Avid Technology Inc (AVID) 2004 Q1 法說會逐字稿

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

Thank you, and good afternoon. I'm David Krall, President and CEO of Avid Technology. And I would like to welcome you to our first quarter 2004 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. Then I will discuss some of the highlights from the quarter and briefly talk about our plans for NAB, the National Association of Broadcasters Convention that starts next week. Finally, Paul will come back and update our financial outlook for the balance of 2004, including our expectations for the second quarter. Following our prepared remarks, we will be happy to take your questions.

Before I begin, please note that the information discussed today is current as of April 15, 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 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 Company's annual report on Form 10-K for the year ended December 31, 2003, and other documents filed with the Securities and Exchange Commission.

In addition, any forward-looking statements in our remarks represent our estimates only as of today, and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and therefore you should not rely on those 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 section of our website, www.avid.com. 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 website.

We're pleased to announce that for the second quarter in a row Avid has delivered record earnings and revenue. Net income for the first quarter was $14.7 million, or 44 cents per diluted share on revenues of $127.4 million. This compares to net income of $5.5 million or 18 cents per diluted share on revenues of $112.2 million for the corresponding quarter in 2003.

Paul will now review these results in more detail.

Good afternoon everyone. The 14 percent year-over-year revenue increase is due to strong sales broadly across the Company's video and audio product lines, including the new Avid DNA family of video editing solutions, Avid's broadcast and newsroom products, the Avid Unity Suite of shared storage solutions, and Digidesign's Home and Project Studio system.

Our video segment revenues were $92 million, an increase of 5 percent sequentially and 16 percent year-over-year. Our audio segment revenues were $35.4 million down sequentially as expected, but up 8 percent year-over-year. Gross margins for the quarter were 57.5 percent, about the same as last quarter and up more than 4 percentage points from Q1 2003.

Operating expenses for Q1 were $58.5 million, including $439,000 of acquisition related amortization. The sequential increase from Q4 primarily represents higher sales and marketing expenses. Pro forma operating income, excluding the $439,000 amortization charge, was $15.2 million or 12 percent of revenue. Operating income, including amortization, was 14.8 million.

Interest and other income and expense was a net expense of $560,000 for the quarter. Included in other expense was a charge of approximately $1.1 million for the expected settlement of a long-standing lawsuit against the Company. The lawsuit was initiated by Glenn Holly Entertainment in 1999, and is described in Item 3 of our Form 10-K under Legal Proceedings.

Our provision for income taxes for the quarter was a credit of $500,000 due to the inclusion of a $1.2 million tax benefit from the reversal of a provision for a potential tax assessment. The statute of limitations has now been exceeded for this particular tax exposure.

GAAP net income was $14.7 million or 44 cents per diluted share. Excluding the $1.2 million tax benefit and the charges of $1.1 million for the expected legal settlement and $439,000 for amortization, pro forma net income was $15 million or 45 cents per diluted share.

Days sales outstanding at the end of the quarter rose slightly to 53. And our inventory turnover improved to 6 times.

As of the end of March, our cash balance was $170 million. During the quarter cash provided by operations was approximately $17 million. Cash used for investing activities was approximately $47 million, primarily for the acquisition of NXN Software for $43 million. Cash from financing activities was approximately 4 million.

I will get back to you shortly to update our guidance for the balance of 2004. But now I would like to turn the call back to David for a discussion of the business highlights from this past quarter.

As you've just heard we just finished another strong quarter with record revenues and record earnings fueled largely by continuing demand for our postproduction, broadcast, storage and consumer (ph) audio products.

In the postproduction industry the Avid DNA family is driving demand across our entire customer base. This ranges from DV editors who run laptop studios on Avid Xpress Pro systems to trailer houses that have installed entire fleets of Media Composer Adrenaline workstations.

