Avid Technology Inc (AVID) 2003 Q3 法說會逐字稿

Thank you for standing by, your online[ph] for today is Avid Technology's 3rd quarter earnings result conference call. At this time, we are gathering additional participants, and should be under way momentarily. We do appreciate your patients, and please remain on line. Please standby, the conference is about to begin. Good day and welcome everyone to the Avid Technology 3rd quarter earnings results conference call. Today's call is being recorded. For opening remarks an introductions, I would like to turn the call over to President and Chief Executive Officer, Mr. David Krall. Please go ahead sir.

Thank you and good afternoon. I'm David Krall, President and CEO of Avid technology, and I'd like to welcome you to our 3rd quarter, 2003 results conference call. In a moment I will turn the call over to Paul Milbury, our CFO, who will provide a detailed review of this quarter's financial results. Of the highlights from the quarter. Finally, Paul will come back and provide you with our financial outlook for the 4th quarter, and a first look at our expectations for 2004. Following our prepared remarks, we will be happy to take your questions.

Before we begin, please note that the information discussed today, is current as of October 16th, 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 result to differ materially, from those indicated by such statements; such as delays in product shipments, the competitive markets that Avid operates, market acceptance of Avid's existing and new products, and the other factors set forth under the caption, certain factors that may effect future results, in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2003. And other documents followed 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 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, and therefore you should not rely on these forward looking statements as representing our views as of any date subsequent to today.

During this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. The most directly comparable financial measures calculated, in accordance with GAAP, are contained in a press release available in the investor relations section of our web site www.Avid.com. Under the heading audio archives. A reconciliation of the non-GAAP financial measures, to the most directly comparable GAAP measures, will be provided during the call and will also be available on our web site.

For the 3 months, ended September 30 2003, we are pleased to report revenues of $119.1 million versus $107.8 million in the corresponding quarter in 2002. At the bottom-line, net income was $11.8 million or 35 cents per diluted share. Compared to net income of $2.3 million or 9 cents per diluted share for the corresponding quarter in 2002. For the 9 months ended September 30 2003, revenues were $344.6 million compared to $305.9 million for the first 9 months of 2002. Net income for the 9-month period in 2003 was $25.1 million, per diluted share, compared to a net loss of $1.3 million for 5 cents per share, for the same period in 2002. Paul will now review these results in more detail. Paul?

Thank you David, and good afternoon everyone. When I spoke to you during our last conference call, I said the biggest risk to achieving our revenue plans for the quarter, related to the shipping of the products. We are very pleased that even without any revenue from our Nitris product, we were able to exceed our plan. The lack of Nitris revenue was more than made up for, by growth in revenue from broadcast and storage products and services. Revenue increased sequentially to $119.1 million for the quarter. Video revenue increased 17% year-over-year, to $86.7 million. As expected, audio revenue exhibited seasonal weakness declining sequentially to $32.4 million for the quarter. Currency did not have a meaningful impact on our quarterly sequentially revenue.

Gross margin grew to 55.7%, above our expectations and higher than the 55.3 in Q-2. Gross margins have improved sequentially, each of the past 6 quarters. Operating expenses, excluding approximately $400,000 for the amortization of restructuring. We're in line with our plan, declining sequentially to $53.4 million. Including amortization of restructuring, operating expenses were $54.8 million. Compared to Q-3 of 2002, operating expenses were up approximately $2.3 million, substantially -- all of which is increased sales and marketing activities. R&D spending has been held flat, and as a result, has declined as a percentage of revenue, by 2 full points. Operating income was $12 million or 10.1% of revenue. The video and audio segments were both profitable, as they have been each quarter this year. Net income, excluding amortization and restructuring, was $12.3 million or 37 cents per diluted share.

This was the highest level of quarterly net income in nearly five years. Including amortization and restructuring expenses, net income was $11.8 million or 35 cents per diluted share. Our cash balance increased by approximately $37 million, with approximately $17 million being generated through operation, and the balance from employee stock program activity. The brought our cash balance to almost $172 million, nearly double the year-end 2002 balance. DSO's declined from 53 days in Q-2, to 46 days. DSOs benefited in Q-3 from the recognition of previously differed transactions for which we had already received some payments. I would expect DSOs to increase in Q-4. Capital spending was about $1.9 million for the quarter, while depreciation was approximately $7 million. I will be back shortly, to update our guidance for the 4th quarter and give our initial outlook for 2004. But now, I would like to turn the call back to David, for discussion of the highlights from this past quarter.

