Avid Technology Inc (AVID) 2002 Q4 法說會逐字稿

Thank you for standing by. You're currently on line for today's Avid Technology fourth quarter earnings result conference call. We're gathering additional participants at this time and anticipate being under way in just a few short moments. Thank you for your patience and please remain on line.

Please stand by, our conference is about to begin. Good day and welcome everyone to the Avid Technology fourth quarter earnings results conference call. Today's call is being recorded. For opening remarks, and introductions I would like to turn to 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 and CEO of Avid Technology and I'd like to welcome you to our fourth quarter 2002 results conference call. I'm currently in Spain, attending our European sales kickoff meeting. In a moment I'll turn it over to Paul Milbury, our CFO who is in our Tewksbury, Massachusetts headquarters. He will provide a detailed discussion of this quarter's financial results then I'll discuss some of the highlights from 2002 and the opportunities we see in front of us. Finally, Paul will come back and provide you with our financial outlook for 2003. 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 January 30, 2003. 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 2003. There are a number of factors that could cause actual events or results to differ materially from those indicated by such statements, such as delays in product shipments, the competitive markets in which Avid operates, market acceptance of Avid's existing and new products, and the other factors set forth under the caption. Certain factors that may affect future results in the quarterly report on form 10-Q for the quarter ended September 2002, and forms filed with the SEC. These 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 disclaim any obligation to do so even if our estimates change. For the quarter ended December 31st, 2002, we are pleased to report higher than expected revenues of $112.8m an increase of approximately 8% over the corresponding quarter in 2001. Our bottom line results also came in higher than expected with net income of $4.3m, or 15 cents per diluted share. Excluding a $3.2m real estate related charge and acquisition related amortization of 300,000 dollars, we would have reported net income of $7.8m, or 28 cents per share. Our solid results reflect momentum building in each of our businesses. For full year ended December 31, 2002 revenues were $418.7m, and we reported net income excluding charges and amortization of $7.1m or 26 cents per diluted share. Paul will now review these results in more detail.

Thanks, David, and good evening everyone. Overall, somewhere some would say we had an excellent fourth quarter. We're looking at it as a good start. Revenues were almost $113m, nearly 8% up from a year ago, and up almost 5% from the third quarter. We achieved the most profitable quarter since 1998, and backlog increased for the fourth consecutive quarter and cash increased for the third quarter in a row.

Revenue from video segment was a little over $79m up from approximately $74m in the prior quarter. For Digidesign our audio segment, revenue $33.7m, approximately the same as the prior quarter.

For the year, although revenues designed declined by 4%, rereduced operating expenses by almost 9%, allowing us to increase our net income before nonrecurring charges to over $7m from a little over $1m in 2001. And we have positioned ourselves to substantially improve our results in 2003 by growing our revenues, expanding our gross margins, and limiting the growth of our operating expenses. Our sales pipeline and our backlog give us improved visibility into 2003, specially Q1. At the end of the third quarter, a significant portion of the backlog that the company had was related to the end of our media composer ABVB upgrade program. In Q4 most of those orders were fulfilled. The net increase in the backlog was accounted for mostly by the addition of new orders for large broadcast solution sales. Gross margins for the fourth quarter was 52.4%, up nearly 2 points from the prior quarter, due to higher margins of the video vied side of the business maintaining our prices and reducing level of discounting. From the fourth quarter of 2001, gross margins have increased by more than 3 points. The major drivers of the year on year improvement are a richer product mix, a stronger Euro and reduced discounting.

Operating expenses excluding nonrecurring costs and acquisition related amortization declined by approximately $700,000 from the previous quarter to approximately $51.4m for Q4.

Fourth quarter operating income excluding nonrecurring costs and amortization was $7.7m, or 6.8% of revenue, up from 2.4% of revenue in the third quarter and less than 1% in the fourth quarter of 2001. Both audio and video segments were profitable in the quarter. This quarter's results included a $3.2m non-recurring and non-cash charge, related to vacating real estate subject to long-term leases, principally in the San Francisco market. Interest and other income net was $410,000, our provision for income taxes for the fourth quarter was $300,000, and acquisition-related amortization was approximately $300,000 as well. For the fourth quarter, our reported GAAP net income was $4.3m, or 15 cents per diluted share, on weighted average diluted shares of $28.3m. Excluding the real estate charge, and acquisition related amortization we would have reported $7.8m net income or 28 cents per share for the fourth quarter of 2002. We further strengthened our balance sheet during the quarter. Our cash and marketable securities balance as of December 31st was $89m, up approximately $11m from the September 30th, balance. The income increase in cash was primarily related to proceeds from employee stock option exercises. Since the end of the March quarter our cash balance has increase by over $35m. Day sales outstanding held steady relative to last quarter at 53 days. Inventory turns were 5.6 times for the fourth quarter. Inventory increased approximately $8m from the third quarter primarily due to broadcast system sales, where we have not yet recognized the revenue. Excluding these sales, inventory turns would have been 7.3 times. I'll now turn the call back to David for discussion of our business and the markets we address.

