Avid Technology Inc (AVID) 2004 Q2 法說會逐字稿

Good day and welcome everyone to the Avid Technology second quarter earnings results conference call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference 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'd like to welcome you to our second quarter 2004 results conference call.

n a moment I'll turn the call over to Paul Milbury, our CFO, who will provide a detailed review of this quarter's financial results. Then I'll discuss some of the highlights from the quarter, including our participation in NAB, the National Association of Broadcasters convention that took place in early April. Finally, Paul will come back and update our financial outlook for the third and fourth quarters of 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 July 22, 2004, remarks made on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, 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 quarterly report on Form 10Q for the quarter ended March 2004 and other documents filed with the Securities & 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 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's section of our Web site at 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 web site.

Now, let's look at our results. We delivered another record with our best ever second quarter revenues and net income. Net income for the quarter was $15.5 million, or 45 cents per diluted share, on revenues of $139.9 million. This compares to net income of $7.8 million, or 25 cents per diluted share, on revenues of $113.3 million for the corresponding quarter in 2003.

For the six months ended June 30th, 2004, revenues were $267.3 million, compared to $225.5 million for the first half of 2003. Net income for the six months period in 2004 was $30.2 million, or 89 cents per diluted share, compared to net income of 43 cents per diluted share for the same period in 2003. Paul will now review these results in more detail. Paul?

Thank you, David, and good afternoon everyone. Q2 revenues of just under $140 million reflected strong year over year growth broadly across our video and audio product lines. Video revenues grew 25% to $96.4 million, with solid increases in both broadcast and newsroom products, and our DNA family of video editing solutions.

Audio revenues grew 21% to $43.5 million with a strong initial quarter sales of D-control, the control circuit centerpiece of Digidesign new ICON's mixing system and strong upgrade sales from older Pro Tools mix hardware to the new Pro tools excel system, however, the fastest growing area of audio continues to be the Home and Project Studio segment, which grew at a rate more than twice the 21% rate of the overall audio business.

Geographically, our Americas business grew 15% year-over-year, and was 54% of total revenue. Our international business grew 35% year-over-year, and represented 46% of revenue. Gross margins for the quarter were 56.4%, up 1.1 percentage points for the same quarter last year and down about 1 point from Q1.

The single biggest factor contributing to the sequential decline in gross margin was the recognition of the bulk of the revenue for the France television installation which had a lower than usual gross margin for broadcast deal due to the unique structure of the transaction.

Second quarter operating expenses were $63.3 million, including $549,000 of amortization of acquisition-related intangibles. The sequential increase from Q1 primarily represented expenses associated with our participation in the NAB show, three full months of operating expenses related to our acquisition of NXN and a higher expense run rate due to the expansion of our business in investments we are making to spur further growth.

As a percentage of revenues, operating expenses declined to approximately 45% as compared to approximately 49% in the second quarter of 2003.

Pro forma operating income excluding the $549,000 amortization charge was $16.1 million, or 11.5% of revenue. Operating income, including amortization, was $15.6 million. Operating profit for our video segment was $8 million, or 8.3% of revenue, and operating profit for our audio segment was $8.2 million, or 18.8% of revenue.

Interest and other income was $595,000 for the quarter, a provision for income taxes for the quarter was $700,000, primarily reflecting accruals on our foreign operations. GAAP net income was $15.5 million, or 45 cents per diluted share. Excluding the $549,000 for amortization, pro forma net income was $16 million, or 47 cents per diluted share. Day sales outstanding at the end of the quarter declined slightly to 51, and our inventory turnover increased to 7.1 times.

As of the end of June, our cash balance was approximately $191 million, up from $170 million at the end of the previous quarter. During the quarter, cash provided by operations was approximately $15 million, and cash from financing activities approximately 6 million. I will be back shortly to update our guidance for the second half of 2004, but now I'd like to turn the call back to David for discussion of the business highlights from this past quarter.

Thanks, Paul. As you might recall, last quarter's call took place right before the NAB convention, so I'd first like to highlight our activity at the show, and then discuss other important development across our business in Q2. If you attended NAB this year or read the coverage from the convention, it seemed that every manufacturer was talking about HD.

Both the press and attendees agreed that HD has finally arrived. While we couldn't agree more, when we unveiled Avid DNA at last year's NAB, we announced that we would deliver extended HD capabilities and Avid DS Nitris and Media Composer at Greenland. And this year we demonstrated those capabilities in action. We also extended HD support to Avid Xpress Pro our low-cost entry level Avid DNA product.

But our HD story at this year's NAB was more than features and function. It was a total HD workflow that allows customers to work with the rapidly growing format in just about any way they want to.