At the high-end our customers include professional post facilities that are finishing prime time TV shows, commercials and even feature films in HD on Avid DS Nitris systems. On Tuesday of this week we announced that New Wave Entertainment, one of Hollywood's leading film and TV marketing companies, replaced a competitor's systems with 30 Avid Media Composer Adrenaline systems, which are networked through three Avid Unity shared storage solutions with Avid productivity tools.

The NewWave announcement followed a similar installation at the Ant Farm, a leading trailer house in Hollywood that purchased 40 Media Composer Adrenaline systems and a Suite of Avid productivity tools for its two existing Avid Unity systems. These sales are a perfect example (technical difficulty) Avid can deliver the most complete solution for video post facilities by combining industry-leading editing systems with a proven networking solution that provides dynamic storage and sharing of digital media.

In the feature film industry our historic leadership was again in evidence at this year's Academy Awards where every film nominated in the best picture, directing, film editing, sound editing, sound mixing and visual effects categories used at least one solution from our Avid Digidesign or SOFTIMAGE product families. Many of those films, including all five best picture nominees, employed all-digital postproduction workflows that incorporated multiple Avid solutions.

In the booming HD market we recently cited a study that shows that 96 of the top 100 markets in the U.S. have at least one cable provider offering HDTV programming. We also noted that we're seeing a high-level interest in HD outside the U.S. To illustrate this, we sold 15 Nitris systems in Europe within the first four months of the product shipment, with customers ranging from top broadcasters like TV4 in Sweden to leading post facilities, Pink House in the UK, and RA (ph) Film and TV Services in Germany.

While we pursue these opportunities in high-end post, the potential in the intermediate and low-end professional markets continues to expand. A growing number of budget minded filmmakers, event videographers, educators and video hobbyists are demanding low-cost but high-quality editing tools. And many of them are turning to our Avid Xpress Pro and Avid Xpress DV systems. Revenues in Q1 from products targeting these markets nearly doubled from the same quarter in 2003.

In broadcast we announced major agreements with NBC and Gannett, two longtime Avid customers that have reinvested in our technology as part of their long-range plans to upgrade their postproduction and newsroom operations. NBC expanded its Avid postproduction infrastructure at MSNBC with multiple Avid DNA solutions, including Media Composer Adrenaline, and NewsCutter Adrenaline FX editing systems and an Avid Unity shared storage network. This installation will help NBC integrate its hard news editing environment with this long form postproduction functions.

NBC also purchased and installed 11 Avid DS Nitris systems for its in-house graphics department and at MSNBC to consolidate the creation of high-quality promos and complex graphics within a single application. At the same time these systems give the network a future path for HD postproduction as the need presents itself.

Most of you know that last September we announced a $6.7 million deal with NBC to replace many of its tape-based news production systems with Avid end-to-end newsroom environments. These latest sales are a natural extension of that earlier agreement, and they illustrate the extent to which our Avid DNA solutions have been embraced at the highest levels of the broadcast and post industries.

Turning to Gannett, the group's Denver affiliate, KUSA, purchased our Avid Active Content Manager system which facilitates publication of news content to Web, wireless and other IP-based distribution points. Working in conjunction with KUSA's existing Avid end-to-end news production environment, Avid Active Content Manager allows the station's journalists to automatically update their Web site and immediately post late breaking sports, news, and entertainment stories. The system, which is online today, saves KUSA time, allowing the station to publish more video and increasing the value of its Web presence to its viewers.

Both the NBC and Gannett deals underscore our ability to go back to existing customers and sell them additional products or services as their needs and our offerings continue to evolve.

In other broadcast news from Q1, we closed a deal with Meredith Corporation to standardize its news station group with Avid end-to-end newsroom solutions. Meredith had already implemented Avid Workflows at two of its 8 news stations, but the remaining six were still using analog production pipelines. Under this new agreement each of those six stations will be equipped with an Avid Unity system in various configurations of NewsCutter Adrenaline FX and NewsCutter XP editing systems, as well as our AirSPACE and Xdeck digital servers.

