Avid Technology Inc (AVID) 2002 Q2 法說會逐字稿

This is Premier conferencing and you are currently on hold for today's Avid Technology conference call. At this time, we are still admitting additional participants, and we should be underway momentarily. We do thank you for your patience and ask that you please continue to stand by.

Please stand by. Good day everyone and welcome to the Avid Technology second quarter earnings results conference call. Just a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn over to the president and chief executive officer, Mr. David Krall. Please go ahead, sir.

Thank you. Hello, I'm David Krall, president and CEO of Avid Technology, and I'd like to welcome you to our second quarter 2002 results conference call. In a moment, I'll 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 of our product development initiatives during the quarter, and our perspective on the markets that we address.

Finally, Paul will come back and provide you with our financial outlook for the balance of 2002. Following the prepared remarks, we will be happy to take your questions.

Before we begin, please note that the information discussed today is current as of July 18, 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 worldwide 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 10-Q for the quarter ended March 31, 2002 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 June 30, 2002 we are pleased to report better than expected revenues of $106.1 million. We reported net income of $152,000 or one cent per diluted share after including a $1 million charge related to a previous equity investment. Excluding the charge we would have had net income of $1.2 million or four cents per diluted share.

Our stronger than expected results for this quarter were due to improvements in all geographies and across almost all product lines when compared to our first quarter performance. For the six months ended June 30, 2002 revenues were $198.1 million and we reported a net loss of $3.5 million or 14 cents per share.

will now review these results in more detail. . unid: Thank you and hello everybody. As said we reported revenues of $106.1 million for the second quarter of 2002 which was up over 15 percent from the prior quarter. Revenue from our video segment was $70.2 million, up 17 percent from Q1 and for Digidesign, our audio segment revenue was $35.9 million, up 11 percent from Q1.

The $10 million sequential increase in video revenue is due primarily to significant growth in the high end and the low cost lines of our post production markets and in our storage and broadcast groups. Additionally, our Digidesign division had a record revenue quarter driven by strong demand for its new flagship digital audio workstation Pro Tools|HD. Digidesign also saw strong demand for Mbox, a low cost portable micro studio targeted for the whole musician.

Gross margins for the quarter was 50.4 percent, up 2.3 points from the first quarter. The increase was largely due to a favorable product mix driven by the release of several new products during the quarter and the ending of a number of special promotions. The margin was also favorably impacted by better manufacturing overhead absorption.

Operating expenses for the quarter excluding amortization and restructuring were $52.2 million, up from $47.3 million in the first quarter of 2002 and down from $58.8 million in the second quarter of 2001. The sequential increase is attributable to planned marketing expenses related to Avid's participation in the National Association of Broadcaster's convention and follow up marketing programs in the United States and Europe.

In addition, our bad debt expense increased due to the provision of a reserve related to receivables from one our resellers. The 11 percent decrease from the second quarter of 2001 reflects the impact of our cost control measures. Operating income for the second quarter was $1.3 million excluding amortization and restructuring.

Interest and other income net was a loss of $700,000 reflecting a $1 million impairment charge to reduce the carrying value of a minority equity investment to zero.

Our provision for income taxes for the second quarter was $500,000. For the second quarter we reported net income of $152,000 or one cent per diluted share including the $1 million charge related to the equity investment. Excluding this charge we would have had net income of $1.2 million or four cents per diluted share. Weighted average diluted shares for the quarter were 26.5 million.

Our cash and marketable securities balance as of June 30 was $65 million up approximately $11 million from the March 31 balance. The increase in cash was primarily due to a reduction in working capital. Accounts payable increased during the quarter as a result of the deferral of inventory purchases to late in the quarter in line with our major new product releases and due to increased focus on payables management.

Days sales outstanding decreased from 76 days to 66 days due to the success of our ongoing collection efforts and inventory turns improved to 8.3 times for the quarter. I will now turn the call back to for a discussion of our business in the various markets we address.

Thank you, . At the National Association of Broadcaster's Convention held in Las Vegas at the very start of the quarter we announced many new product releases spanning our entire product line. Our mission in R&D this quarter was to complete work on all of these products so that they could shift in the same quarter. We were able to achieve this goal on schedule resulting in the largest across the board release of new products in Avid's history.