One of the biggest challenges of working with HD is that there are so many popular cameras, formats and decks to choose from, which makes it difficult to develop editing products that work with them all.

So it wasn't surprising for us to see a number of companies at NAB with products that were a bit restrictive in the way they allowed customers to work with HD. Avid took an entirely different approach to solving this HD challenge.

Rather than giving our customers a limited approach to HD, we announced support for the broadest range of HD formats and resolutions on the market. For example, customers can use Media Composer Adrenaline with the widest variety of third-party HD products, like Sony's HD cam, family of cameras, Panasonic HD decks and cameras plus JVC's emerging HDV format.

They can also edit using the widest variety of HD frame rates and resolution including 720-P, 1080-P, and 1080-I. Ultimately this gives our customers the freedom to choose the way they want to work with HD. In addition, we further bolstered Avid's HD position by demonstrating an industry first -- collaborative HD postproduction.

Let me take a minute to explain what this means. When working in SD, or standard definition, with Avid unit at the center, multiple editors who are connected to the network have the benefit of being able to access the same media at the same time instantly. But HD media throws a monkey wrench into the story because HD has six times the data rate of standard.

Basically, HD media strains network bandwidth tremendously and has made real time collaboration impossible. Avid shattered that barrier at NAB with the introduction of Avid DNXHD, a 10-bit HD encoding technology that enables collaborative HD post production with the same storage bandwidth and capacity requirements as SD files. This means we can leverage Avid DNXHD to make our Avid unity solution and HD shared storage system.

Additionally, we can go back to customers using Avid DS, HD or Avid DS Nitris who have only been able to collaborate in SD, and offer them the benefits of an Avid unity shared media environment in HD. That's a great benefit for our customers. We believe so strongly in the potential of Avid DNX HD, that we're incorporating it into the entire Avid DNA family. And we also introduced another industry first at NAB, by make being the source code license for Avid DNX HD, free of charge. That means the customers who down load the source code for Avid DNX HD from our Web site can preserve their HD media and know they'll still be able to access it 50 years from now. Now, while HD production solutions were demonstrated by manufacturers at NAB it's also worth pointing out that HD continues to gain ground at the consumer level as well.

The consumer electronics association estimates that by 2007, nearly one-third of American households will be tuning in to HD programs. And indicated that viewers are helping drive the demand for networks and channels to create more and more HD content. We're excited about what this means for HD post-production. And we believe that no other company in our industry is as prepared as Avid to help customers tackle all the challenges of working with AD.

Also at NAB, we unveiled the Avid Xpress Studio system that we're targeting at DV professionals this is an important segment of the large low end post production market opportunity that we estimate to be approximately $400 million annually.

Xpress studio is the industry's first all in one content creation suite and it features five leading software applications. Avid Xpress Pro, Avid Pro Tools LE, Avid 3D, Avid FX and Avid DVD by Sonic which represents the state of the art in Video Editing, Audio Production 3D Animation visual effect and DVD offering.

These fully integrated application are augmented by a choice of audio and video hard ware options that include the Digidesign M Box, Avid Xpress DG002 controller and the Avid Mojo digital non-linear accelerator. By leveraging our award winning software and hardware as well as customizing software from Boris effects and Sonic solutions, Avid Xpress studio represents an unprecedented level of integration across all our major product categories and sets a new level of price performance in the rapidly growing DVD markets.

Our broadcast business also had a strong quarter. We ticked kicked it off at NAB by introducing air speed, a video in-jet and broadcast play back server that offers a wide range of work flow capabilities and software programmable compression format. We also unveiled Work Groups 4.0, a family of workflow enhancing productivity tools and services that leverage our Avid unity solutions.

And we brought a new version of our news cutter Adrenaline FX system to the show which offers new editing functionality, including support for the material exchange format, or MXF, and the ability to edit at IMX-30 and IMX-40 resolution.

We also demonstrated our Avid DNXHD encoding technology in news cutter, which will give broadcasters an easy and affordable path for working with HD media in the future, while keeping their current Avid unity infrastructure.

Following NAB, we won a range of deals with new customers these wins included a $6.7, million contract with the Canadian Broadcasting Corporation, to convert three of its 23 television stations to Avid and to an digital newsroom environment.

And the sale of a broad range of broadcast and post production solutions to Washington state university, for its new Edward R Moore school of communication. WSU demonstrates a growing commitment among educational institutions to install fully networked broadcast operations as a means to prepare students for the kinds of news production experiences they'll have when they enter the job market.

We also announced that a new station group, Atlanta based Gray television, purchased iNews systems for 13 of its 29 television properties, which include CBS, NBC, and ABC affiliates in 25 markets. This deal also included an end-to-end newsroom production environment at WOWT and NBC station in Omaha, Nebraska.

