Avid Technology Inc (AVID) 2002 Q1 法說會逐字稿

Good day everyone and welcome to the Avid Technology first quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer Mr. David Krall. Please go ahead sir.

Thank you and good evening. I'm David Krall, President, CEO of Avid Technology and I would like to welcome you to our first quarter 2002 results conference call. In a moment I will turn the call over to Paul Milbury our CFO. He will provide a detailed discussion of this quarter's financial results. Then I'll discuss some highlights from our participation at this years National Association of Broadcasters Convention that concluded last week and how that ties into our overall strategy. Finally Paul will come back and provide you with our financial outlook for the balance of 2002. Following the prepared remarks, we'll be happy to take your questions. Before we begin, please note that the information discussed today is current as of April 18th, 2002. Remarks made on this call may include forward looking statements including statements about new product releases and functionality, projected growth of existing or new markets and anticipated results of operations during 2002 and beyond. There are a number of factors that could cause actual events or results to differ materially from those indicated by such statements such as market acceptance of Avid's products, further weakening of world-wide economic conditions and the other factors set forth under the caption, certain factors that may affect future results in the company's annual report on form 10K for the year ended December 31, 2001, and other documents filed with the Securities and Exchange Commission. In addition any forward looking statements in our remarks represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. For the quarter ended March 31st, 2002, we reported a net loss of $3.7 million for 14 cents per share. Total revenues were $92 million for the first quarter. This quarters operations were adversely impacted by softness in our core video market. The primary driver here is advertising spending which has remained down world-wide. According to industry estimates, advertising spending dropped 9.4 percent in 2001, the largest single year decline in the past 10 years. As a result, total spending in the broadcast and professional video markets is estimated to be down almost 29 percent in 2001. While this trend continued through Q1, it is expected to reverse later this year. In response, we have reduced our budgeted operating expenses, but remained committed to our product development road map for the year. We continue to see substantial opportunities in our core markets and want to ensure that Avid can take maximum advantage of our market position when the economy recovers. We are already seeing positive market response to the introduction of our new ProTool HD family of audio products which we started shipping early in the first quarter. Paul will now review these results in more detail.

Thank you and good evening everyone. As David said, we reported revenues of $92 million for the first quarter of 2002, down 12 percent from last quarter. Revenue from our video segment was approximately $60 million down 25 percent from Q4 while first quarter revenue for Digidesign our audio segment was approximately $32 million in line with our internal expectations and up 26 percent from the prior quarter. As David mentioned, customers within our core post production market are taking a conservative approach to their purchasing. As we neared the end of the first quarter, our pipeline of potential business was at its typical level relative to sales expectations. However, instead of closing business at our usual rate, customers delayed their purchasing during the final couple of weeks of the quarter. Some of this business will close in Q2 and some will not close until there is a tangible improvement in our customers businesses. The weakness in advertising spending is not new, but the duration of the low level of spending is having a cumulative effect on our close, on our core post production customer base. In many cases, customers were initially able to make adjustments in other areas of their businesses allowing them to continue to invest in new technologies. Now many are reducing their capital spending until they see an upturn in their businesses. Gross margins for the first quarter was 48.1 percent, down 1.2 points from the fourth quarter. The decline was largely due to lower volumes over which to spread our manufacturing overhead. Operating expenses excluding amortization were $47.3 million which is down 51.1, down from $51.1 million in the fourth quarter of 2001. This represents an eight percent decrease from the fourth quarter and a 21 percent decrease from the corresponding quarter in 2001. We will continue to maintain tight control of operating expenses as long as necessary. Our operating loss for the first quarter was $3 million excluding amortization and including amortization reported an operating loss of $3.3 million. Interest in other income net was $265,000 and our provision for income taxes for the first quarter was $600,000. For the first quarter, we reported a net loss of $3.3 million for 13 cents per share excluding amortization; including amortization, we reported a net loss of $3.7 million for 14 cents per share. Weighted average shares for the quarter were 26 million. Turning to the balance sheet, our cash and marketable securities balance as on March 31 was approximately $53.5 million down $19.4 million from the December 31 balance. The decline was primarily due to the prepayment of $13 million note leaving the company with long-term debt. The note had an interest rate of 9-1/2 percent which was much higher than the rate we were earning on our cash. The sales outstanding increased to 76 days, but there has been essentially no change in the ageing of our receivables with approximately 80 percent under 60 days. Inventory returns were 7.6 times for the quarter which was lower than expected due to the volume short fall at quarter end, a build up that Digidesigns will ensure availability of its new HD product and consigned the inventory related to NAB. I will now turn the call back to David for discussion of our participation in this years National Association of Broadcasters Convention and the solutions we featured during the show.