Thank you Paul. As you can tell from Paul's discussion, we clearly had another solid quarter. The momentum we've been building continued as we, again, grew our revenue and profitability over the last quarter. Looking at our year-over-year progress, the combination of our increasing revenue, expanding gross margins, and cost containment efforts, enabled us to generate more than 5 times the quarterly net income posted, just 1 year ago. On the product front, we had a full quarter of solid performance from media-composer adrenaline, taking orders from several prominent customers. A few of these deals include, BBC post-production, in the UK, which purchased in an entire post-production work flow from Avid, including 14 adrenaline systems, a 15-seat Avid unity media network, with more than 5 terabytes of storage, and a Digidesign ProTools system. Here in the US, the Discovery Production Group, purchased and installed 28 media systems, in its new facility in Maryland; where it will produce documentaries and shows for cable channels. Like, the Discovery Channel, the Science Channel, Animal Planet, and the Travel Channel.

Last quarter I mentioned a few key drivers fueling, the demand for HD solutions, including Fox's HDTV plans for its fall, 2005 TV season. And NBC's launch of the Bravo, HD channel. We've seen additional HD momentum in the industry this past quarter, with Cablevision systems announcing its U.S. satellite, HDTV service called, Voom. Voom officially launched yesterday, offering 39 channels of high-definition programming. What's significant about this new service, is that the New York based production company, Rainbow Media, is using a fleet of Avid DSHD systems, to create HD content for these Cablevision channels. And now that Avid DS Nitris is available, Rainbow has ordered Nitris upgrades for these existing systems. Plus, several new Nitris systems, that will allow them to handle the volume of HD work, for Cablevisions service.

Last month, COX Communications, the 5th largest cable operator in the U.S., said it intends to make high-definition channels available in 85% of its markets, by the end of this year. And this fall, Football fans who own HDTV receivers, and watch games on CBS, ABC, or ESPN, have already started watching the action high depth. As each network is airing 1 NFL game per week in HD. By the time the NFL playoff games arrive, at year's end, it's expected that most, if not all, of the playoff games, will be available in HD. With more and more content and HD content and production, and with Avid DS Nitris now shipping, we're confident that more professionals will select Avid as their HD vendor of choice. We are already seeing evidence of this, with leading Hollywood's post-production facilities, using Avid DSHS, to finish more than 20 TV programs, in high definition, for the fall season. In fact, more debuting, primetime dramas are being finished on Avid DSHS systems, then any other finishing solution, according to the Hollywood reporters guide to the 2003, 2004 television series. With Nitris, we're delivering an entire new set of capabilities to the market. These capabilities, like real-time effects and color correction on 2 streams of uncompressed 10-bit HD media, allow customers to achieve a level of performance similar to what they've been experiencing for years in the world of standard definition, post-production. By offering unprecedented HD performance, at a break-through price, we believe Avid DS Nitris offers tremendous advantages that will enable post-production professionals to meet the increased demand, we're seeing, for HD media content.

Shifting to the entry-level of our Avid DNA product line, we began shipping Avid express Pro-software and the AVID Mojo Hardware accelerator at the end of the 3rd quarter. And demand for both products has been strong. One of the early benefits we're seeing with Avid Express Pro, is its scalability. In that, customers can use it as a software only DV editing tool, and that expands the softwares functionality by adding Avid Mojo, when they are ready. Avid Mojo allows customers to use Avid Express Pro on both, DV and SD video projects. As well as output complex sequences with layers of video, audio, and effects to tape, without having to render. Both the Avid Express Pro, and Avid Mojo products are compatible with the entire family of Avid editing, and networking systems, and are affordable companion tools for professionals working with film, or video projects. At home, on the road, or at the studio. Given the lower price points of these two products, we are using two-tiered distribution where large distributors sell to smaller re-sellers. The smaller re-sellers will then handle fulfillment and sales assistance, to end users. We also began shipping Avid NewsCutter 5.0 software for our broadcast customers. This is a new version of Avid's portable editing software that's optimized for news. It provides advanced capabilities, to give journalists, and editors, a robust and fast editing tool, that can be used in the most remote field locations, or on a desktop system back at the news station. Similar to Avid Express Pro, NewsCutter XP 5.0, can also be connected to Avid Mojo, with an standard firewire cable. So, editors can take advantage of the additional, real time transcode, editing and play-out benefits. In broadcast news, we received orders to implement 16 additional end-to-end systems for customers who are making the transition from analog to digital news production. With a total of 126 systems ordered or installed around the world, we continue to widen our lead in the broadcast news marketplace.