Within the groups, which we've already penetrated, we've converted roughly 25% of the available member stations so far. And in the U.S. overall, fewer than 8% of all stations have converted to all digital production. So whether looking at groups we've already penetrated or the total available market in broadcast, it's clear that we're still in the early innings of this multiyear opportunity.

In our audio business, Digidesign made the first public showing of its ICON integrated console environment at NAB. As we mentioned during last quarter's call, ICON is a part of a broad effort on Digidesign's part to augment the Pro Tool digital audio workstation platform with D-control, a large format, console service that provides powerful real time mixing capabilities at a lower price point than a comparable solution made up of standard-alone components.

We believe that ICON has the potential to drive an important shift in the industry and it is just the conversion of music facilities, post houses and private studios to a future of digital mixing that integrates computer-based tools with versatile and dependable tactile control.

Our estimates show the market for professional music and post mixing is approximately $150 million annually, and the ICON environment has already begun to make an impact on this segment. Since the D-control product started shipping in Q2, it has done extremely well helping us achieve a 21% year-over-year increase in our audio revenues as we mentioned earlier.

In another important audio development, Digidesign announced plans to enter the live sound market with a digital console system that integrates with Pro Tools, much in the same way that ICON does on the studio side. This strategic move put Digidesign in a position to penetrate what we estimate to be a $100 million annual market for live mixing and includes performance venues, tours, theatrical production, corporate installations and houses of worship.

We expect to demonstrate this live sound product family in early September, so we'll have more details for you during next quarter's call.

In 3-D, our SOFTIMAGE introduced latest version of its flagship SOFTIMAGE XSI 3D content creation system at NAB. SOFTIMAGE XSI version 4.0 delivers enhancements in character animation, new simulation effects, open architecture and customization features and advanced rendering technology.

In the asset management space, NAB 2004 marked the first time that our Alienbrain product line which we acquired from NXN Software in January, shared space in Avid's booth with our SOFTIMAGE 3-D family. This allowed to us showcase the integration features between SOFTIMAGE XSI 4.0 and the Alienbrain Studio 7 asset management solution.

We plan to further highlight the integration between Avid, SOFTIMAGE and Alienbrain products at the Sigraf trade show in Los Angeles in August. So that concludes our roundup of NAB, as well as this quarter's important sales wins and product updates.

But before I turn it over to Paul again for our forward guidance, I'd like to mention that Avid will have a notable presence throughout the content creation industry this summer. In fact it's very likely most people will consume a fair amount of media created on avid systems.

For starters, NBC has announced unprecedented amounts of up to the minute coverage of the Olympics from Athens. Nearly all of which will be assembled with all digital workflows of Avid laptop and desktop editing systems and shared networks.

Mobile production units equipped with avid tools will be covering both the Democratic convention in Boston, and the Republican convention in New York City and then following the candidates across the U.S. as they hit the campaign trail.

But first HD reality TV shows, namely the Casino, which is currently running and the Benefactor which is slated to debut this fall, both used Avid DS Nitris for HD post production and some of the summer's biggest blockbusters like Shrek-2, Spiderman-II, Harry Potter and The Prisoner of Azkaban, I, Robot and the Born Supremacy were all created using Avid systems.

Whatever forms the media takes, professionals around the world continue to choose Avid as their preferred manufacturer. Our strategic plan in digital content creation management and distribution is right on track.

We've posted double-digit year-over-year growth for the last four quarters, record revenues for the last two quarters, and we're looking forward to growing Avid's business in our core markets as well as the new areas we've targeted for expansion. With that, I'd like to hand it back to Paul to discuss our outlook for the balance of 2004.

Thanks, David. On our last call, the midpoint of the revenue guidance range was $542.5 million for the year. At this point we're increasing our full year revenue guidance to approximately $550 million, which represents a growth rate of approximately 17%.

Based on an assumption of $550 million of revenue, we are also increasing our 2004 pro forma earnings per share guidance to $2.04, which represents a growth rate of approximately 49% year over year.

We expect revenue to be approximately $137 million in Q3, followed by approximately $146 million in Q4. Gross margins are expected to be in the area of 58% in Q3, and 57.5% in Q4.

Given the absence of expenses associated with NAB, Q3 operating expenses should decline from Q2 and be in the area of $61.5 million. For Q4, we currently expect operating expenses in the area of $63 million. For the full year, we expect our operating expenses to increase about 12%, slightly less than 75% of the rate of growth of our top line.

As stated in the previous calls, we have been investing in the sales and marketing area where expenses are expected to increase at about the same rate as the top line. For R&D, and G&A expenses are expected to increase at about half the rate of growth of the top line.

