Avid Technology Inc (AVID) 2004 Q3 法說會逐字稿

Good day and welcome, everyone, to the Avid Technology 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. Good afternoon. I'm David Krall, President and CEO of Avid Technology, and I'd like to welcome you to our third quarter 2004 results conference call. In 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 for each of our businesses. Finally, Paul will come back and update our financial outlook for the fourth quarter of 2004 and full year 2005.

Following our prepared remarks, we will be happy to take your questions. Please note that the information discussed today is current as of October 26, 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 and 2005.

There are a number of factors that could cause actual events or results to differ materially from those indicated by such statements such as competitive factors, including privating pressures, fluctuating currency exchange rates, adverse changes in general economic or market conditions, particularly in the content creations industry, delays in product shipments, market acceptance of Avid's existing and new products, and other important events and factors disclosed previously and from time to time in Avid's filings with the U.S. 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 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 and a reconciliation of these GAAP measures to these non-GAAP measures are contained in the press release announcing this quarter's result and available in the investors section of our web site at www.avid.com.

Now, let's look at our results. We delivered the highest quarterly revenue in Avid's history at $147.4 million, resulting in non-GAAP net income of $20.4 million, or 58 cents per diluted share. That's a 24% year-over-year increase in revenue and a greater than 50% year-over-year increase in earnings per share. I'll fill in the business details of how we achieved the results in a moment, but first I'll hand it over to Paul and he'll walk through the numbers. Paul?

Thank you, David, and good afternoon everyone. Before I get into the results, I wanted to point out that our earnings press release this quarter, which is posted on our web site, includes both GAAP and non-GAAP financial statements and tables reconciling the two sets of numbers. During my remarks, I will be referring primarily to the non-GAAP numbers and encourage you to refer to the financial statements to reconcile back to the GAAP numbers. As David mentioned, our Q3 revenue was the highest in Avid's history at $147.4 million.

Video revenues were $95.6 million, with sold results from both our broadcast and post-production businesses. Audio revenues were $51.8 million, reflecting strong year-over-year growth across all areas of the business. M-Audio's revenues, which are included in the last six weeks of the quarter, were slightly under $7 million and in-line with our acquisition plan assumptions. Our 20% year-to-date revenue growth relative to last year reflects the increasing diversification of our revenue sources.

In video, where revenues are up more than $40 million year-to-date compared to last year, we've experienced good growth in high-end post, low-end post, broadcast products, shared storage, work groups, and services. In audio, where revenues are up almost $30 million year-to-date compared to last year, we've experienced good growth in the home market, the mixing market, and in the high-end professional audio market.

Geographically, our Q3 Americas business grew 23% year-over-year and was 54% of total revenue. Our international business grew 24% year-over-year and represented 46% of revenue. Gross margins for the quarter, excluding $127,000 of amortization, were 57.4%, up 1.7 percentage points from the same quarter last year, primarily reflecting improved product mix and overhead absorption, partially offset by the lower margins associated with M-Audio.

As you can see in the financial statements attached to our press release, non-GAAP operating expenses were $64.6 million excluding amortization and stock-based compensation related to the acquisition of M-Audio. The sequential increase from Q2 primarily represents the additional expenses from M-Audio partially offset by lower event marketing spending without the NAB show. We continue to improve our productivity, with operating expenses as a percentage of revenue declining to 43.8% in Q3 from 44.9% in Q2 and 45.6% in Q1.

Pro forma non-GAAP operating income, excluding amortization and stock-based compensation related to the M-Audio acquisition, was $19.9 million, or 13.5% of revenue. Pro forma non-GAAP operating profit for our video segment was 11.4 million, or 11.9% of revenue, and operating profit for our audio segment was 8.5 million, or 16.5% of revenue. Interest and other income was $651,000 for the quarter. Our provision for income taxes was $181,000, which was lower than expected, primarily as a result of higher than previously expected foreign R&D tax credits. This factor will moderately reduce Q4 expected tax expense as well.

In our GAAP P&L, we also recorded a $244,000 nonrecurring tax benefit related to a Canadian tax refund. Excluding the nonrecurring tax benefit, stock-based compensation related to the M-Audio acquisition, and acquisition related amortization, pro forma non-GAAP net income for Q3 was $20.4 million, or 58 cents per diluted share on 35 million shares outstanding. As of the end of September, our cash balance was approximately $120 million, reflecting the expenditure of $82 million for the M-Audio acquisition and $7 million for the purchase of the working capital of our Sweden based reseller operating in the Nordic and Benelux regions of Europe, as well as to compensate the reseller for the early termination of their distribution agreement.

