Avid Technology Inc (AVID) 2003 Q4 法說會逐字稿

Good day and welcome everyone to the Avid Technology 4th quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn over to the President and CEO, Mr. David Krall. Go ahead, sir.

Thank you and good afternoon. I'm David Krall, President and CEO of Avid Technology and I would like to welcome you to our 4th quarter 2003 results conference call. In a moment I will turn over to Paul Milbury, our CFO, who will provide a detailed review of this quarter's financial results then I will discuss some of the highlights from the quarter and provide some color on the acquisition of NXN that we announced on Monday. Finally, Paul will come back and update our financial outlook for 2004, including our expectations for the 1st quarter. Following our prepared remarks we will be happy to take your questions.

Before we begin, please note the information discussed today is current as of January 29th, 2004. 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 2004. There a number of factors that could cause actual events to differ from those indicated by statements such as delays in product shipments, competitive markets in which Avid operates, market acceptance of existing and new products and the other factors set forth under the caption "certain factors that may affect future results", in the company's quarterly report on Form 10-Q for the quarter ended September 30, 2003 and other documents filed with the Securities and Exchange Commission.

In addition, any forward looking statements in our remarks represent estimates only as of today and should not be relied upon as representing estimates as of a subsequent date. While we may elect to update forward looking statements in the future, we specifically disclaim an obligation to do so even if our estimates change and therefore you should not rely on these forward looking statements as representing 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 principals. The most directly comparable financial measures calculated in accordance with GAAP are contained in a press release available in the investor section of our website at www.avid.com under audio archives. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided in the call and be available on our website.

Today we reported record quarterly net income for the 4th quarter of $15.8 million or 47 cents per diluted share on revenues of $127.3 million. This compares to the net income of $4.3 million or 15 cents per share, per diluted share, on revenues of $112.8 million for the corresponding quarter in 2002.

We also reported record net income for the full year ended December 31, 2003 of $40.9 million or $1.25 per diluted share on revenues of $471.9 million. This compares to net income of $3 million or 11 cents per diluted share on revenues of $418.7 million reported for 2002. Paul will now review these results in more detail.

Thank you, David and good afternoon, everyone. Q4 concluded a very successful financial year for Avid, so let me take a minute to provide a recap. Well before entering 2003, we indicated we expected to stabilize our post business with the introduction of a new family of products at NAB of 2003. We met that goal. We also said that we expected to aggressively grow the broadcast portion of our video business. We met that goal too. In fact, over all sales to the broadcast market grew by well over 50% in 2003 and broadcast now makes up more than a third of our video segment revenues.

We exceeded our internal revenue plan, growing year over year by 13%. We added more than 5 percentage points to our gross margin and we more than quintupled proforma earnings per share to $1.37 from 26 cents. In addition, we increased cash balance by more than $100 million to just under $200 million at year end. Essentially, we were successful at meeting or exceeding all the financial goals we established at the beginning of the year.

In the 4th quarter, revenue increased to $127.3 million dollars, a 13% year over year increase. Our video and audio segments each had double-digit year over year increases of revenue in the 4th quarter. Video revenue was $87.4 million, up 11% over the previous year. Audio revenue was the highest ever at $39.9 million, up 18% year over year. On a sequential basis, revenue was up approximately 7% with currency having about a $1.5 million sequential benefit.

Gross margins for the quarter increased to 57.8%, higher than our expectations and more than 2 percentage points higher than Q3. Gross margins were helped by favorable product mix associated with the release of new products in our video unit and by the decrease of certain price protection reserves in our audio unit. We don't expect to benefit from the audio gross margin factor in the 1st quarter, so our over all gross margin should decline slightly in Q1.

Operating expenses for Q4 were $58.7 million, including $1.7 million for restructuring and amortization of acquisition-related intangibles. Of the $1.7 million, approximately $1.3 million is a noncash charge for vacated real estate in the San Francisco area. Excluding these charges, operating expenses were $57 million. The sequential increase from Q3, primarily, represents increases in variable compensation programs such as employee bonus plans.

Operating income excluding the restructuring and amortization charges was $16.5 million or 13% of revenue. Both the video and audio segments posted double-digit operating profits in the 4th quarter. Due to the resolution of a double taxation issue in our Softimage unit, we incurred a tax benefit of $550,000, which more than offset tax accrual of $200,000. As a result, we recognized a net tax benefit of $350,000 in Q4.