Pro forma operating profit for the year is expected to be approximately $70.3 million, or 12.8% of revenue. Pro forma Operating profit does not include $2 million of acquisition-related amortization. Operating profit including the amortization would be approximately $68.3 million.

On a quarterized basis, pro forma operating profit is expected to be approximately $18 million in Q3, and $21 million in Q4. GAAP operating profit would be approximately $500,000 lower per quarter, including 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 in the next two quarters.

Pro forma net income is expected to be approximately $70 million for the year, pro forma net income does not include the $1.2 million tax benefit we realized in Q1, the $2 million of acquisition-related amortization we expect for the year, or the approximately $1.1 million of expense for the legal settlement in Q1. GAAP net income, including these items, is expected to be approximately $68 million.

Diluted shares outstanding are expected to be $34.5 million in Q3, and in Q4, making the full year average approximately $34.2 million. For the full year, pro forma earnings per share are expected to be $2.04 versus GAAP earnings per share of $1.99.

Pro forma earnings per share are expected to be 52 cents in Q3, and 60 cents in Q4, with GAAP earnings per share expected to be 50 cents in Q3, and 59 cents in Q4.

Although we are not providing detailed segment guidance, I would expect mid-teens revenue growth for both units and double-digit operating profitability for both units for the full year. Cash is expected to increase to approximately $240 million by year-end. This concludes my remarks and David and I would now be pleased to take your questions.

Would you like to take questions?

Yes, we would.

Great. [OPERATOR INSTRUCTIONS] We'll take our first question from Steven Frankell with Addams Harkness Investment.

Hi, David and Paul I wonder if you might start by giving us a little more detail on the France TV deal and the size of that, and why the margins were lower, and then maybe an update on where you are in bringing some of your ABBB customers from that generation of product to the current generation of product?

OK. I'll start with the France TV question. The France television deal was approximately $8 million. And the reason why it had lower gross margins than most of our broadcast deal has to do with the fact that it was one of our very first large big picture broadcast deals and we experienced a number of learnings along the way, some of which cost us money.

Second, since we were the prime on the deal, there were -- there was a component of third party product pass-through that we had mentioned originally, where the margins are lower, and then finally, there's a 5% hold-back on the purchase price that we don't actually collect for a year, when we do collect that final hold-back, it will go directly to gross margin and bottom line. So those are the things that are sort of unique about France television

Was the whole $8 million in that quarter?

Yes, it was.

And then I guess, just to address your question of ABBB speakers we estimate anywhere between 5 and 10,000 active ABBB customers, and that's the segment that we had targeted with this upgrade promotion. As you might recall, they had actually been unable to upgrade from ABBB to Meridian and preserve their media format capability because Meridian didn't support ABBB format and we bridged that with our Adrenaline systems, which do support ABBB media, and it's easier for those customers to upgrade to Adrenaline systems

Do you have the promotion during the quarter and can you give us a sense how that went?

As a supportive promotion for us. Obviously we're doing it to do two things really. One is generating revenue gross margin which was successful in doing that and secondarily as you can imagine, it's very important for to us support current Avid customers even if they're on previous releases of our hardware. So the other part of this was really to support our install base.

What were broadcast revenues in general during the quarter?

Our sales to the broadcast market as a whole were up close to 20% sequentially, from the first quarter, and represent more than 35% of video segment revenues.

Thank you.

You're welcome.

We'll take our next question from Jim Ricchiuti with Needam and Company.

Thank you. David, or Paul, I'm wondering as I look at your Q3 guidance, normally you'd see some seasonality in the quarter. There's a little bit of seasonality here, but I wonder if you could comment to what extent you're seeing increased shipment activity just related possibly to the Olympics and to the upcoming elections and conventions.

Well, I'll take it a first shot at that. This is David. Relative to those two events, you can probably imagine the equipment for those was bought actually in Q1. And is actually already on the ground and installed.

So that's very important for those events to get out way ahead of them and in fact we are already in discussions for the upcoming winter Olympics, so just to give you a sense of how far in advance the planning is done. So that's one of the big things there. Then relative to the seasonality that you talked about, often we find Q3 is a slow work quarter for our audio segment.

However, in general that can be influenced by new product introductions and we expect to continue to get a good lift from the ICON product, the D-control, tactical control service as well as some backlog that carried over from an upgrade promotion we had from mix systems to our new Pro Tools HD systems.

OK. And you showed pretty healthy operating margins on the audio business. How comfortable are you with the sustainability of those margins? Is that new product-driven, are there other issues there in.

Well, it's a combination of things. It's somewhat a function of new products. It's also a function of the relatively high volumes and increase in revenue. But we're not expecting the close to 19% level of operating profitability in audio to be sustainable.