Thank you, Paul. Our solid performance this past year is a continuing reflection of the strategy we first put in place nearly three years ago and provides a very firm foundation on which to build in 2003. I'd like to spend a few minutes reviewing some of the year's highlights and comment on some of the opportunities that lie ahead. In our core post production market, there are a couple of key dynamics currently driving our business at both the high and low ends of the market. High definition, or HD post production of media continues to increase and we're finding government mandates that call for television networks to broadcast digitally, and the emergence of digital cinema aren't really key drivers at the moment. While these factors have some influence we're finding that our customers are choosing the HD format because of the work flow and productivity advantages it offers. That is, the cost or competitive edge HD can provide in an always cost and time sensitive environment. This presents a unique digital work flow opportunity for Avid. Given the vast number of Avid customers who already use such systems such as media composer for offline or rough draft editing they can easily transfer projects for finishing or final tuning and polishing a HD resolution to an Avid DSHD system.

Furthermore, Film and television professionals who create media in any format are finding it extremely economical to master their work in HD, creating a HD master extends the shelf life of a project compared to a master created on film or standard definition video. HD masters also enable professionals to generate high resolution copies and almost any format required for broadcast.

We call it future-proofing, something our customers continue to tell us that is particularly valuable for creating high quality, broadcast-ready content from an archived master. So for a film distributor looking to create a future special edition DVD, or its next big blockbuster or a television network wanting to deliver high quality programming that will run in syndication for years to come, there are significant time and cost saving advantages that can result from creating high definition masters. With products like Avid DSHD, Avid is enabling its customers to offer this invaluable service and move further along the value chain of digital content creation. We attribute the strong sales of our HD product offerings in Q4 to the economical cost of acquiring an HD, the tight integration between media composer and Avid DSHD and the growing need to future-proof media assets in HD.

At the low end of the post production market, the explosion in number of DV-camcorders continues to help drive the sales of Avid Express DV; to professional media creators. Advid Express DV is a perfect low cost editing solution for a wide range of professionals from event or corporate videographers to students who are eager to learn the industry standard Avid interface, to the more than 75,000 trained media composer editors looking for a portable tool that allows them to take their work and continue editing from any remote location. In order to further seed the market, we recently announced a free DV-only version of our video editing software old David free DV, this will enable anyone to step into the Avid product family and learn the interface and tool set used by more professionals than Nye video editing solution. More than 7500 people have visited our web site and registered for more information about the excited exciting new product since we made the announcement just three weeks ago. This free software is expected to be available in Q2. Turning now to broadcast news, interest in our end to end digital newsroom solution intensified as the year progressed and broadcasters continued to recognize the efficiencies and cost savings associated with adopting a digital nonlinear work flow. When they are ready to make the conversion, broadcasters are looking for partners with a record of reliability, dependable support, and scaleable solutions that work today. Not sometime in the future. We are proving that Avid can deliver on these promises.

Examples of our track record in Q4 include announcing orders from France TV, ABC news and TVS in Mexico. Just a few weeks ago, we announced a multimillion dollar deal with DB Hong Kong and earlier this week we announced we had completed installation of an end to end Avid digital news production environment for CNN-plus, a joint venture between Turner Broadcasting and Sobe Kabwe (Inaudible) Spain's leading independent television group. The installation at CNN-plus was the final phase of a three-phase project and completes Sobekabway’s (inaudible) two-year transition from tape-based television and news production to an all-digital production environment. As you can see, the conversion from tape-based production methods to non-linear digital work flow environments is taking hold among many of the world's leading broadcasters. Avid continues to win the majority of the deals in which we're involved in the bidding process. And through the end of 2002, we sold a total of 71 end to end digital news production news environments which we believe is more than all of our competitors combined over the same period. We also continued to expand our presence within broadcast station groups during the course of the year. As is often the case with station groups we initially have an opportunity to implement an end to end digital news system at one station, with future penetration into the broader station group depending on our ability to deliver on our promise of reliability and increased productivity. Our track record with these station groups, including Dinnette, Merideth, Sinclair and Univision speaks for itself as we've gone on to convert multiple stations within these groups to all-digital news production. A great example of this is GANNET's continued expansion of Avid nomineer television news production solutions to 12 of its 22 stations. Further validation of the momentum behind our leadership position in this important market.