In announcing the deal Meredith's Director of Engineering cited the openness and scalability and of Avid systems, as well as their ability to integrate with third-party products. As you know, we always strive to make our products as open and scalable as possible so the response from enterprise customers like Meredith is a validation of those efforts.

Shifting now to audio, you have heard us talk about how the mixing market represents a huge opportunity for our Digidesign Division. To give you a sense of the scope of this opportunity, mixing is still dominated by stand-alone analog and digital consoles that offer a familiar work surface for audio engineers, but little of the power and flexibility of an integrated production environment.

For years our customers in this area have been telling us they would like to see a fully integrated system that consolidates the entire production process without sacrificing the comfort level that engineers feel with their current array of studio tools. Digidesign responded to this demand by creating ICON, an integrated console environments that features the new D-Control high-end mix surface and the Pro Tools HD Digital Audio Workstation. Now owners of audio post houses, music facilities and private reporting studios who are interested in implementing a seamless workflow across their entire production process will be able to do so at a much lower price point than they would pay for a comparable solution made up of a stand-alone console, a stand-alone recording system and racks of expensive outboard processing equipment. With ICON, Digidesign is in an ideal position to drive the conversion of audio facilities into a future of digital mixing that combines computer-based tools with powerful, dependable and versatile tactile control.

While ICON addresses the high-end of the music recording and film sound communities, Digidesign is capitalizing on a similar opportunity in the project and home studios sectors with the Command 8, a low-cost but highly versatile mix control surface for entry and mid-level Pro Tools workstations. The Command 8 control surface is also the first Digidesign mix controller to be fully compatible with a wide range of Avid video editing systems, including Avid Xpress Pro and Media Composer Adrenaline.

More specifically the integration actually allows the Command 8 system to serve as the mixing surface for controlling audio within Avid editing applications. Digidesign will be showing both the ICON and Command 8 products at NAB next week.

In the animation market our SOFTIMAGE subsidiary introduced a free version of its flagship SOFTIMAGE XSI 3-D production environment designed to work exclusively with Half-Life 2, a sci-fi adventure game based on the hugely popular Half-Life franchise. Since it was introduced in 1998, Half-Life sold more than 10 million copies. And its appeal has been heightened by the fact that its manufacturer, Valve, release a free software developers' kit that allowed users to create customized versions of the game.

With the anticipated popularity of Half-Life 2 SOFTIMAGE is in a great position to capture mind share among the legions of fans who are likely to want to customize the latest version of the game. In fact, in the three weeks since it became available on the SOFTIMAGE web site, SOFTIMAGE XSI for Half-Life 2 has generated almost 50,000 downloads.

This level of activity is a strong indicator of the overall health of the videogame sector where according to research prepared by Arcadia Investment Corporation consumer appetite for lifelike interactive games fueled a 26 percent increase in unit sales of console games by major manufacturers from January 2003 to January 2004. We see a similar opportunity in the film industry where digital effects artists are insisting on highly sophisticated tools and the ability to integrate them with video, audio and asset management solutions.

Speaking about of asset management, we're continuing to integrate NXN which we acquired in early Q1. In March we launched Version 7 of the alienbrain Studio product, which offers a wide range of optimizations and feature upgrades designed to give game creators an unprecedented level of control over their media assets. Version 7 meets the needs of the games industry as it moves from small clusters of game creators to large development teams that need enterprise level software infrastructures.

So to wrap up our overview of our individual product lines, you can see we've got tremendous momentum in post production, broadcast, audio, 3-D and asset management. And we're about to make a series of announcements at NAB that will further strengthened our positions in all of those areas. I can't tell you more than that right now, but stay tuned to Avid.com for details and we will be sure to give you all the news in next quarter's call.

I would now like to hand it back to Paul to discuss our outlook for the balance of 2004.

Thanks, David. For the full year 2004 we are increasing our revenue guidance to a range of 535 to $550 million from the previous range of 530 to 540 million. The midpoint of this new range is $542.5 million. Now is it possible that we could hit the high end of our range? Yes, it is. But it will be a challenge and a lot of things will need to go right.