During the quarter, cash provided by operations was $16 million, and cash from financing activities was approximately $3 million. Day Sales Outstanding at the end of the quarter increased to 58, and our inventory turnover was 4.6 times. I will be back to you shortly to update our guidance for the fourth quarter of 2004 and full year 2005, but now I would like to turn the call back to David for discussion of the business highlights from this past quarter.

Thanks, Paul. Before I begin a discussion of individual market areas, I would like to talk for a minute about ad spending. We've talked about this before as an important economic indicator for the broadcast and [inaudible -- technical difficulties], and there is some good news to report on this front. Three recent studies show that spending estimates for 2004 are on track to meet or exceed earlier estimates.

One media consulting firm, T&S media Intelligence/CMR reported that worldwide advertising expenditures for the first half of 2004 increased over 9% compared to the first half of 2003, with the specific categories of national TV and cable TV advertising rising more than 17% and 18%, respectively. Two other media consulting firms, Universal McCann and Zenith Optimedia, have slightly upped their ad spending forecast for the full [inaudible--technical difficulties] calendar year in both the U.S. and worldwide, based on strong results in the first half of this year. So given the potential for ad spending to influence the overall economic health of our industry, we're pleased to see the upward trend in these forecasts.

Now, I would like to turn to Avid's markets, specifically, starting with our post-production business. In Q3, our biggest story in Video Post was the increased momentum in HD in primetime TV and feature films. In U.S. primetime television, 28 major shows in the fall 2004 season were finished in HD using Avid DS Nitris. This represents a 40% increase over the number of shows produced in the 2003 season using the Avid DSHD solution, the predecessor to our Nitris product. This trend illustrates both an increase in HD post production across the board and a clear demand for Avid solutions for HD finishing and mastering.

In fact, in Q3, sales of our DS family more than doubled compared to Q3 of last year. In reality TV, we're also seeing the emergence of HD as a leading production format and the Avid DS Nitris system as a solution for tasks including color correction, graphics titling, and simultaneous mastering to SD and HD. The production teams behind Casino and The Benefactor, which were the first two primetime reality TV shows to be shot and aired entirely in HD, both used our Avid DS Nitris system. And we expect this trend to continue in this niche, as it has throughout mainstream TV post production.

Of course, you may have heard that The Benefactor won't continue to be produced, but we think that the work flow behind it may become something of a standard in this type of HD production. Reality TV programming is inherently different from a drama. Because the action isn't staged or scripted, the cameras are essentially running all the time. As a result, a reality show generates twice the amount of footage as a typical drama, making the storage requirements extremely space and cost prohibitive if you're trying to do it in HD.

Using Avid DNX HD, which is the new, high efficiency HD encoding format we unveiled in April, Avid allows professionals to work in HD with the same storage bandwidth and capacity requirements as standard definition files. This allows the post team for The Benefactor to keep five episodes in various stages of production on an Avid Unity system at the same time. Because of this space and bandwidth efficiency, the Avid DNX HD format offers tremendous flexibility to post facilities allowing them to leverage the investment of their existing shared storage infrastructures and to immediately begin working with HD. We feel that this will actually accelerate HD adoption by lowering the barrier to entry for the entire industry.

In the feature film industry, we're also seeing an uptick in the use of HD and Avid DS Nitris systems. Many of last summer's most high profile films, including Fahrenheit 9/11, Collateral, Riding Giants and Alexander, were made using the Avid DS Nitris system to generate HD versions of the films for director and test audience preview screening, and to output HD masters for the final film prints. One interesting aspect of the overall buildup in HD [inaudible--technical difficulties] is that it comes at an early point in our Avid DNA product life cycle with the only Avid DS Nitris system currently offering HD capabilities. All of this is going to change this quarter with our planned shipments of HD [inaudible--technical difficulties.] It is also worth pointing out this upcoming product release will be our biggest release since we first shipped Media Composer in May of 2003. In addition to HD support, we have also added Multicam for primetime shows shooting with multiple cameras and 10-bit processing.