GAAP net income was $15.8 million or 47 cents per diluted share. Excluding amortization, restructuring, and the $550,000 tax benefit, proforma net income was $16.9 million or 50 cents per diluted share.

As of the end of the year, our cash balance was $196 million, an increase of approximately $25 million from September 30th with approximately $14 million being generated through operations and the balance from employee stock program activity. Since December of last year, we more than doubled our cash balance, adding approximately $107 million dollars.

DSOs were 49 in Q4. Our inventory balances were remained about the same as Q3 with turn over being 5.6 times over all. Capital spending was about $3.6 million for the quarter while depreciation was approximately $2.7 million. I will be back shortly to update guidance for 2004, including expectations for Q1.

I would like to turn the call back to David for discussion of the business highlights from this past quarter.

Thank you, Paul. As you have just heard, we finished 2003 with another strong quarter, highlighted by some important achievements for Avid. We had the highest ever quarterly net income in the 4th quarter as well as Avid's highest annual net income in 2003. In addition, Q4 was our 7th consecutive profitable quarter and the second in a row in which our proforma operating income exceeded 10% of revenue. Q4 was also the first since 1998 in which we posted double-digit revenue growth in both our video and audio units.

In a moment I will talk about our individual product segments, but first I would like to highlight a positive trend that affects our video business across-the-board. During previous calls, you heard us talk about advertising spending being the first link in the food chain for many of our post production and broadcast customers. 2003 was a good year for ad spending and the forecast for 2004 from several sources are even better. According to a report prepared by Robert Cohen of Universal McCann, worldwide ad spending was expected to be up 4.6% in 2003. His forecast for 2004 is for even stronger growth with worldwide ad spending expected to increase by 5.8%. On January 15th, TNS Media Intelligence CMR forecasted 7.8% increase for U.S. ad spending in 2004 following an estimated growth of 6.7% in 2003. Both of these estimates would indicate a more favorable environment on spending in media production in the year ahead.

Before I get into the individual product segments, I would like to summarize where we are relative to our longer term goals. Three years ago, we identified significant market opportunities in the growing areas of network news production, HD production and DV editing. Through a number of key acquisitions, as well as our own internal product development efforts, capped off with the introduction of our Avid DNA family of products this past year, we believe we've set the stage to capitalize on these opportunities.

Starting with video post production, by mid-October of 2003 we had all of our new Avid DNA product shipping. The latest and most powerful member of the Avid DNA family, Avid DS Nitris, became available in mid-October and the response has been extremely positive. We had major customer wins among post facilities throughout the U.S., including FrameRunner, Post Works, and Image Group in New York, L.A. Digital Post and Modern Video Film in Hollywood, Turner Studios in Atlanta and Avatar Studios in St. Louis. These customers are using the Nitris system for a broad range of HD products and feature films, music videos, sports programming, commercials and corporate videos. This is just a short list of Nitris customers, but hopefully it gives you a sense of how much progress we've made in the first few months of its life cycle.

One of the biggest factors driving interest in the Nitris system is the increasing demand for high definition post production. According to a recent study by the National Cable and Telecommunications Association, 96 of the top 100 markets in the U.S. and all of the top 30 markets have a cable provider offering HDTV programming. If you combine those figures with the growing number of cable network that is announced plans to provide HD content, it's clear that the shift to HD is continuing to gain momentum.

Outside the United States, we are also seeing increased interest in HD production. Just within the past quarter or so, our European team has seen a market increase in the number of customers who want to know more about Avid's solutions for HD production. While HD broadcasting is still not widespread in Europe, new, more affordable HD cameras from Sony, Panasonic and others are spurring interest in HD production. Further fueling interest is a desire to produce content that can be distributed internationally to markets where HD content is being broadcast. In Asia, for example, mandates in Japan have spurred demand for tools to produce HD content. At the International Broadcast Equipment Exhibition in Japan, also know as [Inter BEE], attendees were very focused on HD and our approach to helping them meet the requirements for HD content. Avid plans to be at the forefront of this opportunity, not only with the Nitris system, but with other HD-enabled products that will be rolling out in the future like the HD option for the Adrenalin system.