On the other side, is it possible we could end up below the midpoint of the guidance? The answer to that question is also yes, given the competitive nature of the markets in which we operate and the challenges we face. We are increasing our guidance for 2004 pro forma earnings per share to $1.98 at the midpoint of the revenue guidance. This is up from $1.86 on our last call.

Now let me provide you with the details and a quarterization for the rest of the year. Please pay particular attention to the quarterization of expenses, because I have noticed that many people have been underestimating our Q2 operating expenses, which typically spike because of the cost of NAB.

This year the spike is higher than typical because our operating expenses will reflect a full quarter of NXN compared to just two months last quarter, and because we're hiring in key areas to solidify our market leadership position and to take advantage of the opportunities we see to expand our business in the short term.

We expect revenue to increase to approximately $132 million in Q2 and then to 137 million in Q3. For Q4 we are currently expecting revenue of approximately 146 million. So in total, this would need revenue in the area of the $542.5 million midpoint of our full year revenue guidance range.

Gross margins are expected to be approximately 57.5 percent for the full year, a half-point higher than our previous guidance. We expect Q2 gross margins to be about a half-point better than the full year average, and Q3 gross margins to be about a half-point lower than the full year average. These variations are related to differences in the expected mix of business in these two quarters. For Q4 we expect gross margins of 57.5 percent, equal to the full year average.

Now let's focus on pro forma operating expenses which are expected to be approximately 243.5 million for the year. In Q2 operating expenses are expected to increase to approximately $62 million. The significant increase from Q1 is related to three factors, first, the cost of NAB; second, the increase in our expense run rate due to the expansion of our business and investments we're making to grow the business; and third, the inclusion of three months of NXN operating expenses in Q2 compared to only two in Q1, given the timing of the acquisition. In Q3 operating expenses are expected to drop about $1.5 million to $60.5 million before rising in Q4 to $63 million.

Pro forma operating profit for the year is expected to be approximately $68.3 million. Pro forma operating profit does not include $1.9 million of acquisition related amortization. Operating profit, including the amortization, would be approximately $66.4 million. On a quarterized basis pro forma operating profit is expected to be approximately $14.6 million in Q2, 17.6 million in Q3, and 21 million in Q4. GAAP operating profit would be approximately $500,000 per quarter lower due to the acquisition related amortization.

Other income is expected to be $600,000 per quarter for the remainder of 2004. And our tax accrual is expected to be approximately 700,000 per quarter for the next three quarters.

Pro forma net income is expected to be approximately 68 million for the year. Pro forma net income does not include the $1.2 million tax benefit we realized in Q1, the 1.9 million of acquisition related amortization we expect for the year, or the approximately $1.1 million of expense for the expected settlement of the lawsuit in Q1. GAAP net income, including these items, is expected to be approximately 66 million.

Diluted shares outstanding are expected to be 34.3 million in Q2 and Q3, and 35 million in Q4. For the full year pro forma earnings per share are expected to be $1.98 versus GAAP earnings per share of $1.92. Pro forma earnings per share are expected to be 42 cents in Q2, 51 cents in Q3, and 60 cents in Q4. GAAP earnings per share are expected to be 41 cents in Q2, 50 cents in Q3, and 58 cents in Q4. Cash is expected to increase to approximately $225 million by year-end.

And as an update to our U.S. tax position we currently expect to maintain a full evaluation allowance against our U.S. deferred tax assets at least through 2005. Therefore, we do not expect to be accruing for U.S. taxes at least through 2005. We currently have NOLs, tax credit carryforwards and additional acquisition related amortization sufficient to shelter approximately $330 million of future U.S. taxable income.

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

(OPERATOR INSTRUCTIONS). Steve Frankel with Adams Harkness Hill.

Paul, if you could just start with some operating breakdowns between audio and video? And then, David, if you could comment on NXN in the quarter and give you us an update on the number of all digital broadcast wins?