So I've been talking a lot about HD, but we're also experiencing strong momentum at the other end of the spectrum in our post production business. On past calls we've talked about the explosive growth of digital video, or DV, as a cost effective, high quality format for event videographers, independent film makers, . and professionals also a doing corporate video work. The ongoing growth of the DV market is being fueled by camera manufacturers who are producing higher quality cameras at lower prices. This in turn continues to drive demand for our Avid Express family of DV products. And as HD becomes more affordable at the low end of the market thanks to the new, high-definition DV format known as HDV, we expect the growth in this segment to continue in the future.

Shifting now to broadcast, we reached a couple of major milestones in Q3. First, we had our most successful quarter ever, in terms of the number of broadcast deals signed, putting us on-track to hit the high end of our initial goal for the year of 80 to 100 stations. While these deals involved broadcasters of all sizes, it's worth noting that many were small and mid sized facilities, illustrating the degree to which our end-to-end broadcast solutions are applicable not only to major market customers like NBC and CBC, but also to smaller organizations like Quinch Newspapers.

That brings me to the second major milestone [inaudible--technical difficulties] --200th broadcast customer to implement work flow. Quincy, which serves small markets in Illinois, Minnesota, Iowa, Wisconsin and West Virginia, the conversion covers nine of the company's ten news outlets [inaudible--technical difficulties] demonstrating once more that penetration into a station group can lead to standardization on an Avid solution. These recent deals come at a time when Avid's profile in the broadcast industry is at an all-time high.

Over the summer, Avid editing and shared stored systems were used by NBC to bring unprecedented levels of coverage of the Athens Olympic Games to audiences throughout the world. And around the same time as the Athens Olympics, Avid systems were being used on location at the Democratic and Republican national conventions. Those same systems are now traveling around the country with the two major presidential candidates as they wrap up their campaigns.

As we were enjoying great momentum in our North American broadcast business in Q3, European customers also made major investments in Avid digital broadcast solutions. Among the major ones announced in Q3 were ITV, BSkyB, and Reuters, which will bring Avid workflow installations to bureaus in various European countries, including England, Wales, Ireland and Germany. While we're on the subject of Europe, I'd like to point out that we're starting to see the adoption of HD in that region. Members of the European Broadcast Union are already engaged in intense discussions over a European HD broadcast standard.

Two commercial broadcasters, BSkyB and France's [inaudible--technical difficulties] are planning to add HD service within the next two years. In the next four years, it's expected 18 million European households will be receiving HDTV programming. We expect this trend to have a positive effect on both our post and broadcast product lines, as it has in the U.S.

So to wrap up our discussion of our broadcast business, we're proud of the milestones we achieved this quarter, but we feel we are only in the early innings in terms of the total opportunity. As we've said in past calls, there is still a huge potential to convert stations from tape-based workflows to all-digital production pipelines. At the pace we're going, we're on track to meet our goal of 80 to 100 broadcast conversions this year alone, and we expect this trend to continue in the future.

Let me turn now to our audio business. Here the biggest story of Q3 was the acquisition of M-Audio. With the transaction now complete and the integration of the company on track, we're looking forward to begin taping with the National Association of Music Merchants [inaudible--technical difficulties] opportunity in the computer music and home recording markets. At the same time, has also bolstered its position. And earlier this year we announced we would be entering the live sound market with a large format digital console system.

In Q3 we unveiled that product, which we've named Digidesign. It's scheduled to begin shipping in Q1 of 2005, but this year we had the opportunity to send the product down the road with both singer/song writer John Mayer and guitarist Joe Satriani and the feedback from their sound engineers was fantastic. [Inaudible--technical difficulties] -- we found unsolicited fan postings on Satriani's web site, praising the sound at his recent shows.

But while we expect the Digidesign venue system to shine in live music production, we're also targeting the product to a number of other markets, including corporate [inaudible--technical difficulties,] theatrical venues, and houses of worship. Given the broad market appeal [inaudible--technical difficulties], we are expecting live sound to be a meaningful growth area for our professional audio business.

In the 3-D space, we introduced new, compelling price points to bring sophisticated, 3-D tools to a broader market. Now, for as little as $495, artists, students, freelancers and facility owners can purchase Softimage XSI software. This also gives our customers an affordable entry point into the Avid computer graphics production pipeline. This production pipeline ties together Avid's 2-D and 3-D content [inaudible--technical difficulties] -- as well as media asset management, giving our customers a completely integrated toolset. The Avid computer graphics pipeline is not a preconfigured, one-size-fits-all product. It's and end-to-end environment that can be customized with tools that make the most sense for the workflow of specific customers, whether it's a small production pipeline with just a couple of Softimage XSI and Alien Brain software licensing, or a massive deployment of 3-D asset management and Avid editing and compositing systems. To some extent, this approach is similar to the way we offer broadcasters a range of solutions that can be optimized for specific needs. Because of our long-standing strengths in all of these areas, we feel we're in a unique position to deliver this type of integrated solution. [Inaudible--technical difficulties.]