OK. And lastly, and I'll turn it over to somebody else, I wonder if you would comment on the overall market environment in the terms of the pipeline that you see in broadcast, and in general the outlook in the -- in both businesses, post production and audio. Are there -- are you just seeing a better -- it sounds like you're seeing a better tone of business but I wonder if you can comment more specifically about those three areas.

That's exactly right it does feel to be a stronger environment overall in broadcast we've talked before how that's influenced by ad revenues, and those in general are going up, we're getting good reports both from the U.S. as well as in Europe, regarding the estimates for advertising growth.

In our post business, we're seeing a drive in business there that is being influenced by a number of factors; one is the movement from standard depth to HD production, which is a pretty big deal. We're also seeing a lot of interest and excitement around DV-based production, so we call that the intermediate space. And that market growing rapidly and we've identified it as about a $400 million annual market opportunity.

And then interestingly, there's a bridge being drawn between the two in a new format called HDV, which is a highly compressed HD format, which we think will be adopted rapidly with the introduction of some new low-cost but very high quality image cameras and we've announced support for that format as well.

So we see a number of things driving the business on the video side. And then in audio, we've talked about the excitement that we're experiencing in the marketplace with the decontrol product, and also as Paul highlighted in his comments, rapid growth in the home studio marketplace, that seems to be something that is really taking off right now.

Digidesign has had very strong year-over-year and quarter on quarter growth in that segment of the business. So it's really feeling like across the board strength in the marketplace.

Great, thanks very much.

You're welcome

Next we'll take a question from Gene Munster with Piper Jaffray.

Hi, everybody, good afternoon.

Hi.

In terms of the kind of home audio market, can you talk a little more about that, that's a new segment I haven't heard you talk of about. Is this kind of the $1,000 Prosumer audio side and is this something we'll be hearing more about in the future?

Certainly right now, the first product introduction we had in there was the M-box, and that's a portable micro studio, it's a U.S.B-powered two microphone input box that lets you record in a home studio environment off a laptop, because it's USB-powered, it's portable and the product sells for approximately $495 list, and includes the Pro Tools LE software with it.

So that's a great product and has been selling extremely well. We then augmented our home studio product line with the 002, which is a fire wire based control surface, as well as the 002-R, which is a rack-mounted version of that product, and those are both doing quite well also.

And then we just recently introduced a new control surface, the Command 8, that also bundles into this segment, and that did quite well this past quarter. So, the growth there that we've been experiencing has been through a combination of the introduction of some new products from Digidesign, as well as what we also see as the increased capability of computer-based software system that's really driving the market segment overall.

So, we believe that there's growth in that segment that is creating ample opportunity for additional revenue in our audio business.

And on the professional side in terms of number of studios, mixing studios, who could be eligible for the decontrol or just the full ICON?

Well, that is a -- also a very significant segment that as we -- but that as we mentioned we've just entered into and I think the numbers we've talked about are roughly a $100 million annual revenue opportunity...or $150 million

Do you know how many studios that is...

I couldn't give you the exact count of studios, because it's not only the conversion of existing studios, but also what we anticipate to be the creation of some new studios using this as a different business model, because it's a pretty significantly lower entry point than you would need to do mixing if you're going to use a traditional analog or a traditional digital mixing console.

And then follow-up to Steve's question on the AVBV, do you expect that that promotion is going to continue this quarter?

Well, it does not continue this quarter. It expired last quarter. But we do in general run promotions for our products, and there is a new promotion that includes the studio tools bundle with our Media Composer Adrenaline product this quarter, as well as the Command 8 control interface.

OK, and if assuming you didn't run -- or let me ask this way? Can you give just a rough percentage of the video business that was under the promotion? ASPs unit but in general was it relatively small part of the video business that came in, or was it a big portion?

Yes, I would say it was a relatively small. It was primarily focused on the U.S., and not the rest of the world. And as I think David mentioned, the net result of the program was an increase in units, increase in revenue and increase in gross margin for Media Composer Adrenaline.

OK, so would you say maybe less than 25% of the total revenue in the video was driven by this?

Oh, yes.

OK. Great.

Yes, substantially less than that.

All right, thank you.

Yes, thanks Gene.

Moving on, we'll take a question from Steve Lidberg with Pacific Crest Securities.

Good afternoon, guys.

Hi.

First of all, I guess, as you look at other market segments around technology, we saw a pause in spending in kind of the end of May, June, time frame and I was wondering what you saw with regards to your customers both in terms of the post production as well as in the broadcast segment?

I'll comment first. Just one thing that differentiates our products from -- in general when we think of our post products, where the majority of our revenue is coming from higher end purchases by customers, those tends to be capital equipment expenditures, and they are less driven by month to month influences in the marketplace.