At the other end of the post production product family, the first full quarter of shipping Avid Xpress Pro and Avid Mojo systems caused our revenue from the low end professional segment to more than double year-over-year. We also introduced a new version of our Avid Xpress DV product at the competitive price point of $695. Our goal in doing this was to increase our penetration in the DV editing market by opening in-roads for us by the growing base of DV camera users who are interested in an affordable but high quality editing solution. By repositioning the Avid Xpress DV product, we get aspiring professionals an easy way to step into the Avid family. Especially for the over 100,000 people who have already downloaded and tried Avid free DV from the Avid website.

Shifting now to broadcast where the conversion of newsrooms from linear tape-based systems to all digital work flows continues to represent a major opportunity for Avid. We are expanding to focus on other broadcast opportunities to leverage the full extent of our solutions. Over the past year we found not only have our sales into broadcast news been robust, but we have also seen a strong increase for television production in general, including live sports, and TV programs of all types, including reality shows. Take for example the upcoming Summer Olympics or any other major sporting event. In order to get the programming on air, our customers may need individual systems to help them with specific tasks from digitizing and logging files to storing huge amounts of footage captured during the event.

In addition to individual systems, these customers might also need a robust work flow that starts with ingest and editing tools and includes media asset management and playoff systems. We feel that our proven ability to deliver this type of comprehensive solution to broadcasters has formed a foundation for expanded revenue opportunities beyond just the newsroom. As Paul mentioned, the sales grew by well over 50% in 2003, which included not only newsroom conversions by new customers, but also the installation of new production facilities at existing customers as well as upgrade business from previous generations of Avid products.

In Q4, we received orders to implement solutions for 20 more broadcasters, bringing the year end total to 75 orders for Avid Network Solutions. If you recall, at the beginning of 2003, we had indicated we expected to take orders for between 60 and 80 installations. We came in at the upper end of our range. We also far exceeded the 40 orders for systems that we received in 2002. We continued to see the pipeline of potential deals growing and the conversion of the world's broadcast operations to digital production methods accelerating, whether it's for creating nightly newscasts, news magazines or any other type of on air programming.

On the audio front, Digidesign just returned from the National Association of Music Merchants trade show, or NAM, where it displayed some of the key new products it recently announced. This included version 6.2 of Digidesign's flagship software and the ProTools software the ProTools HD Accel process card and the 96 I-IO audio interface. In addition Digidesign demonstrated several exclusive third party plug-ins that augment the functionality of the ProTools HD Accel system.

In other audio news we are very pleased that Digidesign will be recognized with a scientific and technical Oscar statuette for the design, development and implementation of the ProTools Digital Audio Work Station. Digidesign's Oscar Award, which is one of only five ever awarded for an audio innovation, is especially significant for us because it's the second Oscar Award in the Avid family, following the 1998 Sci-Tech Award we received for the Film Composer system. In the 76-year history of the Academy, only a handful of companies have ever won two technical Oscar statuettes and we are very proud to be one of the companies.

Finally, Digidesign just announced its acquisition of Bomb Factory Digital, a developer classic plug-ins for the ProTools system. In the near future, Digidesign expects to announce its plans for deploying the Bomb Factory assets across the ProTools product line. In 3 D we began shipping version 1.5 of the Softimage behavior and crowd simulation software, which enables content creators if the film, TV, commercial and video game industries to build sophisticated crowd scenes quickly and creatively.

Looking beyond the individual categories, we continue to look for ways to enhance our offerings across every market we serve. In that regard, we feel that our acquisition of NXN software, which we announced this week, puts us in a great position to step up our presence in the asset management space. As we announced in Monday's press release, NXN is the creator of the Alienbrain product family, which is renounced in the industry for providing a unique combination of infrastructure, configuration, project and work flow management capabilities. With Alienbrain, the creators of digital media project always know they are working with the most current files and don't have to worry about accidentally overriding critical data.

From a business standpoint, we expect the addition of NXN to enhance virtually every part of Avid's product family, including the film and video post production, broadcast, 3 D and audio product lines. With Alienbrain technology, we can enrich the tools we've already built with a feature set that facilitates media creation and management. We look forward to the many opportunities that this acquisition will provide for us.

In closing, we are extremely pleased with the results we achieved in 2003 and energized by the exciting prospects on the horizon for the current year. With our Avid DNA family now in full stride, our expanding leadership in the broadcast space, our continued innovation and industry recognition in the audio sector, our latest enhancements to our 3 D tool set and our strategic acquisitions, we are on track to continue our positive momentum across the entire business.

I would now like to hand it over back to Paul to discuss our outlook for 2004.