That concludes our discussion of individual market segments. I would like to finish by saying we're extremely pleased with the results we achieved in Q3. Not only was this our best quarter ever in terms of revenue and profit, but it was our fifth quarter in a row with double digit year-over-year revenue growth, and pro forma double digit operating profit. These indicators point to the underlying health of our business and put us in a position to continue capitalizing on the opportunities that lie in front of us.

I would now like to hand it back to Paul to discuss our outlook for fourth quarter of 2004 and full year 2005.

[Inaudible--technical difficulties] -- our full year 2004 revenue guidance to approximately $577 million, and we are increasing our full-year, non-GAAP earnings per share guidance by 7 cents to $2.11 from $2.04. Q4 revenue is expected to be in the area of $162.5 million, And non-GAAP EPS is expected to be 61 cents. Gross profits are expected to rise approximately 9% sequentially in Q4 to over $92 million, but gross margin will decline to about 56.8% in Q4 due to the inclusion of a full quarter of M-Audio results.

Non-GAAP operating expenses are expected to rise to approximately $70 million in Q4 as a result of the inclusion of a full quarter of M-Audio, the accrual for certain variable compensation programs in the fourth quarter, and costs related to complying with Section 404 of Sarbanes-Oxley. Including $1.1 million of stock-based deferred compensation related to the M-Audio acquisition and $1.9 million of acquisition-related amortization, operating expenses would be approximately $73 million.

Q4 other income is expected to be approximately $600,000, and our tax provision is expect to be approximately $600,000 as well. Q4 non-GAAP net income is expected to rise to approximately 9%, sequentially, to approximately $22.2 million, or 61 cents per diluted share, based on 36.7 million average shares outstanding. Including acquisition related stock-based compensation of $1.1 million and acquisition related amortization of 1.9 million, GAAP net income is expected to be approximately $19.2 million, or 52 cents per diluted share.

At this point, we're maintaining the full year 2005 guidance we provide on August 13 when we announced the acquisition of M-Audio. Revenue growth is expected to be over 21%, and total revenue is expected to be over $700 million in 2005. Gross margins are expected to be in the area of 56.5% per quarter. Non-GAAP operating expenses, which exclude acquisition related stock based compensation and amortization, are expected to increase to approximately $295.5 million, or approximately 16% for the year. Including acquisition related stock based compensation of $2.7 million and amortization of $8 million, operating expenses would be approximately $306.2 million.

Non-GAAP operating profits are expected to be in the area of $100 million, or over $14% of revenue, including $8 million of acquisition-related amortization and $2.7 million of stock-based compensation related to the M-Audio acquisition. GAAP operating profits are expected to be in the areas of $89 million. For the year, other income is expected to be approximately $600,000 per quarter. Tax expense is expected to be approximately $5 million for the year, starting out with about $1.1 million per quarter for the first two quarters of the year and growing to $1.5 million in Q4.

Non-GAAP net income for the year is expect to be approximately $97.4 million, or approximately $2.60 per diluted share, based on 37.4 million shares outstanding. Including acquisition related amortization and stock-based compensation, GAAP net income is expected to be approximately $86.7 million, or $2.32 per diluted share. For the first quarter, we would expect revenue to be seasonally down $4 to $5 million from Q4, and we would expect non-GAAP EPS of approximately 56 cents on 37 million shares. GAAP EPS, including $2 million of acquisition-related amortization and $900,000 of stock-based compensation related to the M-Audio acquisition, is expected to be 48 cents.

Although we would expect revenues to be up sequentially in the second quarter, EPS is expected to be up only a penny or two as a result of the [inaudible--technical difficulties] -- for NAB in Q2. Lastly, the full year 2005 guidance does not include an estimate of stock-based compensation. We expect to provide an estimate of the impact of stock-based compensation on our GAAP results on our next call, after the new statement has been issued by [inaudible.] These conclude my remarks. David and I would now be pleased to take your questions.

Thank you. [Operator instructions.] Our first question comes from [Steve Frankel] with [inaudible.]