Thank you Paul. Before I talk about the highlights from this years NAB Convention, let me make a few comments about this past quarter and Avid's strategic direction. As Paul mentioned, we're carefully managing our expenses which will allow us to weather the slow economy. In the meantime, we remained committed to our strategic vision for the company. As the market for digital media production evolves from point products to integrated solutions, we believe that Avid is uniquely positioned to deliver the best, end-to-end solutions for our customers. We are dedicating our efforts to enhancing the performance of our products in all media disciplines and at all price points, and further ensuring that they work together seamlessly, enabling an efficient non-linear workflow for our customers. We are already seeing the success of this strategy even in the midst of the economic slowdown. We have sold over 850 Avid Unity shared storage networks in less than three years, as have sold more end-to-end digital newsroom solutions over the past year alone than all of our competitors combined. This years NAB served us an opportunity to further demonstrated this strategy to our customers. Our theme for this years NAB Convention was start-to-finish, emphasizing Avid's focus on delivering complete end-to-end solutions to our customers. Here are some of our product highlights from the show. For our core video and film editing customers, we introduced new versions of media composer, film composer, symphony and Avid Xpress systems, all targeted to ship this quarter. This represented the largest feature release for Meridian hardware based systems in Avid history. One new feature, the DV option, means that we can now support native DV format media in media composer. This is becoming an increasing popular acquisition format and will allow seamless interchange of media and metadata with Xpress DV, our low cost software offering. Another major highlight of this release is MetaSync. Avid's MetaSync technology allows customer Avid solution to incorporate interactive TV subtitling any many other revenue generating offerings directly into their editing timelines. This innovative technology received an industry press award at NAB in recognition of achievement in the advancement of the art and science video technology, and already has six partners who have announced support for this standard and nearly 100 more who expressed interest in becoming partners at the show. In the high-end finishing market, we introduced version 6 of Avid DS and Avid DSHD. The main features of this release include a new media composer-style user interface twice the effects conform capabilities from media composer systems and support for Avid DS on Unity MediaNet. The user interface modifications will open up the advanced effects compositing and HD finishing capabilities of Avid DS to the large installed base of 75,000 trained Avid editors worldwide. For the low cost market place including the corporate and event videography markets, we introduced Avid Xpress DV running on the Macintosh platform targeting our customers who preferred to edit under the OSX environment on Apple based hardware. This product received ray of response at the show and took first place honors in this month's NLE face-off in DV magazine. For the shared storage market, we announced the next generations of our Avid Unity MediaNet and Avid Unity LANshare product. MediaNet 3.0 features an all news 2 gigabyte architecture that increases total system bandwidth by more than 40 percent while decreasing the price of a typical configuration by approximately 15 percent. MediaNet can now scale larger than ever before supporting more clients at higher media resolutions. We also introduced a mid range model of Avid LANshare called LANshare EX. With both LANshare models, we have drastically reduced the entry for the thousands of customers who already own multiple Avid systems and who could benefit from the power of Avid unity. We also unveiled Avid productivity tools, a family of high performance scalable, cost-effective, and reliable solutions for networking, storage and workflow integration including digital dailies and nearline archive solutions. The daily solution extend the editing process by bringing Avid media to every desktop with real-time on-the-fly reviews for executives and clients. For broadcasters the big news was the introduction of a special low cost, nonlinear news production system. Built around Avid Unity LANshare, this special package starts at $150,000 which is less expensive than any tape-based counterpart offering true, nonlinear newsgroup editing, shared storage and playlist automation controls for a workflow that efficiently manages stories from editing to air. This package allows us to more effectively target small and mid sized television stations. Also for broadcast, we unveiled Avid Xdeck, a new direct-ingest device that is the fastest and most cost-effective way to record media into shared storage. The Avid Xdeck device lets stations automatically record video material directly to any Avid Unity system where it can be instantaneously accessed by one or more users for non-linear production. NAB was also an opportunity to showcase Digidesign's new ProTools HD family of hardware and software components. Degidesign introduced its cross platform ProTools 351 software which provides seamless interoperability with Avid video and film workstations and full compatibility with Avid Unity MediaNet. In 3D animation and effects, we highlighted the Softimage XSI 2.0 animation system. The features on this latest generation software include fully integrated 2D and 3D compositing, top-of-the-line modeling and animation tools and innovative hair and fur dynamic simulation. As you can tell from these highlights, this years NAB was a very strong show for Avid. In post production, we reaffirmed Avid's leadership at both the high-end and low-end with DSHD and Xpress DV. In shared storage, we received strong channel interest in our lower cost LANshare products, and in broadcast we confirmed to our customers that we have the most complete end-to-end digital broadcasting solutions available from any manufacturer. Now I'll hand it back to Paul to discuss our outlook for the balance of 2002.