Thanks, David. Because we announced the acquisition of NXN Software on Monday, the guidance that I will provide will include the NXN's expected results. At a high level, NXN is expected to add approximately 2-3 percentage points to growth to top line in 2004. At the operating income level before amortization of intangibles, the acquisition is expected to be slightly accretive in 2004 as we focus on the integration of NXN Technology into Avid's product lines.

For the full year, we are increasing our revenue outlook to arrange a $530 million to $540 million dollars. At the mid-point of this range, our growth rate would be approximately 13.5%. As always, when we enter a new year, we are faced with no internal execution challenges and we make assumptions about external competitive forces and economic conditions. If we execute the our plans well and our assumptions about the external climate are correct, we think we can achieve the higher end of the revenue range or more. On the other hand, if our assumptions about the external climate turn out to be incorrect and/or we don't execute plans well, the revenue could be at the lowerer end or below.

We are expecting solid double-digit growth in the video unit as well as an acceleration of growth in our audio unit to the high single digits from 4% in 2003. For the 1st quarter, we expect a typical seasonal decline in revenue to approximately $123.5 million dollars. The entire sequential decline in revenue is attributable to our audio unit, which coming off a very robust Q4. Video unit revenues are expected to be up slightly sequentially in Q1. We are increasing our full year gross margin outlook to 57.1%. This represents a 1.5 percentage point increase compared to our 55.6% gross margins in 2003. As I mentioned earlier, our 4th quarter gross margins, which were 57.8%, are expected to decline in the 1st quarter as a result of a return to more customary levels of gross margin in the audio unit. 1st quarter gross margins are expected in the area of 57%.

With the acquisition of NXN, our full year operating expenses should be in the area of $241 million, excluding approximately $2.8 million of acquisition-related amortization. Including the acquisition-related amortization, operating expenses would be $243.8 million. For the 1st quarter, operating expenses excluding $700,000 of acquisition-related amortization should be approximately $58 million, including the acquisition related amortization, operating expenses would be $58.7 million. Using $535 million, the mid-point of our revenue range for 2004, we would expect to achieve operating profit of approximately $64.5 million or 12% of revenue, excluding acquisition-related amortization of $2.8 million. This represents more than a 45% year-over-year increase in operating profits.

Quarterly other income is expected to be approximately $500,000 and our tax provision expected to be approximately $600,000 per quarter. Acquisition-related amortization reflecting the impact of the recent Bomb Factory and NXN acquisitions should be approximately $700,000 per quarter in 2004. The amortization charges are subject to some modification as we finalize the acquisition accounting entries.

We are increasing our proforma EPS guidance from $1.75 a share to $1.86 per share. Once again, assuming $535 million, the mid-point of the revenue range, we would expect full year net income to be approximately $64 million, excluding $2.8 million of acquisition-related amortization. Including the $2.8 million of acquisition related amortization, GAAP earnings per share would be expected to be $1.78. For the 1st quarter, earnings per share expected to be approximately 36 cents, excluding $700,000 of amortization. Including amortization, GAAP EPS would be 34 cents. Diluted shares outstanding are expected to be $34.2 million for Q1 and $34.5 million for the year.

There is an update to our tax position. We continue, for the most part, to accrue only for taxes related to our foreign operations. In total, at the end of 2003, we had approximately $345 million dollars of shelter against future U.S. taxable earnings. NOLs and tax credits make up approximately $200 million of the total and the balance is made up of about $145 million dollars of remaining tax deductions related to our 1998 Softimage acquisition. Our cash position is expected to decline to approximately $160 million in Q1 as a result of the NXN acquisition but should begin to grow in Q2 as a result of cash flow from operations.

These conclude my remarks. David and I now would be pleased to take your questions.

Thank you gentlemen. If anyone in our audience has a question or comment they would like to make, you may signal us by pressing the star key followed bite digit 1. That's star 1 if you have a question or comment. I will take questions in the order signaled and we'll take as many questions as time permits. We'll take our first question with Steve Frankel with Adams, Harkness & Hill.

David, very nice quarter. I wonder if you might give us an update on penetration into U.S. broadcast groups as far as the all digital news effort goes.

As we have talked about on previous calls, one of the specific areas that we've been targeting has been station groups, because as we have identified once you've enter a group, you have an inside track for doing installations at multiple stations within that group. The update that I have within the U.S. is that based on the number of groups we have now penetrated, we have approximately 335 new sites open for further penetration within those groups. So that's actually a pretty meaningful increase from the number we discussed last quarter. That continues to go as planned and of course we do have an ongoing effort to continue to penetrate all the remaining groups.