Our audio division Digidesign completed a strong year based on several new product introductions. Digidesign started 2002 with the introduction of prosal HD the next generation audio production platform, that offered significant advancements in performance and audio fidelity. Based on the combination of software, hardware and peripherals, it was the single biggest release in Digidesign's history. During the year, Digi also introduced two products that were focused on consumer and prosumer market. Demand for these two products The M Box and Digi 002 has been even stronger than originally anticipated. A few weeks ago, Digi announced the release of version 6.0 of its pro tool software at the National Association of music merchants show. Chief amongst 6.0's features is support for apple OS-X, system providing improved solid interactions pro tools enviroment and power Mac. The release also features a new streamlined look enhancing pro tools user friendliness. For soft image, our group, 2002 was a significant year and they released two versions of high end animation software SXI. The second of these, version 3.0 of SXI, was released October 31st, and introduced many new enhancements that enable customers to work faster and more productively. Soft Image. also introduced a new product called behavior. Behavior is a powerful professional animation and crowd simulation tool that allows a single artist or developer using characters created in XSI, to generate, choreograph and control tens of thousands of similar characters. In a fraction of the time it would take to duplicate these characters using traditional methods. We're looking forward to the new benefits that behavior will offer to soft image customers work to go create life-like special effects in today's feature films, television commercials and video games. Looking across each of our businesses, I'm pleased by the progress we have made in positioning Avid to capitalize on the many opportunities in front of us. Now I'll hand it back to Paul to discuss outlook for 2003.

Thank you, David. Our strong fourth quarter results coupled with improved visibility have further increased our comfort level with our 2003 outlook, especially the first quarter. As a result, we are raising the high end of our range for 2003 full year revenue by $10m and now expect revenue to be between $440m and $460m for the year. We are expecting growth in our video segment in 2003 for the first time in several years. We anticipate that growth to be between 8 and 10% driven primarily by continued success with our broadcast news solutions. We expect our audio segment to grow between 6 and 8%. For the first quarter of 2003, we are expecting revenue to be approximately $110m. Our full year guidance is unchanged with expected gross margins of at least 52%, up 1.5 points from 2002. We expect our gross margins to benefit from new product introductions and increased solution selling in both the news and post-production markets. We expect gross margins in the first quarter to be approximately 51.5%, and for us to exit 2003 with fourth quarter gross margins above the average for the year. We expect approximately $210m of operating expenses for 2003, however, should our revenue come in at the high end of the range, operating expenses would be a little higher. We anticipate all of the year over year increase in operating expenses to be in the selling and general and administrative categories and not in R and D. First quarter of 2003, we expect rating expenses to be consistent with the average of the last several quarters, and approximately $52m. At $450m, the midpoint of our revenue range for 2003, we would expect to deliver operating profit of a little under $25m, or approximately 5.5% of revenue for the year, excluding acquisition-related amortization, and approximately 4% of revenue for the first quarter also excluding amortization. At this juncture, we feel there is more upside potential than downside risk around the mid point of the revenue range for the year. Quarterly other income is expected to be approximately $400,000 , our tax provision is expected to be $400,000 per quarter, and amortization should be about $300,000 per quarter. Once again, assuming $450m, the midpoint of our revenue range we would expect full year 2003 net income to be approximately $23m, or approximately 78 cents per share on a GAAP basis, with first quarter net income of approximately $4m, or 15 cents per share also on a GAAP basis. Excluding amortization, Q1 and full year earnings per share would be 16 cents and 82 cents respectively. Diluted shares outstanding are expected to be approximately $30m for each quarter during 2003. In the past, a number of questions have been raised about the company's U.S. tax status, so I'd like to take a minute to review our position. For the most part we are currently accruing only for taxes related to our foreign operations.