Some of our Q-3 wins include highly visible customers, such as NBC. With whom we announced multiple agreements to replace several tape-days production systems with Avid end-to-end digital newsrooms. Taken together, these multi-level agreements with NBC, worth $6.7 million, represent the 2nd largest broadcast deal in Avid's history as a accompany. According to these agreements, NBC plans to deploy end-to-end newsrooms at NBC news headquarters in New York, the NBC MSNBC news operations center in New Jersey, and NBC's Washington bureau. We also increased our strong hold within broadcast station groups within Q-3. COX Television, part of the same COX Communications group I mentioned earlier, purchased end-to-end solutions for 6 of its 15 new stations. Tribune[ph] Broadcasting, another group that owns 26 major market stations, will begin implementing Avid New Solutions in 2 of the key markets; Atlanta, and Los Angeles. Earlier in the year, we talked about the long-term benefits that can come from working with station groups, to convert all of their member stations. We believe the addition of these 2 groups is another step in that direction, and we're looking forward to working closely with both Cox and Tribune as each organization completes its transition to digital news production.

To date, we've taken orders from a total 14 different station groups representing approximately 250 member stations across the United States. Out of this total, we've received orders to supply Avid end-to-end solutions at 46 of these stations. This means that 80% of the opportunity at the groups we've already penetrated, is still in front of us. We believe we have a significant advantage, as additional stations within this groups, decide to adopt an end-to-end digital solution. On top of that, we believe these initial station groups --[inaudible] only a quarter of the total broadcast market opportunity, in the United States. Also during 3rd quarter Digidesign, our audio division, began shipping a new process card for the ProTools, HD system. Called HD-XL, the card is optimized for the recently introduced ProTools 6.2 software, and features nearly twice the raw DSP power compared to the card, first introduced with the ProTools system, back in early 2002. With these new processing capabilities, customers are able to work with higher quality audio mixes at any sample rate, configure more complex plug-in algorithms, and increase overall plug-in counts. Digi exhibited the HD-XL card, at the AS convention in New York, earlier this week. Other new products featured at the AS convention, included the new 96i I/O Audio Interface, that enables third party outward gear, like keyboards and samples, to be introduced into a ProTools-HD environment.

Digidesign also previewed a new service at AS, called DigiDelivery. This network appliance allows efficient and secure transferring of digital assets across Internet. Digital delivery is the first module of DigiDesign's fully integrated, collaborative work-flow system, that will enable production facilities, graphics houses, add agencies, broadcasters, and independent contractors, an easy, secure and economical way to transfer any kind of digital file, to virtually, anyone. The technology behind DigiDelivery, was obtained when we purchased Rocket Network, in early April of this year. In 3-D, both SoftImage XSI, and behavior[ph] continued off at the world's visual effects houses, and game developers; compelling productivity and creativity enhancements. Recent blockbusters that used extensive 3-D modeling, animations and special effects, from SoftImage, include The Matrix reloaded, Tomb Raider 2, Terminator 3, and Spying kids 3-D Game Over. Going forward, we anticipate increased demand for SoftImage tools. As film-makers and video-game-makers continue to create stunning, life-like experiences, with computer generated images and characters.

In closing, we're extremely pleased for our Q-3 results, and the trajectory we're on, for the remainder 2003 and beyond. With all 3 members of our revolutionary Avid DNA product family now shipping, with our expanding market leadership in digital news production, with our industry standard position and professional audio, and with the momentum we're gaining in 3-D, we've put the essential building blocks in place to further increase Avid's revenue and profitability. Our 3rd quarter results are another indicator that our long-term strategy is paying off, and we're looking forward to capitalizing on the exciting opportunities that lie ahead. I'd now like to hand it back to Paul, to discuss our outlook for the 4th quarter of 2003, and an initial look at 2004. Paul?

Thanks David. Now let's move on to the guidance, the outlook for the 4th quarter and the for 2004. We are increasing our revenue guidance for Q4, 2003, to approximately $125 million, which would result in full-year revenue right around $470 million. We are also increasing our EPS guidance, before acquisition related amortization, to 45 cents per share, for the 4th quarter, which would result in full-year earnings-per-share of $1.33, excluding amortization and restructuring. Including amortization and restructuring, full-year earnings-per-share would be approximately $1.23. Gross margins for the 4th quarter are expected to be up about a half point to 56.2%. Operating expenses, excluding acquisition related amortization, are expected to increase to approximately $55.5 million in the 4th quarter. The increase from Q-3 is driven, partly,[inaudible] in variable compensation programs, like sales commissions and employee profit sharing, and partly, by some very selective hiring. Acquisition related amortization, would add about $350,000 to our pro forma operating expenses.

With revenue of $125 million, a gross margin of 56.2%, at operating expenses of $55.5 million, we would expect our operating profit to be a little under $15 million for the quarter. Acquisition related amortization, would reduce operative profit by approximately $350,000. Other income in the 4th quarter, should be approximately $600,000, and tax expense should be around $300,000.