Let me take the first one and the third one, and then I will turn it back to David for the NXN question. Regarding the segment breakdown, video operating profit was $13.3 million for the quarter or 14.5 percent on revenue of 92 million. Audio operating profit was 1.9 million or 5.4 percent on revenue of 35.4 million.

There are a number of factors that contributed to a lower than normal gross margin in audio for the first quarter. I expect much better performance there in Q2 and a return to operating profit in the 10 percent area for audio in Q2.

Regarding the third question and the number of newsroom conversions we did in the quarter, as we said on our last call we weren't going to be breaking that out on a quarterly basis going forward for a number of reasons. And I'll repeat some of those. We've got an expanding broadcast business that we think is much broader than initial conversions of newsrooms from analog to digital. So we feel like updating you on the overall level of revenue in broadcast is a better overall indicator of how we're doing.

Broadcast revenues in the quarter grew year-over-year faster than video revenues overall and are approximately 34 percent of total video revenues in the first quarter.

The other reason that we said we weren't going to break out the number of newsroom deals quarter by quarter is that we just felt like there was too much focus on this one number in the short term given that in the large deals business that business can be lumpy, and the average selling price of a deal can vary quite a lot from quarter to quarter.

If you will recall at the beginning of last year's, Steve, we said that we thought we would do somewhere between 60 and 80 deals in 2003. We did 75. I would say that in 2004 we would be looking to increase that number to somewhere between 80 and 100 deals.

Okay and to pick up your questions about NXN, they actually did well for us in Q1. They beat their budget performance -- what we had set for them in the quarter. You may have seen that they introduced alienbrain Studio Version 7, so that is out and shipping. And then the NXN team is actually working very diligently to integrate their product across the rest of the Avid product line. So there is a lot of work going on already, and more news to be announced in the future.

Jim Ricchiuti with Needham & Co.

David, this may be a tough question to answer, but I guess what I'm trying to get a sense on is if you looked at the increase you're seeing in the video business, is there a way to give us in terms of priorities what have been the main drivers? I mean you've got a number of things that appear to be working in your favor, a new product cycle, clearly a better market environment. And I suspect your storage business is doing very well. Can you give us a sense as to what the major drivers were?

Sure. Certainly as you already referenced product is a big driver here. And with the rollout of our DNA family of video editors last year we have seen a very strong market response for that. In fact if we just compare our Media Composer revenue in Q1 of this year to Q1 of last year it is up approximately 86 percent year-over-year just for the Media Composer product. We have a similar number for our Xpress DV/Xpress Probe product family. So very strong uptick there.

And DS already was doing well and that continues to grow as well. Likewise as you referenced our storage business is up. Unity is up strongly, 24 percent quarter over quarter if we compare that to Q1 of last year. And the big drivers -- if you say what are the big factors going on? It certainly is a lot of emphasis that is happening now on the conversion to HD. But even in our SD business, standard definition, as well as our DV business we're just saying strong market growth. So a lot of emphasis going on in upgrading system performance in our customer base as well as with new customers.

Is just generally the better spending environment contributing to some of those other issues?

Certainly. As you have seen, the ad spending numbers are coming in and they're looking pretty good. So even know people had thought 2004 was going to be a good year for ad spending, I think they are already starting to say it is probably going to be better year. And we have seen some numbers coming out either from the New York Times or Gannett who both recently came out with their performance, and they are already citing a stronger Ad environment than they had initially anticipated.

Great. And a follow up question. Just on the margin improvement, the gross margin improvement you're seeing, some of that is clearly mix related. I wonder are you also seeing improving margins in the broadcast business as you move forward with multiple installations with the same customers? How much is that contributing (inaudible)?

Well, our broadcast business has been a strong margin contributor for us. So the gross margins we achieve there generally are pretty good. And when we did a cut through the data, which was done not recently but also not too long ago, we found that some of our larger deals actually carried better margins because we were able to leverage our expenses over a broader installation. So we have been able to generate better margins there. But you're also right in looking at the mix. And certainly our new DNA family of products carries with it better gross margins as we have referred to before, and that helps us as well.