For the high definition editing and finishing market we began shipping version six of Avid|DS which includes systems for standard definition and high definition editing and finishing. We also introduced an entirely new version of Avid|DS at a more attractive price point for customers whose main focus is editing high definition content rather than enhancing content with compositing and effect.

Fueling sales at the high end is increased demand for high definition video content including prime time series, digital cinema and on location advertising using HD video. Recently "Crossing Jordan" on NBC and "The Guardian" on CBS became the first prime time television series on major networks to use Avid|DS HD in their production demonstrating continued adoption of this powerful HD editing and finishing solution in the LA market.

With the release of Avid|DS 6.0 we have further differentiated ourselves at the high end of the post production market by improving our customer's work flow from standard definition to high definition. We have also incorporated a media composer style user interface in DS enabling an experienced Avid editor to start working on DS much more easily.

The rapid growth of professionals using DV media is driving strong demand for Xpress DV, our low cost software only editing solution. During the quarter we started shifting version 3.5 of Avid Xpress DV, the industry's most powerful DV editing studio. This version marks the first time this portable, affordable, professional DV studio is available to editors on both the McIntosh and Windows platforms.

As you may have seen in the press release we issued shortly after our earnings announcement, we have experienced brisk sales of the McIntosh version reflecting pent up demand for the system. We have signed , one of the largest McIntosh resellers as an authorized Avid reseller for Xpress DV 3.5. And to make this software even more accessible to students and independent film makers all the way up to seasoned professionals, we have further widened our distribution of Xpress DV by making it available on both PC Mall and .

Xpress DV 3.5 is also positioning AVID to make a more aggressive push into the education market. In connection with MacWorld, we just issued a press release announcing a major purchase of AVID systems by Savannah College of Art and Design, or SCAD, one of the largest art and design specialty colleges in the nation. This is a significant competitive win for us because the 330 seats of Xpress DV are replacing competitive systems previously owned by the college. But this sale goes much further than Xpress DV. SCAD represents another customer who is embracing the value of AVID's big picture strategy, purchasing a wider variety of our post production solutions including Symphony, Media Composer, and Unity. Ultimately, SCAD's goal is to train students on industry standard solutions and prepare them for the kind of experiences and applications they will face when it comes time to enter the real world. We are pleased that SCAD has chosen AVID systems as a cornerstone in its curriculum to educate the next generation of postproduction professionals.

To address the ever increasing shared storage needs of our customers, we now offer a spectrum of solutions delivering the advantages of creative collaboration to facilities of any size. For customers requiring a lower cost shared storage solution, we offer AVID Unity and EX. Both models of are cost effective solutions ideal for small to mid-sized film editorial, broadcast, corporate, education, and government facilities that want the robust storage management and media sharing capabilities provided by the core technology of the AVID Unity system.

For larger media enterprises, we offer AVID Unity Media Network, which now scales larger than ever before, supporting more clients at higher media resolutions. For archival needs, we established a partnership with EMC and are reselling EMC's content addressed storage solution.

By the end of the quarter, we cumulatively had sold almost 1,000 AVID Unity systems worldwide.

In broadcast the conversion from analog to digital news production is continuing. Broadcasters recognized the many benefits of working in an all-digital production environment and, as a result, our pipeline of potential customers is expanding. We've taken a long-term view of the broadcast market and have been cultivating relationships with broadcasters and have been developing technology based on their input. We have reached a point where our initial partners are coming back to purchase additional solutions and new partners are giving us the opportunity to develop relationships.

During the quarter, we entered into contracts to build and supply solutions to stations within several new station groups. These include Meredith Corporation, which owns 12 stations, Sinclair Broadcast Group with 37 owned stations, and Univision with 15 stations. We continue to solidify our position as the leading provider of end-to-end digital newsroom solutions with nearly 40 broadcast facilities around the world using or installing AVID solutions.