In the U.S., we have NOLs and tax credits sufficient to shelter about $110m of future U.S. taxable earnings. In addition, we have about $160m of remaining tax deductions related to 1998 acquisition of Soft Image…These deductions will shelter approximately $16m per year of U.S. taxable income over the next ten years. As a result, I would not expect that we will be accruing expenses for U.S. taxes for a number of years. On the balance sheet side, I would expect cash to increase to over $100m in the first quarter of 2003, and to over $125m by the end of the year.

In the first quarter, receivables and inventory should be little changed from Q4 2002. The increase in cash in Q1 is expected to be driven by operating profits, increased cash deposits for large deals, and the proceeds from the exercise of employee stock options. These conclude my remarks. David and I would now be pleased to take your questions.

The question-and-answer session will be conducted electronically. If you would like to ask a question, please press star-1 on your Touch-Tone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed and take as many questions as time permits.

Once again please press star-1 on your Touch-Tone telephone to ask a question. We'll pause for just a minute to give everyone the opportunity to signal for questions.

We'll take our first question from Steven Frankel of Adam Parkman Hill.

David, obviously excellent results that speak for themselves but wonder if you might give us a update on the penetration of storage into your new video editing sales and separately some comment on express DV, and we know it did real well the third quarter. How did it do in the fourth quarter?

Yeah, hi Steve. Your first question regarding unity from a unit point of view we actually doubled our number of units quarter on quarter, selling into the video post-production marketplace. In large part the increase in units is due to the fact that we are selling now land share and land share EX, which are lower cost versions of unity and allow to us address that market at lower price points. So our total number of unity systems we've sold accumulated to date is I believe approximately 1235 units. Regarding Express DV we had continued strong growth in Express DV, if we look at it from either a year on year basis for the total of the year or just comparing Q4 to Q4 of the prior year. In both cases it's more than a doubling of revenue from the product. So continues to have very strong growth as a product, and we continue to see strong demand moving forward and as we mentioned in our prepared remarks, it's really being fueled by the increase of camcorder sales that offer Native DV-formats.

And how did Express DV do in Q4 related to Q3?

I don't have the exact percentage number. Paul, do you have the percentage number for Q3 to Q4 increment on Express DV?

No, I don't have that data.

Was it up, down, flat??

from Q3 to Q4?

Yeah.

I think --.

I don't have the data with me. I think it was fairly flat from Q3 to Q4.

Yeah, part of that went into backlog.

Yeah.

Thank you. I'll let somebody ask some questions.

Okay.

Our next question comes from Paul Coster of J.P. Morgan.

Well gentlemen congratulations on a terrific quarter. Quick one on the nonlinear work flow in the broadcast TV space. Can you, David, perhaps just give us a sense of the pace of deals in that sector, and just reiterate for us what you think the market opportunity is and the level of penetration there?

Sure. As we mentioned in our prepared remarks, we've brought the total number of systems by the end of 2002, to 71, that are either installed or underway. So if you compare at our first year was about 30, second year was about 40 systems. We'd be disappointed if we didn't increase that number by about 50% this year, the 40-run rate to a 60 to a 80 run rate. And we do expect to get that, based on the ongoing interest that we're getting from the customer base for the product.

and in terms of market size, do you still --.

Yeah, our market size estimates are unchanged. We think is total opportunity is somewhere between 3 and $4b, and that that opportunity will play out over the next seven to ten years, as broadcasters go through the overall retooling of their production process from a tape-based work flow to a nonlinear work flow. It's important to note that this is a very disruptive change, it's really disruptive technology that we're introducing here. It's a fundamental shift in the way that broadcasters work from tape-based or using signals, to control the movement of data, to making it now be a file-based work flow based on shared storage and high speed networking. So the process is slow for early adoption, but as you can see, that adoption rate has been accelerating and we continue to believe that we've got the best solution out there, as measured by our success rate in winning the deals.

What percentage of overall revenues at the moment can you attribute to this business, and where do you think it would trend by the year end?

Paul, we don't disclose that -- break that out as a specific line of business, so I think we'll have to pass on that question.

All right. Well, thank you --.

Obviously, it's getting to be a bigger percentage of the company's revenue.

You're seeing, it sounds like it's the primary growth driver in the digital video and film business at the moment. Is that fair?

Yes, it is.

Okay, thank you.

Our next question comes from Rich Ingrassia of Roth Capital Partners.

Good evening, guys, congratulations. You know, your growth these days seems to be getting ahead of the ad market in general, would you say that that's characteristic that will continue going forward?