Fully diluted shares in the 4th quarter, are expected to be approximately $33.8 million. Our cash position, currently at $172 million, is expected to be approaching $200 million by year-end. So let me try to sum up the 2003 full-year outlook, obviously, assuming we achieve our guidance for the 4th quarter. We will have exceeded our internal revenue plans, and will have grown our top line by 12% for the year. We will have expanded our gross margins by about 5 percentage points to over 55%. And, we will have contained our operating expense growth rate, to 7%, substantially lower then our revenue growth rate. With this operating leverage, our operating profits, for 2003, excluding amortization and restructuring, is expected to increase by almost 400%. And from a balance sheet perspective, we will avoid and doubled our cash position, from $89 million at the beginning of the year, to approximately $200 million at year-end. Now for some initial guidance for 2004. First of all, we expect to continue to grow our top-line. Our guidance, is for revenue in the area of $520 million, up approximately $50 million from 2003. Gross margins are expected to be in the area of 56%, and operating expenses are expected to grow, substantially less then revenue, at around 7%, for the year. With those assumptions, we would expect our 2004 operating profits, excluding acquisition related amortization, to grow more than 40%, to a little over $59 million for the year. Assuming other income of approximately 700,000 per quarter, and taxes of approximately 500,000 per quarter, in fully diluted shares, between 34 and $34.5 million, we would expect earnings-per-share in the area of $1.75. Amortization would reduce EPS by about a penny for the full year. These conclude my remarks, David and I would now be pleased to take your questions.

Our question-and-answer session will be conducted electronically. If you would like to ask a question,[OPERATOR INSTRUCTIONS]. Our first question comes from Steve Frankel of Adams, Harkness and Hill.

David and Paul, great job navigating this product transition. I would like to dig in a little bit on the storage business, and wondered if you could tell me how much the storage business grew, year-over-year? And then if you look at your immediate composer customer's that are buying multiple units, what is the attach rate with storage in the installed base? And what does it look like as new units are going out the door now?

[inaudible] See this, you know, we don't, specifically break out our storage business as a product line. It is doing will for us because of the success in the big picture business; both in broadcast and in post. Year-to-date, our unity business is up more than 50%, and in this most recent quarter, the increase was actually higher then that.

Great, and what about the attach rate? Just some ruff numbers?

Yes. We don't have a breakdown of the specific attach rate, Steve. But one thing that is happening, that's a significant trend, is we're finding, more and more storage that's going out with each unity system. So, in general, they are larger configurations going out the door.

Right. And Paul, could you just give us the domestic international split?

Pretty much the same as it's been on a worldwide basis, 55% in the America's, 30% Europe, and 50%, and 15% Asia-Pacific.

Thank you.

You're welcome.

Our next question comes from Jim Ricchiuti Needham & Co.

Yes, thank you. Paul, can you give us the operating profits for video and audio?

For the 3rd quarter, the operating profit for video, was approximately $9.8 million, and for audio, $2.2 million.

Great. David, I wonder if you could comment a little bit more about -- just what you've seen, out of -- you've had a full order of media, composer adrenaline under your belt. Just in terms of, you know, what's your take on some of the customer receptions of the product. What seems to be driving it? I wonder if you could just elaborate on that a little more?

Sure. Yes. So, as you would expect in Q-2, we had some pent-up demand for Media Composer Adrenaline, which we were able to, largely, fill into Q-2. In Q3, we actually had higher revenue and higher unit count for Media Composer Adrenaline, as would be expected. We're not going to be breaking those numbers out individually [inaudible] on a go-forward basis. But we are encouraged by the strong demand for the product. In terms of where we're seeing it, we're seeing it both as an augmentation to existing work groups that have prior generation Avid products, such as our Meridian family or our ABB families. As well as, the people who are building new work groups, like some of the deals that I announced; whether it's Discovery Channel, etcetera. Whether we're building entirely new facilities based on the Media Composer Adrenaline family.

One thing that we have found to be very successful in our strategy with Media Composer Adrenaline; in addition to being, basically twice the performance at half the price, we also made it the most compatible media composer we've ever built. Meaning that it's compatible with Meridian originated media as well as ABBD[ph] originated media. And we have found that to be a significant factor as customers who have had a ABDV[ph] systems which might be 8 years old, now have a product that they can upgrade to, maintain their media compatibility. So it's actually a pretty easy and efficient sales process for moving them off to a new family.

Okay. If I could just switch to the broadcast for a second, with one other question? Sequentially, you know, it looked like you had a bit of a decline, and I'm wondering, in terms of the number of new stations, is that a function of, just some, general lumpiness to this business?

That's exactly right. So, what we find, is that, you know, 23 new stations sold in Q-2, 16 this quarter, we're expecting the number to go back up again in Q-4. If you go back to what we had talked about at the beginning of the year, we had said we expected the station count to increase by 60 to 80 for the year. We're currently sitting at 55 after this quarter and we're expecting to [inaudible] somewhere in the hunt of the high-end of that range by the end of year.

Okay. Great. Thank you.

