay and last question is Oh, how do you plan to pay off the remaining convertible debt. That's now short term.
Well, we had a 51 million of cash on the balance sheet, where again, we just got back eight and a half million that was restricted so we've got.
Close to $60 million of freely available cash we expect to have.
Strong cash flow in the second half of the year.
Plus we have $20 million 22 million of Undrawn revolver. So.
I have multiple sources to pay it off.
You know I'm, just going to use cash in the balance sheet I I feel very comfortable.
Doing that and.
Reducing that liability.
Okay. Thank you.
Yes. Thanks.
And at this time it looks like we don't have any further questions from the audience I'd like to turn things back to Jeff Rosica for any additional or closing remarks.
Right. Thank you operator, and thanks, everybody for attending the questions. So as Youve heard avid has exited the first half of 2019 on a positive performance trajectory and is entering the second half with some confidence.
We're encouraged by the progress we've made in our operational improvements and smart savings initiatives to date.
We're also excited about our recent new product releases and deliveries, which we anticipate will make an important contribution to our performance in the second half as we work to deliver the results laid out in our full year guidance.
Thanks again, everyone for joining us today, and we look forward to our next call in the fall when we report our Q3 2019 results until then have a great rest your day or evening and enjoy the rest of summer. Thanks, everyone.
Once again, ladies and gentlemen that concludes our call for today. Thanks for joining US you may now disconnect.