So we didn't see any particular drop-off over the past quarter as a result of any factors that were happening in the marketplace. In general, these systems are budgeted for, and they're needed for actual production requirements. So we didn't see anything there at the high end.

And then at the low end we actually saw a growth in our revenue from our lower end products, both on the video side, which includes products like Express DV, express Pro and the new express studio and on the audio side we talked with the home recording audio products.

Great. And in terms of the Media Manager and product, what have you seen in terms of appetite or interest in the marketplace in the broadcast segment?

Well, in broadcast we've talked about this before, in many ways Avid is kind of the quiet market leader there. We've sold more media asset management solutions into broadcast than anybody else out there.

And what we saw sell is actually set of productivity tools and media asset or production asset management solutions, that help our customers track all of their rich media assets and also track their progress in their actual production. So, that they can complete the media on time and deliver it.

So, we find very strong interest, as customers integrate more and more of their production work flow, it becomes more necessary to have a digital media asset management solution, because otherwise it's actually just becomes very difficult to track your assets. And there have been some interesting stories we've heard about customers without such systems actually losing track of where some of their media assets are.

And I guess lastly, relative to the international strength that you saw in the quarter, was that centered in Europe or Asia or consistent between both geographies? Thanks.

I actually don't have the exact numbers in front of me, but off the top of my head our Asia-Pacific business grew around 50% year-over-year, and our European business was in the high 20s, I believe.

Thank you.

37%?

We'll take our next question from Sasha Zarovich with Oppenheimer.

I was wondering if you could give us a update on the competitive landscape in particular regarding Apple and Final Cut Pro but other products as well.

Sure. Well, if you attended NAB, Apple introduced Final Cut HD at the show. They've got a HD work flow that is fire wire based from DBC Pro HD cameras right into Final Cut Pro and also introduced a $299 product called Motion for the motion graphics industry, and that was actually targeted -- I believe at the marketplace that's currently being serviced by aftereffects.

So that's a product that we have some pretty good inter op with. We saw customer interest in that and we expect at that price point there will be a lot of interest. But in general we haven't seen any significant shift because in fact we've seen HD introductions by most of the players in the industry ourselves included, and we believe that we came out with the most comprehensive HD story which includes not only the wide format capability that I talked about earlier, but also the ability to have a collaborative HD work flow, which is the first one in the industry.

Could you comment any on how you see discrete?

Sure, I mean, if we look at the post marketplace, you can roughly divide it into two categories. Lower end post is primarily occupied by software-based solutions, that's where you find Final Cut, you find Adobe Premier servicing that end of the market. They tend to sell for less than a $1000, and they'll bundle well third party hardware, etc, etc.

We believe that that market is growing pretty well, and we see a lot of demand for our own products, which we sell into that market. That's where we sell our Express Pro and Express DV, and the new Express Studio bundle. So market is rapidly growing and I think we'll have room for a lot of people to do well.

At the higher end of the market, that's where we find players like Discrete, like Sony, Quantel generally with more expensive H.R.-based solutions, and servicing the higher end post marketplace. I'd say in general that marketplace has not been as rapidly growing in some geographic areas we've seen a decline in that market. However, we feel that one of the drivers there is going to be HD production.

Because most of the existing infrastructure is currently SD-oriented and we specifically targeted Avid DS Nitris there, because we've got real time HD capability that are better than anything else on the market, and we've also now got a collaborative HD work flow, which we think will support that market as well.

OK. And how about comment a little bit as to when you were giving your guidance and for international where do you like at the value of the dollar versus Euro being for the remainder when you're basing for your guidance?

I think the answer to that question is basically we pretty much assume that the dollar FOREX currency relationships stay are they are today when we're looking ahead. We don't try to forecast one direction or another.

Great. Thank you very much.

You're welcome.

Next we have a question from Chris Rowen with Robinson Humphrey.

Hi. Can you give us any idea on when we should expect the HD card on the Adrenaline platform, and also on those DS HD upgrades that you talked about in your prepared remarks, do you get paid for those, or is that something that you give the customer for free?

Talking first about the Media Composer Adrenaline HD upgrade that is obviously second half of the year, because we're in the second half of the year now. Originally targeted for Q3, it's kind of too close to call right now, so we'd be expecting Q3 or Q4 delivery of that product.

And then on the Nitris upgrades that you talked about?

I believe the Nitris upgrade is free of charge for any customer who has purchased the system for the software-based upgrade for Nitris.

Great, thanks a lot.

Next we'll take a question from Bob Sale with LMK Capital.

Yes, a couple questions. The France TEL deal, was that revenue all recognized in Q2?