Our next question comes from Richard Ingrassia, of Roth Capital Partners.

Good afternoon guys. A couple of quick questions on Nitris. Was it, actually, delayed a short time? Or is that my imagination?

No, not your imagination and all. We had said, in our last conference call, that this, actually, a pretty complex product. Both from the software point of view as well as the hardware point of view. And then you layer on top of that a multi-site work environment in Tuxbury, Montreal. Some locations in India and pulling that all together and integrating that into a working and fully tested system. So, we had said at the last call, complex, coming out near the end of the quarter, might moving into the following quarter. And when it came down to September 29th, which was our targeted ship date, we actually felt that we wanted to put it through a few more passes, to make sure we were completely comfortable with it. And as you know, we actually shipped it on the 15th of this month. So I think we delayed it by two weeks, but were very happy to do that. Because what we're very focused on his having high initial customer acceptance of the product, and a very good, what we call, out of the box, experience. So, as it is, we think our customers will be very pleased with this product.

Great, and, and are you doing some of the -- are some of the sales more direct now? Then through re-sellers, they don't seem to make some sense to be doing that.

That's correct, and I think Paul talked about some of the direct, versus indirect, numbers that we've got. In fact, do you want to fight with the numbers?

No. The trend in our video businesses is somewhat more toward the direct, because all of the, substantially, all of the large broadcast business is being taken direct.

Okay, but Nitris itself is still going to be, mainly, a re-seller?

Mainly re-seller. There are a couple exceptions to that, some geographic regions in particular, overseas, where it might be a direct product. But primarily, that's a channel product.

Okay. And then just one last product question on Mojo, and the slightly altered channel. Do you see a margin impact? In going to the distributor first and then to the smaller re-sellers?

It's not a -- that comment was not specifically targeted towards saying a change in strategy regarding our channel distribution. It was, simply, trying delineate the fact that we do go through multiple channels. Express DV was already going through a multi-tiered channel. The same is true for Express-Pro, and we just wanted to make it clear that Mojo is also a 2-tiered channel product. So, it's not a change for us, just a clarification of what to expect Mojo and express Pro to primarily be delivered through. And the main reason for that is that our traditional resellers generally operate at the higher-margin products, or shouldn't say margin, higher gross margin dollar products, so the adrenalin class product is more the order of our traditional channel, and we're just identifying that the lower cost products often go through 2-tiered distribution.

Okay, thanks for the clarification.

We go next to Gene Munster of Piper JaffRay.

Congratulations. I'll start with a million dollar question here, Paul. Gross margins on the new products? Any sort of -- I know you can't give us absolute numbers, but any sort of direction in terms of where those might going with these new products as they roll out in the next couple of quarters?

Well, as we said in the past, the Adrenalin product has gross margins that are more attractive than the product it's replacing; that's in the mix today. Nitrus margins are attractive, but don't represent the same sort of increment over the product that they're replacing as adrenalin did, so all of that's factored into the guidance, for roughly a half point increase this quarter.

Okay, and in terms of the -- I apologize if you guys went over this already, but in terms of the audio business it would seem logical that kind of Q1 would be a Digi upgrade, does that seem reasonable?

We don't have any specific announcement to make or guidance for Digi for Q1 or beyond at this juncture.

Is it safe to say that the upgrade space in that is going to be consistent with historical -- I guess [inaudible] between upgrades?

I think Gene, you're probably referring to the ProTools HD introduction from January 2002, and you are looking for a similar upgrade cycle with our HD system, or something like that?

Okay well, this quarter is really where we're going to be shipping the HD Excel card, and that is an upgrade to the current ProTools HD system. In terms of what Digidesign's plans are for next year, we have alluded on several prior occasions to the fact there are going to be some new products introduced, next year from Digi, and we haven't been explicit about what those products are, and we're not yet going to be explicit about those products. But you should expect some new products from Digi next year that are going to be -- .

I apologize for the interruption, gentlemen, please continue.

I think we lost him, that might have been Gene's cellphone going out of range or something. Okay we should go on to the next question.

We go to Randy Scherago, first Albany.

Hi guys, congratulations on a good quarter. The lumpiness, I'm just trying to back into it, and I know you guys don't want to give that much granularity, but given the lumpiness of the broadcast business, was the size or scope of the size of the broadcast installations, bigger, the same as it was historically, and sort of kind of back door it into your Adrenalin numbers, one would think that you were sort of North of 900 units this quarter.

Yes. I guess we don't have a specific comment on that in terms of the size of the deals, or the size of the Adrenalin revenue.

And in fact, to be clear, there's a connection we should make sure that you don't make, which is, when we're talking about the fact that we got 16 new orders in the quarter, that's actually not stating how many deals were recognized for revenue during the quarter. So you can't extrapolate from that number to then back in with the Media Composer Adrenalin units are. Does that make sense?