Now I'd like to discuss some of the marketing initiatives we have underway. Building on the excitement generated at April's NAB convention, we kicked off two campaigns during the quarter. The first was a domestic tour called Start to Finish, echoing our NAD theme. The tour covered eight cities and explored industry trends and highlighted the AVID product family. In Europe, a similar tour called AVID Experience started in May and will run through October visiting cities in each country. In each location the seminars provide an opportunity for customers to make direct contact with industry experts from AVID and many of our partners.

They also enable customers to improve their technical skills and learn about Avid's vision for the future. For , our 3D animation and effects division, their most significant trade show of the year happens next week.

is a gathering of the world's computer graphics community. will be unveiling version 3.0 of XSI, our flagship, high end animation software that offers significant productivity enhancements, as well as improved between XSI and the rest of the Avid product family. Looking forward, we continue to execute against our ambitious product development plans, delivering highly compelling solutions for all of our markets, and we're confident that our progress this quarter demonstrates the enthusiasm our customers have for the new and innovative solutions we're bringing to market.

I'm extremely proud of the hard work of all of our employees, and look forward to building on this momentum as we prepare to deliver on the next phases of the plans we have put in place for the future. Now, I'll hand it back to Paul to discuss our outlook for the balance of 2002.

Thanks, David. During our last call, I said that we expected 2002 to be a difficult year for our post-production customers. We are pleased with the improvement in our revenue from Q1 to Q2, but we still think that the economic environment will remain challenging and uncertain for the remainder of the year, and we will plan our business and our expenses accordingly.

Last quarter, our guidance for the second half 2002 revenues was $208 million. At this time, we are reaffirming our second half guidance at that level, which would imply full year revenues in the range of $406 million. We expect revenues in the third quarter to be in the range of $102 to $104 million, down slightly from the second quarter.

The reduction in expected revenues for Q3 is primarily related to our audio business that is coming off a quarter of very high revenue and moving into a quarter that tends to be seasonally weak. Gross margins, which were 50.4 percent in Q2, are expected to remain in that range for the balance of the year. Operating expenses, excluding amortization and restructuring, are expected to decrease sequentially from 52.2 million to approximately 51 million in the third quarter.

Full year operating expenses, excluding amortization and restructuring, are expected to be approximately $201 million, a decrease of about 10 percent from the 2001 level of 222.5 million. At the mid point of our $102 to $104 million revenue range for Q3, we would expect to achieve a small operating profit for the quarter. For the full year, assuming revenue of $406 million, and operating expenses in the range of $201 million, we would expect an operating profit, excluding amortization and restructuring, of approximately $2 million.

We feel that the current level of operating expenses is appropriate given the importance of maintaining the R&D programs that are underway and the need to invest in sales and marketing programs as the economy begins to improve. If economic conditions improve and our revenue grows faster than currently anticipated, I would expect an improvement in profitability based on our ability to support higher revenue levels without growing our operating expenses proportionately.

Now, let me give you the outlook for items below pro forma operating income. Other income is expected to be approximately $300,000 per quarter for the rest of the year. Our tax provision is expected to remain level at $500,000 per quarter, and amortization is expected to be about $300,000 per quarter. Diluted shares outstanding are expected to be approximately 27 million for Q3, and basic shares outstanding are expected to be 26.1 million for the full year.

We will continue to manage our cash carefully, though we expect the cash balance at the end of Q3 to be at or slightly below the Q2 level of $65 million. These conclude my remarks. David and I would now be pleased to take your questions.

Thank you, and today's question and answer session will be conducted electronically. If you would like to ask a question, please press star, one, on your touch tone phone. Again, that's star, one, if you would like to ask a question. And we'll take our first question from of Piper Jaffray.

Hey guys, if you could talk a little bit about the -- just the upside in revenue. David, you mentioned that there was a slew of new products that came out. Is there any way to segment how much of that came from new products, or was it from a fundamental -- are we seeing an inflection point with some of the post production studios in terms of them actually spending more money on some of the traditional products.

Hi, . The revenue up tick quarter on quarter from Q1 to Q2 was not related to products in any new business areas for us. So it was really improved product versions over previous releases, so it reflects -- I think a combination of two things. One is a slight economic up tick that we experienced fairly broadly, and as we said, across all geographies. And then also, increased customer willingness, based on some of the significant new features that we introduced in some of our new products. I'll give you some examples, , which we introduced during the quarter, lets us provide unity storage all the way up to uncompressed resolutions for customers at a much lower price point, because it's based on storage.