Good afternoon. First for Paul, could you give us an idea of what the M-Audio impact was on both inventory and DSL?

Yeah. Inventory -- total company inventory for the quarter was up approximately $20 million, with more than 70% of that attributable to the combination of M-Audio and the inventory we purchased from our Nordic reseller that we bought out in the quarter. So I think it was -- M-Audio was about $12 million and the reseller was $4 or $5 million.

And in terms of receivables, which were up around $15 million in the quarter, almost all of the increase was attributable to the acquisitions of M-Audio and buying out the receivables of our Nordic reseller.

Okay. And what was broadcast revenue as a percentage of total revenue?

Broadcast revenue was around 25% of total company revenue in the quarter.

Thank you.

Sure.

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

Yes, thank you. David, I wonder if you could -- if we take a step back and look at the post production business and look at where we are in the upgrade cycle, how would you characterize where we are today?

Well, as we mentioned in the script, we actually feel we're still very early in the cycle because as of today, the only DNA family member we have that currently supports HD is our Avid DS Nitris systems. So it's not until our planned shipments this quarter that we expect to bring that capability to our mainstream adrenaline product, as well as the Express Pro product family. And we expect to get a nice response from the market with the introduction of both of those products.

And as we look at the intro of those products, how would you see the initial order intake for that? Do you see that as being a relatively fast ramp up given that people have been expecting this?

Well, there's two things going on. There's one breakdown of this which is geographic, and depending on what part of the word do you look at, HD adoption is at a different stage. So, for example, in Asia, we expect probably about two third of our adrenaline customer base to upgrade to the HD product version, which is a pretty strong uptake.

If we [inaudible--technical difficulties] --number of adrenaline systems we've sold and just look at the overall run rate that we've had, we're at over [inaudible -- technical difficulties] -- and you can imagine that if a sizable percentage of them use the DNXL card, which is what we've named our HD upgrade board there could be a good revenue uptick from that.

Okay. And just to shift gears for a second, I'm looking at the audio business. Can you talk a little bit about how the -- what the market reaction has been to some of the newer products, like [Icon]?

Well, Icon has actually been doing very well, and, in fact, we expect that to be one of the drivers in Q4, which is a quarter that we expect to have a good number of console sales to take place. If we look at venue and the performance that we've had with that, which, I should remind everybody that it is only in beta right now, but we're getting very good response from that and we do expect that to be a successful product for us starting next year, as our planned shipment is in Q1 of next year.

Okay. Thanks. And just with respect to M-Audio, can you talk a little bit about the seasonality in that business and the December quarter?

December is traditionally a strong quarter for M-Audio, and that's partially due to the lower price point, so, often, they are associated with the holiday season. And if you look at the sales we are expecting from the consumer channel as well as on the web, we are expecting an uptick in that revenue in Q4.

Okay. Thanks very much.

Sure.

Next we'll take [Paul Koster] with J.P. Morgan.

Hi, gentlemen. This is [Amy Namm] for Paul Koster. A couple questions for you. So given Pinnacle's refocus to more of a point solution, what extent does that yield pricing power to Avid [inaudible]?

Well, I think the part of the business that Pinnacle has decided is less interesting -- it seems to be in the systems, I think, where they need some customization. I think they've had some experience where they may have gotten bogged down in some deals, where we have been focusing, and continuing to focus our deals where our solutions, either individually or collectively, are able to be customized fairly quickly for a customer's application. And then once we penetrate a group, we very often roll out a very similar configuration throughout the rest of the stations in that group. So we have been able to find pretty good velocity, once we penetrate a group, with our ability to roll that out into other stations.

And I do believe that in any industry, if you have a competitors that refocuses their efforts away from where you're focusing, then, obviously, it opens up more opportunity. And as we mentioned this quarter -- although I would certainly not attribute this to anything Pinnacle has done -- but this was certainly our strongest quarter, in terms of total number of stations converted, and we're very pleased with our results this quarter in broadcast.

Okay. In terms of the backend of the Olympics coverage, any one-time benefit you expect to see from the presidential campaign and the coverage there?

I think you can see the results of the presidential elections with just overall advertising spending. So that has represented a pretty significant amount of the advertising numbers we're seeing. And that has been a boost to the post production industry. But in addition, if you just look at the Olympics, already planning is underway for next year's -- or in two years the next round of winter Olympics. And also we've had some initial discussion on the next summer Olympics in Beijing. So that's a cycle that actually never ends because the planning for it actually starts years in advance of the actual events.