But, you don't want to give out any granularity on the size or scope, or sort of the Adrenalin, how that's continuing to sell in the market.

Well, our basic statement is that that product is a great product, and it's doing well for Avid, and we expect it to do well for us moving forward. We also expect to do well with the HD option, which we've talked about coming out next year for that product. But we don't intend to report on a quarterly basis what the unit count is for that. We should also point out that historically, Media Composer Revenue had been as high as 65 percent of Avid's that revenue as a company, and in that case, I think following the exact unit account for Media Composer was very relevant. At this point, Media Composer Adrenalin is one of many products that we sell, and its revenue contribution to the over revenue number for the company is now below 20 percent. Even though it's a great product, it's no longer the single measure by which to gauge how we're doing.

Could you comment on the size and scope of broadcast wins, as far as -- are you seeing the size of the installations being larger than they were when you started out?

Well, we had mentioned that [inaudible] was the our largest deal in Avid's history. The NBC deal was actually the second largest deal in Avid's history, so we're continuing to see large deals. But we're also continuing to see some small deals, and expect that there will be, on a going forward basis, a spread of large systems and small systems, and what happens in any given quarter is anybody's guess. It just all depends on when station groups decide to do the conversion.

And are you limited by any factors as far as people, to the number of installations you can do in a given quarter?

That's actually a very good question -- doing an installation that is -- has a significant amount of custom work, could be very people intensive. On the other hand, when we sell another station to a station group where we've already sold 1 or 2, in general they standardize on a configuration, and those can go in actually fairly quickly. So, it depends on the nature of the deal that we're talking about. Some of them are people-intensive, and we have been ramping our capacity in manufacturing, in our custom engineering team to do the customization, as well as our professional services team, that can go out and do the site planning, and help manage the installation process. So we have had to increase our re-sourcing there.

Can I ask one more question? Which was just regarding R&D, are we going to start to see any sort of dialing down of your R&D spend over the next year to 2 years? In constant dollars?

No, no we're not. As I said earlier, if you look year-over-year, R&D spending is pretty flat, not down in terms of absolute dollars, it is down a couple of points, in terms of a percentage of our revenue from 19 to 17 percent of revenue. It's not our plan to reduce that in absolute dollars, but it will continue to decline as a percentage of our revenue.

Okay, thanks guys.

Our next question today comes from Neil Gagnon, of Gagnon Securities.

Hello David and Paul. Our clients thank you for the good job you're doing. On Nitrous, did you experience any of the pent up demand that you saw on Adrenalin?

The short answer is yes; we went into the quarter with some backlog, and that's something that we obviously intend to fulfill this quarter, and we have also found a fair amount of pent-up demand for the product -- for new orders that are coming in. So, we're pretty excited about how that product is going to be received in the marketplace, and that's also why we highlighted some of the details around HD content being created, and some of the new channels for distributing JD content. We believe that HD is going to be a pretty big driver in the postproduction business moving forward.

One other question. [inaudible] Are we going to get some blockbusters, or will it be a fill in sort of year in '04?

Well, we're not going to tell you what we're going to be introducing at [inaudible] but I will say that we expect to have a very successful NAB this year, without commenting specifically on anything that we might be announcing, I don't think that people will be let down by NAB 2004.

Great, thank you very much.

Our next question today will come from Jacob Caldenbalm, Harvest Equity Research.

Good afternoon, gentlemen, good job on the quarter. I was wondering if you could speak a little bit about other market segments, beyond broadcast, as well as film postproduction, and do they constitutes the vast majority of new wins, or are there a third and fourth market segment that are also contributing to your growth?

Well, what's contributing to our growth today is primarily that we have stabilized, and are turning around our post business, and that was an area that, with the maturation of the standard definition marketplace, was something that we had to work our way through, and we believe that HD is going to be a driver moving forward, for picking that up.

In addition, something that we haven't talked about yet explicitly, is the increased use of DV media, as an acquisition and publishing format; and that is something that is very prevalent in the low-end professional marketplace and what we're targeting explicitly with Express DV, with Express Pro, and with Mojo. And we're expecting to see some pretty strong growth there. In fact, Mojo our introduction to that product, just at the end of Q3, it's been very well received, and we've upped our build plan for that product for this quarter by approximately 50%. So, we're already seeing strong demand, it's a good driver for us, and pretty excited about that, moving forward.

The other big growth area that you're already alluded to is in broadcast, and the conversion from analog or tape-based production, to fully networked digital production is something that we expect to be seeing moving forward on a multiyear basis. So it's not a 3 or even a 5 year trend, it could easily carry us beyond that. When you then say, well what else could be a significant driver for us? One of the areas that we see is storage. And Paul already alluded to the increase we had in Unity revenue. It was our best Unity quarter ever, in the history of the company, and we expect to get continued growth out of that part of our business as well.