Thanks David. When we implemented our structuring plan last year, we indicated that we were cutting deeper than we felt we needed to at the time in order to provide ourselves with the flexibility to address certain skill mix and geography mix issues across our worldwide organization. Since that time as our revenue outlook has changed, we have made decisions not to add back the level of resources we originally planned. Our business units and functions have addressed their critical skill mix issues, but they have been required to fund these resources through natural attrition and are making additional cuts in exchequer spending. Even with a lower level of spending, we're confident we've the necessary resources in place to accomplish our strategic product road map and move the company forward. Since forward looking planning has enabled us to make conservative assumptions for 2002 revenue, there is still no significant improvement in the economy. It allows to achieve break-even at the operating profit level for the full year. Our current view is that 2002 is going to be a difficult year for our video post production customers who make up the bulk of our video unit sales. We expect a good pickup in sales to our broadcast customers moving forward and an expanding pipeline of potential business. As previously indicated, we expect revenue growth in our audio unit to return to double digit levels for 2002 based on the introduction of ProTools HD. For the June quarter, we currently expect revenues of $100 million, a nine percent sequential increase from Q1. With higher revenue, gross margins are expected to improve in Q2 to approximately 49.5 percent. And then for the balance of the year, we are expecting gross margins in the 50 percent area. Operating expenses are expected to be approximately $51.5 million in Q2, increasing sequentially by about $4 million. The sequential increase is mainly due to the cost of NAB and other critical marketing programs being initiated in Q2. At $100 million revenue, we would expect a small operating loss in the second quarter in a range of $2 million. For the full year, we are planning our expense structure assuming revenue in the range of $400 million. At that level, we believe there is a more upside potential than downside risk. Our previous guidance for operating expenses for 2002 was $260 million down three percent from the 2001 level of $222.5 million. We currently expect full year operating expenses to be approximately to $100 million at decrease of about 10 percent from the 2001 level. At $400 million revenue and the stated assumptions for gross margin and operating expenses, we would expect to approximately break-even at the operating profit level for the full year. If our post production business picks up sooner than expected, our revenues could be higher. In that case, I would expect a large portion of the incremental gross margin from higher sales to drop to the bottom line. Other income is expected to be approximately $300,000 per quarter for the balance of 2002. Our tax provision is expected to remain level at $600,000 per quarter and amortization is expected to be about $300,000 per quarter. Basic shares outstanding are expected to be approximately 26 million for Q2 and for the full year. Our cash balance at the end of the second quarter is expected to be roughly the same as the balance of the end of Q1. For the full year, we expect to be slightly cash flow positive . These conclude my remarks. David and I would now be pleased to take your questions.

If you would like to ask a question at this time, please signal us by pressing the star key followed by the digit one on your touch-tone telephone. Once again, please press star one to ask a question at this time.