Okay. Great. And one last question. Just generally, in terms of the market, what are you seeing as the enablers or impediments of TV broadcast solutions and the adoption of that?

Do you man our end-to-end digital solutions?

Yes.

I think what we've talked about before being an issue is just simply budgeting cycles and people being able to work through, in some cases, workforce issues, because it can require retraining. Some customers are waiting for others to do it first so they can convince themselves the solutions are successful. And I think we're seeing all of those barriers kind of melt away in a sense that we are seeing enough proof points, now with Avid . having over 200 stations that have either been sold or installed worldwide, it's harder to find reasons to object. And I think what customers are really just looking for is what's the best timing for doing it.

And that's one of the big reasons why we've put a fair amount of investment into our professional services group, because that helps customers do the site planning, the workforce planning, the actual implementation and training that needs to happen later on. Those are all pieces of the puzzle because if you think about it from a broadcaster's point of view, they maybe be switching their [inaudible -- technical difficulties] -- in a very major way, but from a customer's point of view, they need to see the news every night or afternoon or every morning.

They expect the show to go on so we need to make this transition seamless for customers, especially in terms of what impact it has on their product. So as this becomes more of a mainstream effort, we're finding that the barriers to adoption are diminishing.

Great. Thank you very much. And just as a reminder, it is star one if you do have a question or comments. And we'll move next to [Rich Encrossi with Ross Capital Management.]

Thanks. Afternoon, everybody.

Hi, Rich.

Paul, you gave us revenue contribution from M-Audio. And chance we can get gross margin contribution or EBITDA?

No. We're not going to break that out. With respect to gross margin, M-Audio's gross margins clearly are below what we as a company overall have and what Digidesign as a unit have. But we expect their contribution in the future to be at the bottom line with their growth and good operating profits at the bottom line.

Can you speak to any other operating expense synergies, apart from maybe some shared expenses at the NAV show?

For M-Audio?

For M-Audio, right.

Well, the M-Audio acquisition was not -- the target there was not to get synergies on the cost side. Obviously, Digi and M-Audio are working closely together to sort of pick off the low hanging fruit, like getting together on marketing programs and events and that sort of thing. They are also working together to try and improve and become more efficient with respect to logistics and manufacturing operations. But the focus there is working together to grow the top line.

Fair enough. Okay. And David, can you speak to what the next evolution of the R&D strategy might be, either from an interop perspective or perhaps line extension as Pro Tools and M-Audio products are integrated?

The way we think about our R&D investments is investing in growth areas. So we've identified what we see as the key growth areas and we continue to push to expand what we're able to offer to the marketplace, really, to take advantage of the upswing that's happening in the underlying industry.

For example in broadcast, the entire movement going on right now is that transition from tape base to all digital workflows, but the big wave that is just lining up behind that is going to be when all of those systems convert to HD [inaudible--technical difficulties.] We've talked about the fact we've got over 200 broadcasters who have bought [inaudible] from Avid and none of those are currently HD capable. So as we look at what the opportunity is for additional systems, for upgrading current systems, and for upgrading the storage in those facilities, it's a big opportunity as they convert to HD.

Switching to the post production industry, the trend we've been talking about for a while has been the conversion of the infrastructure from SD to HD. That's still in the early innings and as we've said, we've only got the tip of the iceberg there. We only have one product today that supplies to that market and as adrenaline now comes on line and Express Pro comes on-line, we're expecting an uptick there as well.

And then on the lower end of the marketplace where [inaudible--technical difficulties] -- Express Pro has been doing very well. We just came off a very strong quarter With Express Pro and [Mojo] and that's another place where with the introduction of HDV we think it is going to be another growth segment, just driven by the introduction of that format from camera manufacturers. And that's just on the video side. When you look at what's going on on the audio side, certainly the fastest growing area of the business was in the home recording marketplace. That's what prompted the acquisition of M-Audio.

And we have a number of new products that are going to be rolled out, both from M-Audio individually and then also with M-Audio and Digi working together. And our shared storage solution, which supports both audio and video, Avid Unity, we actually are coming off our most successful quarter ever in terms of revenue for Avid Unity, and we see lots of opportunity, lots of growth in the areas of shared storage across all of the markets that we serve.

So you can imagine we spend a fair amount of money on R&D, roughly $100 million a year, and there's no shortage of opportunities to pursue.