How many station groups have you penetrated so far?

I don't have the exact number in front of me.

I don't have it either.

We'll have to get back to you on that but we can look that up for you.

How about an update on the storage business.

Our unity business, which of course our storage is two components, local storage and shared storage, but unity was up meaningful.

It was up over 50% for the full year.

Great, thank you.

You're welcome.

Our next question is from Jim Ricchiuti with Needham & Company.

I wonder if you can just give the operating income for both of those divisions. Paul, do you have that?

I do have that, Jim. Video operating profit for the quarter was $10.8 million or 12.3% on revenue of $87.4 million. Audio operating profit was $5.8 million or 14.4% on revenue of $39.9 million.

Great. Thank you. Can you talk a little bit about the strength you saw in the audio business, David. It seemed a little surprising and I wonder if you can expand a little bit on what happened in the quarter.

Well, the biggest new product introduction was the introduction of the new HD Accel card, which roughly doubles the processing DSP power that you can get out of a single card in the Digidesign ProTool system. That product was very successful for us and we continue to have strength in our consumer end of that market or the home recording market with both the M-Box and the Digi002 market. A strong quarter with Digidesign.

Looking at the video business, it looks like it's shaping up to be another good year just in terms of the advertising market firming up and you will have a full year of the new DNA products. If you look at your broadcast business, it's growing very rapidly and you pointed to some new market opportunities, but you can give us a sense of what you think the broadcast business could grow in 2004.

I don't think we are prepared to give you an exact number for what that's going to turn into for 2004, but I will say that to your point, there a number of factors really driving the growth. Ad spending obviously being a very positive factor. If those forecasts turn out to be correct, it will obviously be a nice lift for us and the industry in general.

In terms of identifying the specific areas, we found, interestingly, that as we have continued to increase station count for new stations, we have found that our repeat business to exsisting stations is obviously going up and the installed base, as it becomes more and more sizable, is having repeat business rivaling the rate of business we are getting from new customers. That's a nice thing to be seeing as well.

Thank you.

Next We'll hear from Piper Jaffray's, Gene Munster.

Good evening, everybody. If you can talk about the Adrenalin quarter to quarter. Was it up in December?

We are not going to break out the exact numbers in terms of Adrenalin, but Adrenalin continues to be very strong and continues to meet our expectations. We are very happy with the acceptance and sell through of the product through the channels.

In terms of, can you give us color directionally up or down September versus December?

No. It just continues to meet expectations. I would even go further to say we have, as you know, just had our first full quarter of Xpress Pro and Mojo, as has Adrenalin, been doing very well. The forecast for Mojo, our actual shipments are roughly three times the forecast for the Mojo products. So, we're seeing very strong uptake of that product in the channel.

You gave some interesting specifics in terms of number of major markets that have HD-compatible networks. Do you have an idea what percentage of, not necessarily prime time content, but key content that's out there? Is it already in HD?

In our analysis of the market, we're finding it's now over a majority of the shows being produced in HD. There is several reasons for that, but one is, for the archival value of the assets as well as the future syndication value. So we are finding that even if a broadcaster is broadcasting in SD, they are producing in HD today because they are thinking about the future. We are seeing the demand is very strong now and continuing to pick up both in the U.S. as well as worldwide.

As I mentioned in Europe, it's actually for the first time in recent quarters that we are finding people really asking about HD and that's a great sign. We are also seeing in this country increased interest in HD news broadcasting. While we would have anticipated that prime time shows would be leaders in terms of going to HD broadcasts early to see that news is also an area of interest is something that is a new trend for us and a positive factor.

What I'm trying to get to is there any way to get an earlier read in terms of what the adoption of the HD card could look like. Can you talk on margins on that and what direction would it be, greater or less than your current margin.

When you said HD card, I assume you are talking about media composer Adrenalin system with the HD option.

Yes.

So we haven't talked explicitly about what the margins for the expansion card are going to be, but we do expect they will be in line with the current Adrenalin system margins. and in terms of demand, we do believe that a reasonable portion of the demand for the Adrenalin system today is due to upgradability to HD. It provides a future proofing for the customers. The other thing we are seeing today is that the benefits of being in a host accelerated system are also coming true because as host CPUs are getting faster and faster, customers are getting higher performance without buying a new system. They are getting those improvements automatically.