We will take our first question from with Piper Jaffray.

Hi guys, if you could talk a little about on the post production side, David, both you and Paulie got to mention that you expect that to be a little bit tougher sailing, just related to general advertising spending or can you give us any sort of color in terms of why that's difficult sailing on the flip side in terms of broadcast, this is what, or may be one or two the key fundamental drivers that broadcasters face right now?

OK. This is David. In the post production side of the business, where we're seeing growth right now is actually at the high-end with HD finishing because of the new format many customers are now starting to retool their capabilities to finish in HD and likewise we're seeing some growth at the low-end of the market place where there are new low cost software-only offerings that Avid is offering. As you probably heard, at NAB we're going to be shipping a product called Xpress DV running on the Macintosh platform, expected to ship in Q2 of this year and we already have a Windows based version of the product now, but in our core market and post production which is largely driven by advertising and that's why we spend some time describing some of the dynamics going on in advertising, that market is being negatively impacted by the decline in advertising spending, and we're looking to pick up in advertising spending for that market to bounce back. Now in the broadcast market place, there is some different dynamics going on. Q1 is typically a quieter quarter for broadcast because that's when the year's budgets are first established and usually not as much spending historically takes place in the first quarter. But some of the dynamics going on in broadcast which is actually the major overarching dynamic is that most broadcasters are gearing up to retool from analog production methods to digital production methods and we're finding a significant amount of interest in our broadcast offering. We saw that at NAB, but we can also just point to our strong customer list that we built over the last year to show that there is very strong demand for Avid's offering there. So we think that our broadcast pipeline will pick up during the year pretty much independently of a recovery in advertising spending.

Any mean-full winds in broadcast that are noteworthy.

Well, we've got a list of 30 of them that we can talk to you about who have already installed a complete end-to-end digital newsroom solution from Avid, but in terms of just new news, we actually met with a number of broadcasters at NAB who we feel very exited about and that we think the deals will close shortly. I don't have any announcements that I'm going to make right now.

And in terms of just the numbers I -brought my numbers down, on a conservative basis, down sequentially from this quarter based on basically Digidesign as that kind of tails off after the strong first quarter upgrade, but my numbers are substantially lower than the $100 million you out for the June quarter, I mean 88 million. Could you talk a little bit about offsetting, is it safe to say that there will be natural decline in the Digi business after the upgrade and what other - is it broadcast area that are specifically going to be offsetting that.

Well I will let Paul talk about the guidance for Q2, but I do want to point out one thing about Digi, its not, the ProTools HD offering is now our new high-end flagship product, and while we will continue to offer the mixed system which was the previous generation system, we actually expect sales of that system to decline over time and we're expecting the ProTools HD system to carry the bulk of our revenue in audio moving forward. So its not a onetime upgrade that's taking place, that is actually completely new hardware and that is going to be our flagship product, moving forward. So we're not anticipating a near-term decline in Digi's business from that product and Paul is going talk to you.

Right and just for the numbers point of view, Jean, we're not expecting a fall off in the level of Digi's revenue in the second quarter. We're looking at, you know a fairly stable level. So the second quarter relative to the first. So that most of that Delta from Q1 to Q2 in the total comes from the video side of business. And just in terms of other big pictures that they come with the high-end Discreet Logic and Quantel or you see anything competitively from them or can you give us of the state of the union?

Well as you know, at the high-end there has been some re-trenchment, Discreet has pulled back from their Discreet edit product which was a competitor to Avid's media composer editing products. We've also seen some pull back from a couple of our other competitors including Sony and Quantel in terms of them reshuffling where they're putting their resources. So I think what we're seeing is that this advertising decline is actually impacting most of the players fairly broadly, but we actually feel that we're in a very strong position, we're not detecting a decline in Avid's market share. So expect to be well-positioned when the market picks up again.

Excellent. Thanks.

.

Once again please press star one to ask a question at this time. We will take our next question from Brian Securities.