Okay and on the last call, you guys talked a little bit more about the services organization. Is there any update into how you're developing and growing that? It sounds like human resources are something that you guys need to keep putting into the pipeline to continue the growth of the company.

Well, our services business actually did very well in Q3, and we've been getting a higher attach rate than we had in recent history. We believe that that's a significant driver for us, because it means that customers are making a longer term commitment to us, as a company. We're also finding that in broadcast in particular, our customers want to make sure that they're getting the highest level of service. So they are very interested in attaching service to the product purchase from us. And so, as a consequence, yes, it does carry with it an ongoing requirement on our part to support our service organization, and provide for headcount growth as needed.

Is there anything interesting in terms of revenue recognition, with the services contracts?

Well, that's ratably recognized already, I'm not sure -- do you mean, is there some difference moving forward, in terms of how we would recognize it?

Right, I'm looking at the deferred revenues balance declining slightly, and I'm wondering if -- is there any relationship between that?

Not really. The deferred revenue balance is down just a little bit, and that's substantially all due to the maintenance portion of our deferred revenue. Where, we get paid up front and then recognize the revenue ratably over the course of the year. Most of the broadcast service revenue we're getting, we're getting as installation and training upfront, with the purchase of the product.

Okay, thank you very much and congratulations, again.

Our next question is a follow-up from Jim Ricchiuti of Needham & Co.

Yes, yes I wonder if you could just expand a little bit on the professional services group. How many folks do you have in that group right now? And how does that compare with say, 2 months ago?

Well, we've been growing that group. I think the initial announcement we had on that was somewhere the 12 people staffing. It's been increasing from there; still not -- probably hasn't doubled in size, but it's something that we expect moving forward to be a larger source of revenue for us, because what we're finding is that customers need help often, when we're doing a broadcast installation, whether it's a green field site, or a build into an existing installation, they need help on the site planning, on the management of the actual work being done, and they often need somebody [inaudible], sometimes we service the prime for it. And then, subsequently, for help on any integration issues, we very often will provide that service as well.

David or Paul, is it safe to assume that the backlog in the broadcast business came down this quarter, but you would expect it to increase in the December quarter?

No, we don't break out in backlog or talk about its direction typically in specifics or in its components. The backlog overall remains strong, and it may have been down a million or 2 or something like that in the quarter, but fairly constant.

One final question if I may, just given your cash balance right now, can you talk just little bit about that? In terms of, do you -- ? Are you looking at potential acquisition opportunities, are there pieces that you feel you still need to acquire to round out the product offering? Or to address some of the market opportunities you see ?

I think what would say, -- well, first of all yes. We're looking at acquisition opportunities as we always have been, with more cash and a higher stock price, we can be a little bit more expansive, in terms of the kinds of things that we're willing to take a look at. I would say that there is nothing that really fits into the category of things we have to have, to fill out our offering. For example, into the broadcast space so it's more a matter of being opportunistic and looking for attractive opportunities like the last several that we've done. We've done knowledge (ph) and Rocket and INews (ph).

Okay, thank you.

Sure.

Our next question comes from Tom Leech, with Bennett Lawrence Management.

Yes, good afternoon, nice job folks. Two questions, is on the Unity product that you sell. What percentage of that goes to the broadcast world and what percentage would go to the content or film world?

Percentage wise, it's still from a unit count point of view, primarily goes into the post business. But, it's an important point that when we talk about a broadcast news deal, what we mean by that, is that at the heart is a unity per new system, or a Unity land share system, which is the low cost version of Unity. So, for every broadcast sale that we list there is a Unity at the root of that. The volume number, if you just talk about the number of systems sold, still primarily goes into post production. Which is still a larger market for us.

And you guys have said a couple of times, that post production tends to have a direct link to ad spending. So are you seeing things wake up in the post production world at the moment? Ad spending seems to be climbing slightly here.

Well we're seeing that -- What we said was that one of the big drivers is conversion to HD production (ph), and we think that's going to be a driver, in some ways, almost independent of a pick up in ad spending. However, we are also believing that next year, for example, being an Olympic and an election year, that there will be a pick up in ad spending. And we've seen estimates from people who are even thinking that ad spending is going to be going up, this year, in the later part of the year.

So I guess it all depends on which report you're looking up, but I think there's at least a bottom has been found and that we're going to be moving up from this point. Moving forward.

And just clarifying, what percentage of content today is currently captured in an HD format?