Let me ask you I know you won't get the total number of Adrenalin systems, but what percentage of those could have interest on the HD card?

That's a good question. There is not a statistical way for us to determine the weather, but my estimate is if you look at the over all trend that's happening, the conversion to HD is actually very, very significant and I think that the length of time it's taking to happen is in some ways lulling people into not realizing how big of a trend it is. The last time that the broadcast standard changed this dramatically was with the introduction of color TV, which had its first broadcast on January 1, 1954. We are talking about a 50-year period of time that took place before the over all broadcast standard had really an opportunity to change in this significant of a fashion. We believe this conversion to HD is going to be a very significant trend and we shouldn't under estimate it, even though its slower than many people predicted. It's analogous to the internet. It was over hyped in the beginning, but what we are finding is that all those initial predictions have ultimately turned out to be true and in some cases have been under estimated. We believe the same will happen in HD with the adoption of HD.

To get right back to the point of your question, I wouldn't be surprised if a very large percentage of our current Adrenalin customers choose to upgrade to the HD-enhanced system.

Okay and one final question, Paul, in terms of the expanded structure for the 1st quarter. It's a little bit more than I was originally looking for. Is that integration related to NXN or any thoughts.

Clearly some is the addition of NXN to consolidated numbers, but in addition to that, we are planning and were planning some growth in head count and operating expenses for the year. As I said earlier in previous guidance that underlying the numbers preNXN is our cost containment where we were planning on growing operating expenses at let's say 7% relative to 11-13 at the top line. That still exists, but there still was a plan to add expenses in 04.

Congratulations.

Thanks.

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

Good afternoon, guys. The calls have become so boring with success quarter after quarter. On the software side, we are picking up some indications on the West Coast that there is actually some traction already in XSI growing here even before the Bomb Factory announcement. Do you have any color on that?

Actually you linked two things that I wasn't expecting. XSI and Bomb Factory, what was the question? XSI and NXN? Is that what the question is? Or NXN or XSI and Bomb Factory.

XSI and Bomb Factory. I just wanted to know if you're getting indications of software growing as a proportion of video.

I guess we don't break out the Softimage sales separately, but we did have another quarter of sequentially higher revenues from the 3 D piece of the business.

Okay. On the Bomb Factory acquisition, any information on that on what it means for growth and what portion of growth it comprises or if it's accretive for the year?

The Bomb Factory acquisition for the audio position is expected to be slightly accretive before and after amortization for the year.

Okay. Thanks.

Actually Rich, just to make sure I add to something, Bomb Factory, as you know, gives a whole set of plug-ins, great plug-ins that many of our customers had been buying for ProTools and now we can include those with our ProTools for the customers, which I think will be appreciated by a lot of our customers. Then secondly, relative to NXN, what it does for us initially, as you know, NXN is very, very strong in the 3 D market place today, it's really the standard for 3 D production pipelines, so we think that should bring near term boost to XSI and longer term we see ourselves being able to leverage across our product family. So, moving into video and ultimately into audio. Both of those acquisitions slightly target different areas of the business but as you pointed out, they are software revenue and should carry good margins.

Thanks for the clarification.

I would like to remind our audience that is star 1 if you have a question or comment. This is Steve Lidberg with Pacific Crest.

Good afternoon, guys. A couple of questions. Can you provide us color with regards to U.S. versus international markets and the health of those markets that you saw in Q4 and whether you seeing improvement internationally in terms of demand.

On the tax rate, Paul you updated where the tax shelter is. When would you start to see a potential increase in the tax rate? I assume it's maybe the back half of '05 given the level of profitability, but wondered if you can comment on that and lastly, where did the head count end up in the the end of the quarter.

In terms of the geography question, the Americas piece of the business, which grew 14% for the year last year ended up at 56% of our total revenue. Europe, which grew 19% last year ended up at 31% of total revenue. Asia, which actually declined 5% year-over-year, ended up as 13% of the total revenue of the company. So, although the Asia business declined for the full year, in the second half, their revenues were up more than 25% over the first half and their 4th quarter revenues were up 8% from the prior year.

In terms of head count we ended with 1,582 people, which was up 18 in the quarter and 26 for the entire year. As we announced earlier with the acquisition of NXN, that's another 63 people we added this month. The third question was?

The tax shelter and when you might...