This is David. The ad market actually by many estimates is actually beginning to recover a little bit which is an encouraging sign, but you know, one of the primary drivers that we've seen for the retooling of broadcast has been primarily the benefits in productivity and cost savings, related to switching to an IT-based infrastructure which is what encouraged broadcasters to continue investing during the downturn, and we suspect that it can only be a positive influence for the advertising marketplace to recover.

So would you say that you're tracking with overall trend in broadcast cap ex or are you sort of outside of that general trend as well?

Well, broadcast cap ex, if you think about the fact that broadcasters, many of them have been around for many, many years and in some cases over a hundred years, you know that they think long-term. So when they see a decline in advertising spending, what they do is usually look at it as a short-term impact as opposed to something that alters their overall strategy of how they plan on being successful. On the other hand, we do sell a fair amount to broadcasters that is in addition to their retooling of their news production facilities, for example. So when broadcasters are faced with a decline in advertising spending, they may find that they are producing less original shows, for example, and may not sponsor as many new series or as many documents documentaries, et cetera, because some of that expenditure is discretionary. So it's only a positive influence overall, as the advertising market recovers. But the cap ex component of retooling news rooms, we think, is somewhat resilient to the short-term up and down swings in advertising.

and last, it was actually pretty surprising, great to see Steve jobs quoted in a press release of yours. There was no love loss between the companies a while back. How do you characterize that relationship these days, and going forward? What does it mean for collaboration on technologies for example?

Great question, Rich, because I think a lot of people don't quite understand what the relationship is. It's certainly the case that we do compete with apple in the Express DV, and final cut pro range of our product line. And that, I think, is healthy competition that ultimately benefits the consumer. In a much broader sense, though, we sell a fair amount of our equipment on the MacIntosh platform. We're believers in the converse to OS-X, and plan to fully support that operating system. And appear sell an important supplier to us. We work with them not only on press releases but also on our engineering development efforts. They provide support to us. We provide bug feedback, and it's a collaborative process that literally does benefit both companies as well as the consumer. So I expect that to continue moving forward, and I'm happy to have a collaborative relationship with Apple as a company and Steve jobs individually.

Thanks.

Our next question comes from Gene Munster of Pieper Jaffrey.

Hi, this is Scott Nicholas on behalf of Gene. Great quarter. Couple questions for you. I guess first, looking at the backlog, you've talked about how the net additions of backlog were driven from the broadcast side. I'm wondering if you can give us some color on the product mix of the backlog overall exiting '02?

Well, the large majority of the backlog exiting '02 is, as we said, made up of these large broadcast solutions. Those large broadcast solutions would typically include a unity for news, editing equipment, ingest and play equipment. So the end to end solution we're offering to that marketplace.

Is news cutter a part of that as well?

Yes.

Okay. All right. Kind of on the new product front, I realize you won't want to go into specifics but can you give us a general feel for either product areas or general types of new products we may see unveiled at either at NAB, or over the course of 23?

Scott, this is David.

Hey, David.

Yes. Unfortunately, I don't think we'll be able to make you happy with our answer here. We do have a media alert that's going to be coming out shortly that is going to be a discussion we have with major publications who is cover Avid in general, and also will be contributors at NAB. And that's going to be happening shortly, where we'll give them a flavor of what we're going to be talking about at NAB. But primarily, I'm sure you realize we do target a fair amount of introductions as NAB, it's our most important trade show of the year. And we like building the suspense, so I hope you'll forgive us for trying to keep this a big secret, but of course you can imagine we're very excited about the show.

Got you. Okay. The guidance you've given implies improving gross margins in 2003. Do you think that will be a continuous improvement or I guess what I'm wondering, with the upgrades to some of the products in the second half of 2002 if we see kind of either stable R&D expense or a drop-off in R&D at some point as a percent of revenue, at some point in 2003 and thus a pop in the operating margin.

This is Paul. As I said earlier with respect to operating expenses, being $210m, slightly up from '02, none of that increase is related to R&D, so R&D is expected to be pretty flat in '03 versus '02. R&D was actually down in '02 versus '01. So R&D as a percentage of revenue is declining as revenue grows and R&D spending is contained.

Okay, it sounds like the operating margin improvements will be gradual over the course of the year and on an absolute basis, though, to expect R&D to be pretty much constant?

Yes.