Okay. Thanks for the detail. Question about competition, especially in Europe. Obviously, there were some great wins there. Is there anything specific you can point to that's making you more successful these days against Thompson or [inaudible] or [Quantell] or some of the others that are traditionally successful over there?

I think, in large part, we've been successful, initially, because we were one of the first to come out with a solution that actually worked, and our customers certainly have been experiencing the improved efficiencies associated with going to an all-digital network solution. And in many ways, that has led to the ongoing success because, for example, a typical broadcaster will not make a purchase unless they've actually seen the system working and very oven they want to fly to one or more sites somewhere else to hear the customers war stories and to see the system actually on air.

And the great benefit we have with now having over 200 sites that have purchased or installed their solutions, there is a plethora of places where they can go to now see the solution. And I think this is a case where success is breeding success. There's no shortage of a lot of work that we need to do, but he good news is that we've had our products coming out, continuing to improve the offering, we're expecting some pretty significant new introductions next year that will further the solutions that we are able to deliver to broadcasters. And right now, we're just seeing a lot of very good momentum in the industry.

Okay. Thanks again.

You're welcome.

Next we have [inaudible--technical difficulties.]

Thank you. My first question would be about the foreign currency impact in the quarter.

Sequentially bankruptcy had a negative impact on revenue of about a half million. And then on a year-over-year basis, currency had a positive impact, somewhere between 14 and $15 million on the top line. Of course, the bottom line impact of currency movement is mitigated by our local currency operating expenses, the impact of which would be in the opposite direction.

And then of course, we make no attempt to calculate the impact that things like price actions may have on that calculation, price actions that we may actually take in response to currency. But just the mathematical calculation, year-over-year, would be $14, $15 million at the top line.

Great. And the second question, you said that the overall advertising climate and all improving, are you seeing [inaudible--technical difficulties] any in your shorter product cycles or secondly improved pipeline when you compare where, like now, compared to where it was a quarter ago?

Well, we actually don't break out our pipeline publicly, but it's obviously something that we track through all of our geographic regions. I could say that there is not some dramatic change that has happened. It's something that we always [inaudible--technical difficulties] -- in the upcoming quarters. I don't know if there is something more specific that you're trying to ask me?

--improvement in advertising spending as you've gotten more robust.

Yeah. Go ahead, Sasha.

How about the sales cycle?

You're saying does it accelerate the sales cycle, or --?

Have you seen any changes in it?

Well, I mean, I think the proof is in the pudding, right? So I think the bottom line here is we've had growing revenues, we've had our most successful quarter ever in Avid's history, and we're expecting Q4 to be even more successful and again, a record for us.

So underlying that, I think, is the contributor of advertising spending, as well as all the trends that we talked about as underlying growth engines that are fueling the overall demand for our product. It's hard for me to attribute anything in particular to ad spending, and that's why we always allude to it as an indicator but it's not something that we can tie a specific purchase to from a given customer.

Sasha, this is Paul, once again. I just want to clarify my earlier answer. The year-over-year currency impact that I gave you of 14 to 15 million favorable at the top line was a year-to-date number. The year-over-year quarterly number was a little over 4 million positive at the top line.

Great, thank you very much.

Okay.

And once again, as a reminder, it is star one if you do have a question or comment. And we'll move to [Steve Lindbergh with Pacific Crest Securities.]

Good afternoon, guys. First, I was hoping you could provide some details on what your plans were with the HD module. Are you shipping both Mac and Windows versions in Q4 or how are you staging that out?

Yes. Specifically, the name of that hardware card is DNXL, and that is actually being introduced first on our Windows-based systems and it will be a subsequent release that delivers that to our Mac-based customers.

And what is the margin structure of that module going to look like?

We don't break out the margins by individual products.

Okay. And as you look at employees, where did you end the quarter?

2,000.

We ended the the quarter right at 2,000 employees --

Okay.

-- which was up about 280, 290 from the prior quarter, most of which were attributable to the M-Audio acquisition and then taking over the operation of our Nordic reseller.

And related to the takeover of the Nordic reseller, is this an ongoing strategy of yours? And then also along those lines, what was, kind of, the direct versus indirect break out?

Well, I'll just speak specifically about the Nordic reseller and what was the primary driver there. We've seen a fair amount of business, both in post as well as broadcast, in the Nordic region. And part of the terms of the agreement prevented us from working directly with those customers for those deals, and in some cases that was actually something that was important to them. So we see owning that region ourselves as being something that will allow us to work much closer with our customers and help them adopt Avid-based solutions, again, both in the post market as well as in the broadcast market.