The express version 3.5, which is available on the Mac now, let us address some pent up demand for that product on the Mac platform. In broadcast, we had new versions of several of our products, and I think a lot of our customers were very interested and excited about seeing that our solutions are maturing more and more. A similar action happened with , where with version six we did three key things. Significant improvement in performance, it's about 100 percent faster than where it was a year ago. We also improved the conform capability from Media Composer offline to , and we also improved the user interface for Avid trained editors.

So what you end up seeing is that there was a broad-based effort that we did at NAB to upgrade all of our products, and it was that total effort that moved things forward, as opposed to just any one item.

Do you get a sense, though, from your customers -- I know Paul that you mentioned a number of customers that, you know, that are starting to pick up borders. Is it -- do you sense that it's, hey, these are products that have a lot of value to us that we want and that's why we're buying it? Or do you just sense that, you know, there's something in terms of the ad spending and, you know, just in terms of the workload at the post-production level that has given some sort of reason for optimism. I'm trying to figure out, is it the product cycle driven, or is it market driven?

It's -- I think it's a combination of both. On the market side, there's a couple things we're seeing. One is a slight up tick on the advertising side. You probably saw the results of the up front sales of ad -- of ad spending that the networks just held this quarter, and they had an improvement in their up front sales for the upcoming fall season of about 5 to 10 percent of revenues over last year. So there's an up tick on the add side and the broadcasters I think are responding to that.

Another market trend that we're seeing is an increased use of HD as a delivery mechanism. I've talked recently with many of our post houses and what they're telling me is it's becoming an increased percentage of the contents that they're delivering for their customers. And they get to charge about a 50 percent premium for content delivered in HD over content delivered in standard definition. So that's another driver for picking up the economics in our post production business.

OK. Could you just talk a little bit also about the you know Digidesign obviously that was actually a little bit stronger than I had been expecting because the upgrade was at the beginning of last quarter, the March quarter. Any particular reason for that?

Well one strong driver with Digidesign this quarter was that we have an upgrade from our previous generation products that actually came to an end at the end of this quarter. So we got a fair amount of upgrade revenue from our Pro Tools mix systems with people upgrading to Pro Tools HD. That was one of the factors.

We also have a slight price increase on some of the versions of Pro Tools HD that is beginning next quarter and we think that that may have driven some demand as well.

OK. Just on a competitive front you had made some comments regarding Apple, some of their difficulties, if you will. Any sort of comments on that front?

I don't think there's any significant change going on on the competitive landscape. I think the big news for us is that for the first time now we have an offering in the lower cost segment available on the McIntosh platform. And as I mentioned there was a fair amount of pent up demand for that product and we're in fact displaying that product this week at Mac World down in New York city. That product is something that is very exciting for us.

In fact, just to give you a sense of the improvement for the up tick that we've had with that we've had about a 40 percent increase in revenue just quarter on quarter with the Xpress DV product. So that's a pretty strong growth for us.

One final question back to the - some of those contracts, Meredith, Sinclair and Univision, any sort of idea what the dollars what the value of those contracts might be and over what period of time you might recognize that?

Well I can't give you the details on each of those contracts. But I can tell you the general size when we do and end to end digital newsroom installation it can be anywhere from a million to a million and-a-half dollars for complete unity for news system. There are some smaller stations. I mean we can deliver a system that is as low cost as around $150,000.

But in general for the larger stations it's usually on the order of a million to a million-and-a-half per system. And in terms of when the revenue gets recognized, it generally is within the following quarter or two from the initial sale because we do installation and we get complete customer acceptance before we recognize revenue on the sale.

Do you feel as just in general that the company is kind of coming out of it's kind of difficult period of what had been happening with some of the closed production areas? Or is it just as had mentioned so is this kind of tough going?

Well we you know we're - as I said we're really pleased with the turnaround from Q1 to Q2 but we're going to be cautious about it going forward. , I also want to just clarify and make sure that you understood the comment that was made earlier. The deals that we signed with those various stations, the various groups were four stations within the group. It wasn't necessarily a contract to sign up all of the stations within the particular group.