Yes.

OK. And so the video, when you talked about the 20% sequential growth in the broadcast revenue, that Q2 included the France deal and Q1 did not?

Right.

OK. And the 5% holdback, will be recognized as 100% profit revenue when?

Q2, a year from now.

OK. Will be recognized ratably over the next few years or a year from now once everything is up and running in?

A year from now -- well, everything is already up and running.

Yes, once it's running for a long time, I guess.

Right.

Second question. In the quarter you had very nice growth, congratulations on that. On a steady currency basis, bottom line is what was the effect of currency on the growth year-over-year?

Currency on the top line had had a negative impact of a little over a million sequentially, and it was around 4 million on a year-over-year basis. Obviously, the bottom line impact was less in either case because of the offsetting impact of local currency expenses.

Right. Now, on the audio side of the business, can you just maybe qualitatively talk about -- this is -- there's kind of a number of moving parts that are helping that business, talk about what the rough contributions of the decontrol product is, the home products, and then whatever else is involved. Just to understand the mechanics -- the dynamics of those parts, you know, sequentially, if you will, and then going forward what that looks like?

Well, we don't break out the businesses by product. I can give you, since it's really a newer area, the home and studio market, roughly represents a little over a third of Digidesign's business today. And as I said earlier, that's the piece of the business that grew twice as fast as the business overall.

OK. And--

Next we will take a question from Richard Ingrassia with Ross Capital Partners.

Thanks, operator. Good afternoon, guys.

Hi, how are you.

Good. I know you don't give specific numbers, but can you give any general backlog guidance going into Q3 here?

General background guidance, no, it's -- Rich as we talked about in the past we don't really sort of detail the level of the backlog. You know, backlog did remain strong and increased in the quarter, but that is about as far as we'll go

OK, that's all I was looking for.

OK.

And can you just give us a quick update on the status of the new NBC deployments in Washington and in New York?

Sure. We actually have been working very closely with NBC. I've been down to visit both of those installations personally, and they're actually doing quite well. We have conference calls with NBC on a routine basis to make sure we're on top of it. But both of those installations as well as at the Olympics, obviously you can imagine, we're doing everything we can do to make sure they stay on track. Right now, so far so good.

OK. and barring some major acquisition, Paul, do you see your tax status changing dramatically in 2005 at all?

No, I don't.

OK. A couple quick housekeeping things here. Broadcast seats now, do you have a number for that?

No, we -- as we said, a couple quarters ago, I think, we're not going to break out the number of installations on a quarter-by-quarter basis. Rather we're going to focus more on the total sales to the broadcast market and how we're doing there.

OK, fair enough. And just Capex and D&A for the quarter?

Let's see, depreciation and amortization for quarter was about $3.5 million or so, and capital spending was about three.

OK, thanks. That's all I have.

Thanks, Rich.

Now we'll take a question from Brian Gagnon with Gagnon Securities.

Good afternoon, gentlemen, congratulations on a great quarter.

Hi, Brian. Thank you.

I'd like to focus on two things, first, DNX HD, and then second, broadcast. First, the DN X HD, introduction to NAB, to me it seems like an enormous opportunity to cross-sell unity into the HD marketplace. Can you talk a little bit more about it, what your plans are for it?

Yes, well, that's exactly what the strategy is there. Without a compression format like DNX HD, you actually don't have existing technologies that can even support had HD collaboration. So it's an essential encoding technology.

The big effort behind the development of that technology was to make it be mastering quality. So it's actually first mastering quality encode technology for HD media, and we've actually done a number of comparisons to other formats and find that it compares favorably with formats that require much higher data rates. So we think we've got the right recipe there. And the market has actually received it quite well. We've got a number of manufactures who are adopting the technology for incorporation into things such as cameras, and we are going to be selling new HD collaborative work flows around unity as well as upgrading existing customers from standard F to HD work flows base on using that technology. So we are very excited about it. It was a big component of our news at NAB, and obviously we've got plans to take that forward.

I've had multiple discussions with broadcasters that are in the process of looking at the digital conversion, and most came back from NAB and said this is the single point that will allow them to do the digital conversion and get them into HD. Are you guys seeing the same type of thing?

Yes, absolutely. It's interesting how quickly transitions happen in terms of whether the sorts of questions that customers are asking, but we rarely had broadcasters a year ago asking about what the upgrade path was to HD production, and today we actually rarely have a deal where that topic doesn't come up.

Because obviously folks are looking at it and wanting to make sure that whatever infrastructure they put in place going to be able to handle it, and in many ways DNX HD is the missing link, because otherwise the big concern broadcasters would have is that they make a large investment in infrastructure and then find that obsolete when the day came when they would need to be doing production in HD.