With respect to the breakdown of direct and indirect, approximately 70% of our total revenue was through the channel in Q3, with essentially 100% of the audio revenue through the channel. In video, indirect business was well under 60% this quarter.

And I guess the last question, as you look at Q4, what would you anticipate, especially given the full quarter contribution from M-Audio, what ? would you anticipate, kind of, the mix of revenue to be between video and audio?And what would you kind of look for it to be in 2005? Thanks.

We don't have a breakout for the guidance, either for Q4 or for next year. At this point, I would expect on the next call to be more specific with respect to the gross rates for the two units. Although, obviously, audio, with M-Audio, is becoming a more significant portion of the business and is expected to be getting pretty close to 40% in Q4.

Great. Thank you.

You're welcome.

And we'll move to Jim Ricchiuti with Needham & Company.

Thanks. Just wanted to talk a little bit more about the shared storage business and what you see is the major drivers to that. I mean, it seems like you've seen a very significant increase in that business, although you don't really break it out for us. But I wonder if you can comment a little bit more about that.

It's interesting. I think in some ways it's almost counter-intuitive. As storage prices continue to decline, it actually is an enabler for people to adopt a shared storage solution, because what it means is that you now have affordable solutions that open up the market for what has been previously an untapped market segment, which has been lower cost shared storage. So we provide that with our Avid Unity land share product. At the same time at the higher end of our market, people are now taking a look at the affordability of storage and saying, "boy, you know I can do an entire film production or hold three films worth of production on one Avid Unity system."

We've used the example in the past of the Lord of Rings trilogy as an example that was done on an Avid Unity system, where all three versions of the film were being work on simultaneously. And that was enabled, specifically, through an Avid Unity environment. So one of the things that we're focused on as we look forward is the ability to scale these solutions to more storage as well as focusing on reliability and availability, which are two features that are also very, very important for broadcasters. It's also worth pointing out that at the heart of every broadcast deal that we announce is an Avid Unity system, so shared storage is really a key enabling technology both now as well as we expect into the future.

David, any sense as to what your market share is in that business right now?

No, actually I don't have a number, overall, because the shared storage market has a number of things which overlap into areas of the business which we don't really sell to. And there is a broad availability of options that are in the category of storage area networks or network attached storage, which are different from a true, shared storage solution as used in a post production or broadcast environment. So we feel comfortable, ourselves, that we are the market leader in the markets that we serve. However, it's difficult for me to make a broad-based statement about the broader markets of [Sans or Nass.]

I was actually trying to get to more where you think you are in your [surfer] markets. It sounds like you gained share in the last two years.

Well, in our surfer markets we're doing well. And as I said, our primary indicator is really the fact that our revenue was just at a record this quarter in shared storage. So for us, we'd say that this is certainly a positive indicator.

Okay. I just had one question on the new venue product. I wonder -- you'll be shipping it, I guess, early next year. But can you talk a little bit about how large a market that addresses and what you see as the competitive advantages of that product?

Well, boy, there's a lot of things about the product which are pretty compelling. In essence, what we've done is taken the processing capabilities that previously were only available in a studio environment and now made them able to be used in a live performance environment. So all of the audio processing that can be done in real-time with a Digidesign Pro Tool system will now be available to the performing artist.

So in addition to live performances, we mentioned that it could be used in a corporate environment for corporate presentations. It can also be used in houses of worship, it can be used in any places where live music is enjoyed and performed. And that is something which, initially, we are saying is roughly a $100 million annual opportunity, but certainly, as time goes on we expect that opportunity could grow as well.

In terms of some of the specific things about it, we've had to make it be something that is different than Pro Tools in a recording environment in the sense that in a live environment it needs to be more robust, it needs to be crash proof. In fact, if you disconnect the cable that connects it to the front-of-house equipment, it actually keeps running because there's a redundant capability that lets you unplug a cable and, in fact, still run, using the backup. And you don't even miss a beat doing that. And that's the kind of thing that differentiates it from what you'd normally see in a studio environment, but it's an absolute necessity in a live recording environment.

Okay. Thanks a lot.

All right. My pleasure.

And that does conclude our question-and-answer session. I'll turn things back over to you, Mr. Krall, for any closing remarks.

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

And that does conclude our conference call. We do thank you for your participation.