Gene Munster with Piper Jaffray.

Dave, that is a pretty impressive number in terms of video business growth year-over-year. And thinking back to Adrenaline, I guess it is three quarters old right now. Can you talk a little bit about just how the adoption of that -- it seems like it should kind of -- steady eddie is it -- and what to expect. It just takes people time to kick the tires and therefore to just kind of continue to expect an Adrenaline kind of tracked around on a per unit basis. And maybe you can give us any sort of color in terms of unit sequential with Adrenaline 2, that would be helpful.

Sure. I will give it the caveat that we won't break out the numbers every quarter, because I know you'll probably be interested in the number every quarter. But in Q1 we actually shipped over 1,000 units of Adrenaline. That is up from Q4 and very robust demand. So we're finding pretty widespread adoption of the Adrenaline system. And the great news is that because it is an expandable hybrid architecture the performance of Adrenaline only continues to get better as computers get faster and as we add more features to the software upgradable hardware that the system has.

In addition, as we have talked about before, we've got our HD expansion card that is going to be coming out this year, which will be another booster for Adrenaline as it specifically targets HD content creation. So we expect to see ongoing strong demand. And as we saw in Q1 it was accelerating.

Just to recap in terms of the HD card kind of Q3, is that right?

Yes, we have been talking about that being second half of this year. And certainly we will have more to talk about that next week at NAB.

In terms of the stuff at NAB is the guidance you gave -- Paul gave a little bit of a range there. But how much of that is predicated on things that are going to come up at NAB versus -- I am sure there are going to be extensions of products and so forth, but is there components of that guidance that are new products or is this just based on existing business that you're looking for these numbers?

Certainly anything that we're looking for revenue in our guidance has to be on products which are shipping. At NAB we show products that are currently shipping. We also sometimes show products that are going to be shipping in future quarters. So any guidance that we give me needs to encompass the expected ship dates of any new products.

Last year at NAB I would say you kind of surprised the world with Adrenaline. Is this going to be kind of a surprise the world NAB or or is it more steady eddie?

We have always got surprises, and I think that there will be some very nice surprises this year as well. So I hope you're coming to the show.

I will be there. And then just one final thought on the HD side. Obviously the storage component of high def is greater than standard def. Can you talk a little bit about how you guys can capture the storage? Obviously customers can go to third-party storage and you guys win benefits from that. And dealers might actually benefit from the sales of the third-party side. But can you talk a little bit about what the change in the depth (ph) of the storage capacity is and the likelihood that you guys might grab it?

And then finally -- I know this is a lot of parts to this question -- but can you talk a little bit about what percentage of your overall business roughly was storage in the March quarter?

Okay. Well just talking about the storage opportunity, if you go back to the mid-90s a large part of Avid's business was comprised of attached storage. Because in fact in the early days we needed to fine-tune the storage that went along with the Avid editing systems just so that they could handle real-time media. And in fact we used to alter the firmware on the hard drives themselves. As basic hard drive storage has -- performance has improved over time, it has been more possible for dealers or any third-party to integrate storage that in general works pretty well.

But the whole bar gets raised when you go to HD, as you just referenced, because obviously the data rates for uncompressed HD are six times the data rates for uncompressed SD. So it as a consequence it creates another opportunity I think for Avid to deliver extra value to our customers by delivering some performance capabilities that they just can't get off the shelf.

As you probably know, just to pull HD off of a storage array you actually need to strike the array, which is more then just buying off-the-shelf storage. So there are a number of challenges that HD represents that create in turn opportunity to deliver better benefit to our customers.

As the typical customer, can you give a percentage of -- because basically if you go HD, you're going to have to buy more storage whether it is from Avid or somebody else. Do you have any idea of what the percentage of customers you can capture? I guess it is really hard to try to calculate that, but if there's any sort of guidance -- do you think it could be 70 percent of the storage would be Avid or is it 30 percent? Just any sort of guidance on that?