As I said earlier, we have got the ability to shelter an additional 345 million of future U.S. taxable income. When you look at our financials, although we reported a solid worldwide GAAP profit in 2003, our U.S. tax return will continue to show a loss due to the ongoing tax amortization of the Softimage acquisition and the incremental deductions that we get from stock option expenses that are deductible although they don't flow through P&L. The bottom line is that the day that we have to write a significant check to the IRS is still quite a ways off. In terms of when we might be making a decision to reverse the reserve against our deferred tax asset and start accruing for U.S. taxes is obviously not going to happen this year. It's something we will be looking at in '05, but it impacted, in a number of ways, by this specific form of the new rules around stock option expensing for next year, if and when they come, and we haven't seen those yet.

Great. Thank you.

The next question will come from Tom Leach with Bennett Lawrence Management.

Good evening, gentlemen. Can you talk about book to bill and backlog here?

We don't disclose a book to bill. Our backlog has remained strong and was up in the quarter.

Did it grow faster than revenues?

We are not going to provide that level of detail.

Anything further, Mr. Leach?

I think that's it. Thank you.

Next we'll take a follow-up from Jim Ricchiuti.

Just a question on NXN. Can you talk about the growth that you have seen in the business and maybe, David, if you could expand a little more on how you, the timing around when we might be seeing this leverage throughout the company?

Okay. Well, NXN, as you would imagine, being a small company has been seeing pretty significant growth rates and while we haven't talked specifically about what the revenues are, as Paul had said he expected it to continue tribute 2-3 percentage points to our top line during the course of this year. But we think we will be able to accelerate NXN's growth rate for a number of reasons. It will be going through our sales force and our channel, which is obviously much larger than what they had as a start up company and also because we will be able to expand the product offering to broaden beyond the traditional strength in the 3 D market place into other areas of content creation. So, specifically what NXN is targeted to do is facilitate the media production process. That's actually, if you think about what broadcasters face or what large post customers face, they are media factories and producing that media is actually a very difficult operation and becomes more and more challenging as you add more seats to it and as the number of digital tools that are used in the creation process increases. Now, obviously, we would like to see that increase take place so we are taking on the responsibility of trying to simplify that process. One of NXN's historic mission statements has been helping customers manage complexity. We plan on doing that.

In terms of timing, NXN provides benefit to 3 D offerings, for example, Softimage XSI is already integrated into the NXN tool set. And in terms of when the other capabilities will be realized in the market place, I can't and shouldn't preannounce anything, but what I can say is that even during the due diligence process, we were already doing the product planning, and in fact I think it would be fair to say that the product road map is well underway for the integration of NXN technology throughout the rest of the product line. That's something you can look forward to and know it's already being worked on.

If you look over the next two to three years, is there a way for you to characterize what this business could grow?

If you just look at the concept of media asset management in general, we think it's a pretty meaningful opportunity. We think the rational for us to acquire companies such as NXN is not different from the rational that EMC used in the acquisition of Documentum. If you look at what that opportunity represents, it's in helping customers, obviously, manage the production of their rich media assets, but it also has interesting leverage points into other parts of an end to end solution that might include the ability to link in a very seemless way to archival storage. That represents a market opportunity we do not address in a significant way today. As we look at what NXN has to offer us in general, it's not only increasing efficiencies in our core markets, but it's also an expansion of our core markets into areas that we don't currently serve.

Okay. Thank you. David, can you comment on whether we might be seeing additional acquisition activity. How aggressively are you looking at things and I know you won't be specific, but can you comment on that.

It's a good question. I think, as Paul mentioned in the past, we found because of our increased financial strength over the past year and a half or so, we will be able to be more expansive in thinking and in the case of NXN, it's a very, very strategic acquisition. We are committed to our mission, which is serving the industries that make, manage, and move media, and as we see abilities to fill out that end to end solution either in the making or managing or moving parts, we would look seriously at that opportunity. In terms of whether or not there is anything specific in the short-term horizon, we couldn't talk about that. It's an area that we will ton pursue throughout the course of this year.

Thanks.

I would like to invite our audience to one last person to ask a question, please press star 1. There appear to be no further questions. Mr. Krall, I will hand the call back to you.

Thank you all for joining us today. Should you have any further questions, feel free to contact us directly. We look forward to speaking with you next quarter and while you are all watching Sunday's Superbowl on your new HD TVs, don't forget to root for the patriots.

That concludes our conference. Thank you for your participation and have a great day.