Hi guys, two questions for you. After getting through the first quarter, can you give us an indication of kind of what happened to ordering, I know you are giving guidance or may be a little bit of indication of what happened ordering and whether or not there was any slowdown towards the end of the quarter based on NAB coming up, and second, on the broadcast side, can you give us what the numbers were in total revenues for 2001 and what you kind of anticipate they might look like for 2002.

Hi, Brian, this is david. I'll mention the one comment about orders at the end of the quarter. As Paul said, we were going through pretty typical pattern, but we did find that at the end of the quarter, that some of the business held off and moved into Q2. We actually do believe that some of that was due to the earlier than typical NAB with the show being, just literally the starting on the 8th, eight days away from the end of the quarter, some customers just chose to wait and see what was at the show before closing business which I think in some cases probably just makes sense, but also as paul referred to in his remarks, some that businesses pushing out later into, more even later into the year, pending an uptake in what our customers see in their own business, and as we said, we think the macro factor there is ad spending. Then regarding broadcast revenues, we actually don't breakout our broadcast revenues as a separate line item, but we've seen growth in our broadcast revenues over the past two years, actually as we've been enhancing our broadcast offerings.

You've done 30 in totals so far. How many did you have last year and how many in 2000?

Well in the first quarter of this year, we were actually mostly doing completing installations of systems that were previously sold, some of which we had not yet recognized the revenue for.

Right.

But for us, Q1 as I mentioned in my earlier comments, Q1 is not typically the strongest month for us in new sales in broadcast mainly because its the first quarter of the new budget cycle.

OK. Last question, since I don't have the internal findings, what were the deferred revenues for the quarter?

The balance sheet item for deferred revenues.

Yes sir.

Let's see. Let me get back to you a little bit later in the call, I've to total the deferred and other liabilities number, but I don't have the breakdown of the deferred.

OK. Thanks.

Thanks Brian.

Once again, please press star one to ask a question, we will take our next question from with First Union Securities.

Yes good afternoon. How big the market is this HD finishing. Everyone has to edit their video and I am assuming all of your end customers have to do finishing and what percentage of that market do you think is already penetrated and that is it for the moment.

OK, just in terms of how we review our market sizes internally. We don't separate out HD finishing as a separate market segment, so when we look at editing in general; editing plus finishing, we size that market at roughly a $500 million annual opportunity and absent macro factors such as the decline in advertising spending, that market historically has grown at about a seven percent annual growth rate. Now there is a component of that market, which represents finishing in HD format which initially is starting out as a smaller component of the overall 500 million, but we expect that it will increase more and more as HD editing and end finishing becomes a more common delivery format. Right now, the drivers for HD include digital cinema as well as digital broadcasting, and some of that digital broadcasting is taking place in HD format. With increasing adoption of HD television sets we expect that HD delivery will become more and more common. So that is going to be a driver that makes the HD component become a larger and larger segment of that overall $500 million market.

And do you have any numbers as far as what percent of the market is HD television, is that less than five percent these days, 10 percent.

Well if you, if you measure that by HD receivers in the market place right now, we're talking about low single digits if you measure it as a percentage of US households. However, if you look at that percentage of broadcasters who are actually now creating content in HD, I could comment on CBS, as of my last visit to CBS, all of their prime-time shows except for one were being finished in HD. If you look at other geographies though, other areas in the world, Japan for example who has had a much more rapid roll out of HD broadcasting and we have found stronger demand for our HD systems in Japan initially. We expect that demand to translate to the US and we expect that in general, that format will become pretty broadly adopted.

OK. Thank you.

You're welcome.

And there appears to be no further questions at this time. I will turn the conference back over to Mr. Krall for any additional or closing comments.

This is Paul Milbury just getting back to Brian on the question of what was the level of deferred revenue. Deferred revenue on the balance sheet at the end of the quarter was 34 million which was up from 29 million at the end of the previous quarter.

OK thanks Paul.

And thanks Michael. And I would like to thank you all for joining us on the call today. As usual should any of you have any further questions, please feel free to contact us afterwards and we look forward to speaking with you again in next quarter. Thank you.

This does conclude today's conference. We thank you for your participation. You may now disconnect.