We're not anticipating that we would have a 70 percent attach rate in general, although in particular when customers are going after very high-performance storage architectures they could very likely choose to buy an Avid system, because we know we will solve the problem. And in fact often the problem requires some fine-tuning of the editing system with the storage array. So sometimes you can't even do those things separately.

But our internal estimates are that we will continue to sell a fair amount of local storage, which is storage attached to a single machine. But then also we continue to do well with our shared storage product, the Unity, because of the benefits that you get from a shared storage environment. And certainly we're looking at addressing the needs of people who want to work in a shared storage HD-based environment.

I don't have a specific number for the revenue related to storage, but we did I believe ship in the quarter our 2,000th unit of Unity or Unity LANshare. So it continues to do well.

Yes, in fact it is worth highlighting the fact that Unity really is the industry standard in postproduction for shared storage. And even though we sell a heck of a lot of those into the broadcast business, the majority of them go into postproduction.

Okay and just on the competitive front, Pinnacle has talked about overhauling their broadcast business for the last couple quarters. Are you seeing any impact of that?

Well, I think Pinnacle just came out with their announcement today about Practical HD. And I think that is what they're going to be showing at NAB. So I think that is a part of what they're trying to tell the world about. I would say that just competitively as we have talked about before the competitors we run into tend to vary depending on what part of the world that we're operating in. And that variation geographically is something that hasn't really shifted that much. So I would say that in Asia, for example, Sony tends to be stronger. In Europe we see Thompson, GBG. In the states I think we see a mixture of our competitors there. But there is not a prominent competitor that we see in all geographic regions.

Steve Lidberg with Pacific Crest Securities.

First of all, can you give us a little geographic lock at how the businesses performed or how the business performed relative to North American and international?

A quick question on foreign currency. What was its impact in the quarter? And then in terms of Active Content Manager, what kind of opportunity do you see with that product? And where do you see it in terms of its lifecycle?

Okay. I'll leave the last one for David. Regarding the geographic breakdown of revenue, our America's business grew 16 percent year-over-year, and was 56 percent of the total revenue. Europe grew by 5 percent, and it was 29 percent of the business. And Asia-Pacific grew 26 percent and represented 15 percent of the overall business.

In terms of currency, if you do the simple math of applying last year's exchange rates to this year's exchange business and comparing the difference, currency had about a $6 million positive impact on our revenue year-over-year. However, as I said in the past, this simple math only counts the difference in exchange rates, it doesn't factor in other operating decisions that are made sometimes in response to currency.

As a matter-of-fact in the first quarter we reduced our European prices by 10 percent largely in response to the increase in exchange rates. So this would dampen the positive impact that currency would have overall. And then as you take that to the bottom line, since some of our expenses abroad are in local currencies, as the euro or yen appreciates they hurt us at the OPEX level offsetting some of that gain at the topline.

And then just to address your question about Avid Active Content Manager, it is a system which as we cited we sold to KUSA. They're using it currently for their Web presence of their news programming. And the great benefit of it is that if you look at how news broadcasters have traditionally addressed the notion of getting content onto the Web, they have in the past needed to have a separate organization that in many cases reproduced news which was already produced once, so that it could be delivered through the Web. And that reproduction process might have meant coming up with different bit rates for the video streaming. It might have come up with different formatting for the story, or in fact rewriting the stories themselves.

What Active Content Manager allows you to do is use the same initial news that you created and define rules which tell when the news would be posted on the Web relative to the live broadcast. So for example, you could make it simultaneous or have a built-in delay. And you also then don't need a separate department which is spending all of its time prepackaging something that has already been done.

So in terms of what we see as the opportunity, the benefits of Avid Active Content Manager are very clear. And we think that it is a very desirable product for anybody who currently owns an Avid system for news, because it integrates seamlessly with Avid Unity for news. So we see the entire segment of Avid customers to be a potential customer for Active Content Manager.