So now we've got the bridge, we've also made the technology licensable free of charge so that broadcasters can feel comfortable that it's not a proprietary enclosed solution. They can have the actual source code for it and are comfortable that they can read their media at any time in the future. So it's a very exciting story for our customers.

Last question. On the broadcast business, if you had to gauge it versus six months and a year ago, the number of RFP, is it up one fold, two-fold, three-fold?

You know, I don't know what the actual answer to that is, other than saying that Paul alluded to investment in our Opex and increasing our infrastructure in terms of our own ability to handle business in sales and marketing and a big percentage of our investment has been going toward the broadcast marketplace, and what we're finding is that even in spite of our increased resourcing there, we are still maxed out.

So I don't know if it's a one X. or 2 X. increase, but I would say that it is a steadily strengthening market right now, and we don't see any sign of that diminishing in the foreseeable future, because as we've described it, we think that this is a multiyear transition that's taking place.

Good, congratulations.

Great, thanks, Brian.

Next we'll take question with Ray Froster with Morgan Stanley.

Thank you. Great quarter guys. What is the ratio of product revenue to services revenue, or just in general how is the services business?

Actually, our services revenues grew strongly in the quarter, and they now represent a little more than 10% of our total company revenue, up from about 8.5% of total company revenue a year ago, so they've been growing quite nicely.

I could give you one data point on that. In the Americas it was our best Q2 service bookings ever.

Yes, Adam Taylor, our head of sales for the Americas mentioned that to me just the other day.

Excellent. Thanks very much.

Next we'll take a follow-up question from Steven Frankell.

I wonder if you might give us a update on NXN and how successful are you in both selling that into your install base and also cross-selling their customers with some of your other products?

Well, the NXN acquisition as you know took place in January. We've been integrating the sales force with our overall sales force so those teams are at this point integrated and under a common management infrastructure.

We've been doing the calls together, both from a 3-D point of view into customers and some of these also transition into post, so the link to NXN isn't just into our 3-D business, it's also in our post business.

But the primary reason why we did the acquisition of NXN was for the technology, which we're incorporating into our work group products. So that's something, which is well under way also. So the NXN acquisition is pushing forward on the sales side, and then also pushing forward on the engineering side. And so far so good.

Do they meet your expectations in the quarter?

Well, we don't break out the individual revenues for NXN, but I will say that from a technology point of view, the technology has absolutely met our expectations.

Great, thanks.

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

Thank you. Just wonder if you can comment on the unity storage business. I believe it was up 20, 24, 25% last quarter. Can you talk a little bit about that?

Well, again, we don't usually break it out too specifically, obviously if you're quoting us, we must have done that last quarter.

Always a dangerous thing, Paul.

I know. I don't actually have the revenue numbers in front of me. I do know that on a unity basis we sold more unity units this quarter than ever. So it was a record quarter for unity units this quarter

And I assume the profitability of that business continues to be very healthy?

Sure.

Also, Paul, can you go back, I may have missed something, but on the -- you were talking about expenses and I think you were referring to R&D. That the R&D was about half the rate of growth of the top line. Is that what you were referring to?

Yes, I said with respect to guidance for this year, we're looking at revenue growth of around 17%. I indicated that we would expect our sales and marketing expenses to grow roughly in line with that 17% revenue growth this year, but that our R&D and G&A spending would grow at roughly half that 17% rate.

Right, and I know you're not going to give any kind of real guidance for '05, but what I'm getting to is, how can we think about the rate of growth and operating expense looking out a year, is that a decent way to look at it, or should we -- are there some other things we should take into consideration?

I think it's a -- well, it's a decent way to look at it. I don't anticipate that we will necessarily be increasing our spending in sales and marketing at the rate of growth of revenue indefinitely.

I think that if you go back a couple of years, we were investing heavily in R&D to get the new products out, that we have been getting out to the marketplace. Right now, we're investing heavily in sales and marketing to take advantage of the growth opportunities that are in front of us and those kinds of dynamics could change from year to year.

We have said in the past that we'd like to try to target the rate of growth of our operating expenses overall to be 75% of the rate of the growth of the top line, or less.

OK. Great. And one final question. You gave a little color on the service business, and I wonder how you'd characterize the overall level of profitability of that business?

Improving, and it does have margins lower than the overall business, but it's a profitable business.

OK, thanks very much.

Sure.

That's all the time we have for questions. I'll turn the conference back over to our speakers for additional or closing remarks. Gentlemen, if you have any closing remarks?

All right, yes, I'd like to thank you all for joining us today and invite you, should you have any further questions, please feel free to contact us directly after the call. And we'll look forward to speaking to all of you again next quarter. Thank you.