Well HD is not the primary capture format. There are still traditional formats that are used for capture. Standard definition video, it could be DVD, could be film. And in fact a lot of material that is finished in HD is in fact captured on film, because film is a very high-quality, high-resolution format. However, what we are seeing is that the percentage of shows, for example, prime time shows, being captured in HD is increasing and there is a lot of development going on in that direction from Panasonic, from JVC from Sony, from JVC, who have all introduced very compelling HD acquisition cameras that allow people to acquire natively in the HD format. And the next thing that you need, once you've acquired natively in HD, is an editing system that can handle that HD media, which is one of the big drivers for us.

So we're very excited to see that. But we're not dependent entirely HD being the acquisition for us, because you can convert to HD resolution from film based material.

Okay, I understand that. I'm just trying to get a sense -- Or even ten percent of the video being captured today in HD, or ten or twelve percent --?

I couldn't give you a number for that because it would be a different number in every market, whether your talking about feature films, or news programming or prime time T.V. programming or commercial editorial. I just don't have that number off of the top of my head.

And last question. What type of pent-up demand do we have on the new Nitris? Obviously, it's in ship. People are expecting and had ordered some in the last quarter, so is there terribly -- is that why your inventory and dollars was up a little bit quarter on quarter?

Yes. There probably is some inventory in there for Nitris, that would have not have been there had we shipped it before the end of the quarter. David said earlier that we entered the quarter with a backlog for Nitris. The demand continues, the interest continues to be good. But, we're not going to quantify it.

I'll just give you an anecdotal story, though, just for what it's worth. We had a customer who was a beta site, who was actually doing active production for money, using our beta system. So, if that's not pent-up demand, I'll tell you, these guys were one of the first people to actually order system a system when it shipped, and we expect that a lot of other customers are going to be anxiously awaiting it. Because, the primary benefit is that you can work in HD media in real-time, and that is a significant time savings over having to wait and render your effects.

Super. Thank you, gentlemen.

You're welcome.

We go next to Jeremy Mendig [ph]of Scopia Capital.

Hi. Most of my questions were answered, but, two little questions. One is on Nitris. You're going to be selling mainly to resellers, you said? Could you just say how the revenue recognition will work on that? Will you recognize when you unto the resellers?

We recognize revenue when we sell it to the resellers, but, by company policy, the reseller order needs to have the end customer identified on it.

Great. And then the last question is just, if you break out, I don't know if you've broken this out in the past, what effect currents you have on your sales earnings?

What we said was that on a sequential bases, there was really no impact of currency.

Jeremy Mendig. Great. Thanks a lot.

You're welcome.

And our final question today will come from Jacob Caldenbalm [ph] of Harvest Equity Research.

Thank you for taking the follow-up question. I'm assuming that you guys must be tired from all this talking by now. But, I wanted to ask a couple of larger industry questions? And, one of them had to do -- are you guys seeing the rise of DRM or Visual water marking technologies being incorporated into the system by outside vendors, and if so, do you have some partnerships that you guys are working with? Can you comment at all about those?

In general, whether it's water marking or any other Digital Rights Management that's being done, is in a process that's done post our process, so you might call it post-post production. It's not something that we have to actively drive within our content creation tools. On the other hand, it is a very big issue, as you know, with the piracy of digital media,. There's a lot of concern about how do people maintain their proprietary media and make sure that it's not pirated. So, we know that it's a big trend in the industry. It's not an area that we are actively trying to drive because there are much larger players who are trying to create some standards there, and there's a lot of money being spend to solve that problem. So it's our intent to support whatever formats are defined in the future. Whatever standards are adopted. In the same way, I would give you an analogy. In the same way that we support Windows Media 9 as a distribution format, or Real or QuickTime, we will support whenever emerges as industry standards.

Okay so you're fairly agnostic with that.

Absolutely. In fact, it's a big requirement, from our customers. We try to be as agnostic as possible in acquisition formats, whether it's film, HD, SD, DV, or any MPEG format, and then, in terms of publishing, we want to be able to do universal mastering back to HD, DV, SD, you name it. And that gives our customers complete freedom in how they work with their media.

Okay. And then the second short I had is, are you seeing any trends of increasing the adoption use of stock film? Which, I guess would, you know, you guys might notice in terms of people wanting to import stock film from outside sources?

I couldn't comment on that. I haven't seen anything or heard any data on that one.

Okay. Thank you.

That will conclude today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Krall for any additional or closing remarks.

Thank you, Jennifer. You know, one thing that we didn't mention is that free DV is now available for download off of our web site. That has been available for about a week at this point, and we've had approximately 40 thousand downloads of it. So, for anybody who would like to get their hands on the Avid industry standard video/editing user interface for free and take a look at it, please go to our website and you download it. I'd also like to just thank everyone for joining us today and just say that if you have any further questions, please feel free to contact us after tonight's game. Go Sox.

Once again, this will conclude The Avid Technology Conference Call. Your participation is appreciated. You may disconnect your lines at this time.