(OPERATOR INSTRUCTIONS). Chris Rowen with SunTrust.

I just have a quick question, Paul. Is the stance of not recording taxes through 2005, is that a change from what you said last quarter?

No, it is not a change from what I said last quarter. I think what I said last quarter is that this is something that you need to review from time to time. I think I said last quarter that we wouldn't be recording taxes in 2004. We look at it on a regular basis and we look at it as we get closer to 2005. And it may be a slight change in that I think it is extremely unlikely that we would have to make any changes at all in 2005. But I didn't mean to imply last time that we would be looking at accruing taxes in '05.

Neil Gagnon with Gagnon Securities.

The one impression I get today is that in broadcast we used to talk in terms of roughly $1 million per station, but there's a lot more things that you'll be selling them. Can you give us some idea of just how much more you might sell at an individual location among all these tools that you have?

Sure. We have talked about the fact that a broadcast deal can vary pretty widely in size. And that is why we're trying to not just look specifically that a given deal and trying to assign a number to it, because it can range from change from $500,000 all the way up to almost $9 million, like we had with France TV. But then in addition there tends to be professional services that can go along with it, which is training and installation and site planning. There can be the full suite of our products that go in initially, which is generally an Avid Unity for news system with news editors and a play out system. But then in addition it could go along with an iNEWS system for -- as a newsroom computer system.

And then things that get added on later generally that we find are additional storage, additional editing seats. And then people might integrate a postproduction suite that connects directly to the Avid Unity for news through our Transfer Manager or Media Manager products.

Then what happens next is as the customer expands beyond a specific site and they go to different geographic locations they can connect those as well, again, using Media Manager and Transfer Manager for remote connection. So in ends up being something that is being networked that starts small but can grow basically to as large as the customer wants to integrate it.

Might this increase the broadcast business by a factor of 50 percent or some number like that? I am just trying to get a rough handle on how much additional business there is on a same store or same site basis, if you will?

Absolutely. For a given site it could increase the size of our business by 50 percent easily. And certainly we've got examples of that where it started with a news department or started with a postproduction department and then moved into graphics and then moved into the newsroom.

Would you talk a bit about NXN and how that is going to affect your various businesses and where it adds onto, please?

Well MSN, prior to our acquisition what brought them to our attention was that they were really the industry-leading rich media asset management solution for the content creation industry. And they had a very strong position in 3-D; in fact, a true leadership position in 3-D.

Well, if you think of asset management as being two key pieces, one is managing media assets, but then also managing people assets or the workflow of the creation of that content, you actually see that NXN does both of those extremely well. That is a challenge that is faced not just by 3-D content creators, but also postproduction suites as well as newsrooms as well as in the audio industry. So what we saw was the ability to leverage the same technology that had been developed very thoroughly for 3-D and then applying that more broadly across our business.

So this is going to affect the entire product suite across the Company?

Well we see the opportunity to do that. We're not making any specific announcements about that. Certainly as we do our development that is what we've got in mind.

One last little one. Paul, could you talk a little bit about why the lower margins in audio in Q1, and why we should expect it is going to snap back in Q2?

There are actually a whole number of factors that all just sort of worked against them in the first quarter, from just the ends and outs of some promotional deferrals that they had in the quarter to some changes in inventories that had an impact on overhead absorption and that sort of thing. Just a whole bunch of things that worked against them. As I said, my current expectations is that those things turnaround in the second quarter and that audio's operating profit margins get back up toward double digits.

Okay. It gets back to its strong double-digit margins?

In the second quarter what I said was in the 10 percent area.

And gentlemen, we have no further questions at this time. I would like to turn the call back to you for any additional or closing comments.

Alright. Well, we would like to thank you all for joining us today. We hope to see many of you at NAB. It looks like it is going to be a great show. Should you have any further questions, please feel free to contact us directly; otherwise, we will look forward to speaking with you all next quarter. Thank you.

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