OK.

Yes. The thing that is beneficial though is that we found for example with that we had an initial sale at WKYC. They've been on the air since December or January of over a year ago, and what has happened in the is that they've been subsequently signed on additional stations. So we would hope for and further penetration into the station groups that we've just signed in to.

Just in terms of the field of business, my previous question, is it, do you feel like you're coming out of a difficult period, or are we still a little bit premature?

Well I think Paul's reflecting the fact that we're trying to be conservative about how we're looking at the industry moving forward, but certainly if you look at Q2 compared to Q1, there's a pretty strong recovery so we're seeing some solidification there and we're hopeful that that trend will continue. We are seeing, as we've mentioned, advertising spending is a driver. We're seeing some up tick in ad spending and some industry analysts have improved their estimates for advertising spending through the end of the year. So those are trends that we hope will continue.

And the pipeline of activity is getting stronger for us as well.

Thanks, guys.

Thanks .

We'll now hear from of Raymond James Canada.

Hi, good afternoon guys. Just following on that pipeline comment, would you say that there's any changes in deal sizes as well, are deal sizes getting bigger on the broadcast side or ... ?

That's essentially been a general trend over the last four to six quarters. As we do more and more of the broadcast deals, those solutions are in the $1 million plus area.

Okay. And do you guys actually break out your video business? Is the majority in post and you're just starting out on broadcasting, or can you give me any flavor on that?

The segments that we report externally are the video segment and the audio segment. We don't break the video segment down further.

Okay. Okay, and then in terms of the merger, have you seen any benefits or any negative effects of that, or is it still too early to tell?

In general, it's still too early to tell. Thompson and GVG prior to the acquisition had some overlap in their product line, so I think it's probably yet to see how that overlap will be reconciled. So I think it's still too early to tell.

Okay. And then just on the broadcast side again, in terms of - I mean you had a good quarter this quarter - do you think that's just the market picking up or do you think you're actually winning share against other people?

Well I can tell you one comment just in terms of number of the broadcast deals that we've been in. They generally are multiple vendor bids, and we have found that we've been winning more than we've been losing, so we've been very pleased to see that. And as Paul said, our pipeline has been improving as well. So we do feel like we're gaining some momentum there.

And just my last one. In the last conference call, you mentioned the high end post side, you said that has pulled back and Sony and have pulled back as well. I think was introducing a product called the platform, which played in that space. Have you seen that at all or am I way off base there?

You know, I can't say that I've heard about it much. I think it may be the case that we're running into it in some geographies, but I could say that it's not something that's across the board, because I've not been getting reports of us running into that.

OK. That's it for me. Thank you.

All right.

Thank you.

Moving forward, we'll hear from of Partners.

Hi guys.

Hey Rich.

Can you give us a sense for, well what sorts of specific things are you doing on the operating side to keep you expenses down?

Well, as you can see, we've made some pretty significant progress on a year over year basis. If you look at the six month year to date results on op ex year over year, I believe operating expenses are down about 19 million year over year, and that will get somewhat better in terms of the full year comparison. We've got a very aggressive product road map that's well underway, and we've made a decision at this point in time that we need to maintain that, and as I said earlier, we think that the level of operating expenses today is the right level for the company, and so we're not planning any specific actions there other than just being real tight with managing expenses and hiring.

I could mention one thing just to add onto what Paul said. When we -- we had a restructuring last August, and at that time we had built in some extra buffer, where we were actually reducing expenses further than we thought we even needed to, so that we could do some additional hiring back in some geographic regions, and also just to alter our skill mix a little bit. As a result of further softening of the economy, we didn't fill in those positions that we had kind of created as a buffer, and that's allowed us to keep that lower level of operating expenses as we've moved into this year. So we were fortunate in that we had built some buffer in there. It allowed us to enter this year with a much lower operating base, and as you probably saw our results in Q1, our operating expense there was actually the lowest it's been since 1995.

So it's been pretty aggressive expense management on our part, but, you know, good timing given what's going on in the economy right now.