Okay. Great. And for 2003, looking at your broadcasting business, it's probably -- the answer is probably going to be a mix of both of these, but do you expect growth in that business to be due primarily by sales to existing customers or new customer wins?

This is David. It's interesting, if we talk about broadcast news solutions, there's two parts to the answer to that question. One is that we will be selling to new customers, meaning new stations, or new station groups, and that will be a significant component of the growth. But in addition, an important part of where we're seeing our success today is that once we penetrate a station group, they tend to use the success of that first station as an indication of how well the solution works, and then we find that subsequent sales to that same station group can be at an accelerated pace. So we expect that we will be satisfying both ends of your question, selling not only to new customers but also then having some significant expansion within current station groups. And then a last flavor of that is just but even a current station that we've already sold to, very likely will do increases in number of seats of editing or media browsing or may increase their amount of shared storage that they operate with.

SCOTT NICHOLAS Okay, great. Thanks.

As a reminder to listening audience, it is star-1 to signal for a question. We go next to Louie Sykes of Penton Capital.

Hi good afternoon, a couple of questions. First, what was the number for cash flow from operations, capital expenditures and depreciation in the fourth quarter?

Capital spending in the fourth quarter was, I believe, around $2.5m, and depreciation was $3m for the full year, capital spending was about $10m and depreciation was $12m.

Great. And cash from operations?

I'm afraid I actually don't have that statement with me today.

Okay. And then, second, you talked about the gross margin increase end of quarter, and an increase of 3.1 points versus last year. Can you quantify the components, you mentioned it came from mix from currency and from lower discounting.

Let's see. Of the three-point increase year over year, I would guess close to two-thirds of that, or 2 points was related to firmer pricing, and a reduction in the level of discount activity.

Okay. And --.

Two of the three points. Currency and the third factor was --.

Mix.

Is mix. I would guess that they're about equal.The big difference was the lower level of discounting and firm firmer pricing.

So it's two points from lower discounting, half a point from currency and half point from mix exchange?

Roughly.

and of the revenue growth year over year, how much of that was due to currency?

the full year, or the quarterly -- the quarterly number, I think -- or the full year currency impact was several million positive.

Several million?

Yes. I think a little under $3m.

Okay. Okay, great, thank you.

Next we go to Neal Gagnon of Gagnon Securities.

Good afternoon.

David, everyone knows that you're going to be introducing the beginning of a new line, at NAB. Can you give us any sense at this point of what it's going to do to your traditional video business over the next few years?

Well, again, without commenting specifically on any new product introduction --.

Of course.

Yes. What we've expected to do, we have talked fairly publicly about the fact that we've had some decline in our core editing business, primarily in the standard definition resolution, as that marketplace is relatively mature. What we expect to happen over the course of the year with new product introductions is that the post-production marketplace will primarily stabilize for us as a business segment, and then we expect that to turn back into growth segment. And the drivers there for it are the conversion to increased HD production, as well as the ongoing demand for our lower cost products, Xpress DV being one of the products that is having very significant growth right now.

Okay. Will you have a lot of new capability for your very large customer base that hasn't seen new product?

Well, again, one of the trends that we'll be capitalizing on is the ongoing shift to HD production, and what we think will happen is that as the demand for HD production increases, and there are quite a number of signs indicating that the HD production is picking up in terms of its momentum, we expect that our ability to offer ongoing solutions there will be a significant driver for us. If I were to point to a couple of the indications, the fact that this year about a third -- somewhere between a quarter and a third of the prime time TV shows were acquired in HD HD format this year, and about 90% of the prime time shows were finished in HD format this year. So it's showing that it is getting accelerated momentum as a format. In addition, if we compare the adoption of HD on the production side, to the adoption of color TV when that was introduced in the mid '50s, the adoption of HD is actually going faster than the adoption of color TV. So our belief that the conversion to HD, is going to happen; not so much a visionary statement as really just a pragmatic statement. It's really already well under way.

Good. David, thanks. .

You're welcome.

Next we go to Rob Zuffin of Brike Alore.

Hi, guys. Nice quarter.

Hi, Rob. Thanks Rob.

Can you remind me what the station count was for the September quarter? .

Paul, do you have that on your end? I've got the year end number.

No, I don't know precisely what it was.

--.

the September quarter.

Was it roughly in the low 50s, is that the right comparison?

I think -- the number 53 is coming up in my mind, but I'm not sure.

and that's about what I'm thinking, too, low to mid 50s.