And on R&D, was the reduction due to outsourcing, or any other kind of, you know, one time event?

We are actually using outsourcing in some key areas where we've got specific programs that are phased, for example, specific design elements where we may not need a design skill for a long period of time, so we're strategically using outsourcing for those purposes. And as a consequence of that, it'll give us the opportunity to lower R&D expenses further in the future when we can phase out some of those expenses.

OK. Just one last question on the top line. Any back logs, significant backlogs like an or of the other to speak of?

We don't disclose backlog numbers specifically, but we entered the quarter with -- for us, a pretty strong backlog, and we improved on that during the quarter.

OK, thanks, great quarter.

Thank you.

Thank you.

And as a reminder, if you would like to ask a question today, please press star, one, on your touch tone phone. We'll hear next from of .

Thank you very much. The question I'm going to ask was partially just answered, but on the R&D, David, when do we start to see the leverage from that, because I know you're still working in the video area and you're not getting a lot of leverage from that, yet. So when do you suspect we'll start to see that -- I guess it's all got to come out of sales at this point.

The -- when you say when are we going to see the leverage from R&D, do you mean the market returns for the investments we're making in R&D?

Yes.

OK. The -- as we've described to you in the past, we've got a pretty aggressive development road map underway, and elements of it are coming out now. Part of it contributed to our performance in Q2. As I mentioned when answering question, part of the factor that helped boost revenues in Q2 was the very broad array of new products that we were able to bring to market. But if you're also asking, what are some of the other key milestones for us, we do have pretty meaningful product releases that are going to be happening throughout the rest of this year, and then also going into next year. So our time horizon that you should be thinking about of where our investment horizon is for these R&D investments is over the next probably 12 months, and the next couple quarters after that as well.

Now, if you're saying, when is the pick up going to be? Part of the impact in the post-production industry has really been an overall economic impact, as we mentioned with the advertising spending declines. So as that picks up, I think that that'll be an independent factor that'll start helping us out. But as Paul mentioned, it's still too early for us to be bullish about that, so we're taking a conservative approach.

I'm really asking it from a product driven, not economy driven.

OK, so from a product driven point of view, we should think of it as over the next four to six quarters that we'll be driving our video business.

Paul, can we get the headcount at the end of Q2 please?

The headcount at the end of Q2, I believe, was 1552, which is up about nine people for the year, so far. is up more than nine and the video organization is net down for the year to date.

Thanks very much, good quarter.

OK, thanks.

Our next question comes from of .

Hello gentlemen, don't mean to do back to back on you. David, I just finished at down here in Nashville, and I noticed that the was here. Can you give us an idea of when that will actually be introduced to the market?

Yes, I know that we were going to be announcing that product. I believe that it's within a quarter, but I actually don't have the exact ship date for that. I'm pretty sure that it's going to be shipping this quarter.

OK. The other question is, many of the new products that you introduced in the second quarter, I thought that they were all kind of June introductions, and if so, could they really have contributed that much to the second quarter, and shouldn't we expect to see some of that coming into Q3 and 4 as well?

Well, we do expect it to continue to help us gain revenue in the future quarters, but given that we do have somewhat back end loaded quarters, delivering our product releases within the quarter that we announce them is actually very important to us. If for nothing else, it's just to avoid having deferred revenue across the quarter boundary.

Got it. Thank you, congratulations.

Thank you.

And as a final reminder, if you would like to ask a question, please press star, one, on your touch tone phone. Our next question comes from , The Boston Company.

Oh, hi. I don't know if I missed it or if you said it, but could you break out your revenue for the quarter by, you know, by audio and video?

The video segment was roughly 70, and the audio segment was roughly 36 for the total of 106.

And what was it last quarter?

Last quarter was 92, and it was roughly 60 million for the video unit, and 32 for the audio unit.

OK, great, thank you.

You're welcome.

And it appears there are no further questions today. Mr. Krall, I'll turn the call back over to you for closing remarks.

All right, well thank you for joining us today. Should you have any further questions, please feel free to contact us, and we look forward to speaking with you next quarter. Thank you very much.

And that does conclude today's conference call. Thank you all for your participation.