Okay. Are you finding that the deal size is increasing on the broadcast side of your business, or are you starting to actually be able to sell to the small broadcasters as well?

You know what, we're actually seeing it go in brought both directions. With the introduction of land share EX, that in combination with some news cutter systems and an airspace playout server, we have a very cost-effective solution that we refer to internally as a broadcast in a box capability and we find that we're able to address stations in smaller markets with that product, because it's very cost-effective and it gives them a set of capability that is still a significant advancement over what they're currently Ewing. On the higher end, you've seen us achieve the win that we announced with France TV, the TV D, and technical deals were also sizable but there are additional deals under way today, for example I just returned from Asia, there are two deals that I'm aware of that make the TV D deal look small. So we're finding the size of deals that are coming are pretty significant. In addition, another opportunity for us is that once we've installed the system, our customers are coming back to us asking for solutions for mirror line storage as well as archival storage and again in some cases those deals are opportunities can dwarf the initial newsroom installation. So those are all things that are the challenges faced by today's broadcasters, and we are working with them to come up with creative solutions for those problems.

Okay, great. Turning to gross margin for a moment, your gross margin was above guidance, and as you introduced these new products I'm wondering what the gross margin potential is by year end?

Rob, in the guidance for the year, we said we'd average 52%, starting out at 51.5% in the first quarter and that would get progressively better over the course of the year, and we expected the fourth quarter to be higher than that 52%. I guess at this point we're not going to be more specific than that about the gross margin, although we do expect the fourth quarter to be the highest level of gross margin for the year.

Okay. Well, thanks again, nice quarter.

Thank you.

Thanks, Rob.

Up next we go to David Einhorn of Green Line Capital.

Hi, actually it's (inaudible). A lot of my questions have been Hans answered but one question had to do with your operating profit margin by your respected businesses. You said you were aiming for 5.5% consolidated margin. How would that fall out into the video and in the professional audio business?

At this time, we're not providing specific profitability guidance for the segments. We provided the revenue, revenue guidance for the two units but we're not providing specific profitability guidance other than to say that our expectation is that both video and audio will be profitable for the year, or expected to be profitable for the year and for the first quarter.

Can you explain to me why video was such a money loser over the past few years and what you've done specifically to bring it to break even?

Well, -- if you were to go back to look at the cost structure of the video unit over the last several years, you would see some pretty dramatic reductions in cost. On the other hand, the video segments revenues have been declining also over the last several years. So it's been a process of trying to keep the costs in line with the revenue. And going forward, as we look at 2003, as I said earlier, I would expect the video unit to grow at the top line by 8 to 10%, with operating expenses growing much lower than that and with gross margins expanding in that unit. We have been investing heavily in R&D, in the video segment over the last several years, to bring the products that we have lined up today and the ones that we have coming out over the course of next year to market.

So the decline in R&D year over year, I think it was from something like 86 to 81 or 82, is that -- that's primarily a decrease in the R&D at the video side of the business?

Yes, that's right.

Okay, thanks.

You're welcome.

At this time we do have one question remaining in the queue. I'd like to remind everyone that if you would like to ask a question, or if you have a follow-up, please press star-1 to signal. We'll take a follow-up question from Rich Ingrassia at Roth Capital Partners.

Sorry it was asked and answered. Thanks, anyway.

We do have another question from Randy Shurago. at First Albany Corporation.

RANDY SHURAGO. Hi, guys, great quarter. What was the mix as far as the Americas versus rest of the world, how did like Asia and Europe do relative to domestic operations?

in the fourth quarter?

Yeah.

Can you be more specific, relative to the third quarter or --.

Relative to the third quarter and -- yeah. Was there a big mix shift as far as what was driving the business, was it European and Asia an operations vis-a-vis U.S.?

the mix of the company's total business at -- in the fourth quarter was still around 55% in the Americas, 30% in Europe and 15% in Asia.

Okay.

On a quarter over quarter basis, Q3 to Q4, I think we had the best performance in the European segment of the business.

Okay.

in terms of the top line.

Thank you.

That will conclude our question-and-answer session for today. At this time I would like to turn the conference back over to David Krall for any closing remarks or additional remarks.

I'd like to thank everyone for joining us today and ask you that if you should have any further questions, please feel free contact us and we look forward to speaking with you again next quarter. Thank you for joining us.

Once again that does conclude today's presentation. Your participation has been appreciated. You may disconnect your line at this time. --- 0