Avid Technology Inc (AVID) 2004 Q4 法說會逐字稿

Good day and welcome everyone to the Avid Technology Fourth Quarter Earnings Results Conference Call. Today’s call is being recorded. And now for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Dean Ridlon. Mr. Ridlon, please go ahead sir.

Good afternoon. I am Dean Ridlon, Avid Technologies Investor Relations Director. In a minute, I will turn the call over to David Krall, Avid’s President and CEO. However, before we begin, please note that this call will 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 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 pricing pressures, fluctuating currency exchange rates, adverse changes in general economic or market conditions, particularly in the content creation industry, the 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, our forward-looking statements represent our estimates only as of today, February 3, 2005, and should not be relied upon as representing our views as of any subsequent date. Avid undertakes no obligation to review or update these forward-looking statements. 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 results, and available in the Investor’s section of our website, www.avid.com. And now I’d like to introduce David Krall, President and CEO of Avid.

Thank you Dean. I’m David Krall. And I’d like to welcome you to our fourth quarter 2004 results conference call. In a moment, I will hand the call over to Paul Milbury, our CFO, who will provide a detailed review of this quarter’s financial results. Then I will discuss some of the highlights from the quarter and past year for each of our businesses. Finally, Paul will come back and update our financial outlook for 2005. Following our prepared remarks, Paul and I will be happy to take your questions.

Now let’s look at our results. We set a record for quarterly revenue, with $175m, up 37% from Q4 of last year. For the full year 2004, revenues were $589.6m, an increase of 25% over 2003, and the first year in Avid’s history that the Company generated over $500m in revenue. It was also the first time since 1995 that Avid’s annual revenue growth rate exceeded 20%.

Non-GAAP net income for Q4 was $23.5m, the highest in the Company’s history, and up nearly 40% from the fourth quarter of 2003. I’ll talk about how our various businesses performed during the quarter, as well as a few highlights from the past year, in a little while. But I’d first like Paul to review the numbers. Paul?

Thank you David. And good afternoon everyone. Before I get into the results, I would like to remind everyone that our earnings press release, which is posted on our website, 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. So I encourage you to refer to the financial statements to reconcile back to the GAAP numbers.

Q4 concluded a very successful financial year for Avid. For the year, we grew our top line by 25%, we improved our gross margins, and we contained the rate of growth of our operating expenses to about 75% of the rate of revenue growth. As a result, our pro forma operating profits grew by over 70%, and our operating profit margin increased by 350 basis points to 12.8% of revenue. Both our video and audio segments had solid double-digit revenue growth. And both achieved double-digit operating profitability for the year.

Looking at Q4, we had revenue of $175m, our highest ever. Video revenues were $107.1m, with both our broadcast and post-production businesses posting good results. Audio revenues were $67.9m, reflecting strong year over year growth across all areas of Digidesign’s business, and a full quarter’s revenue from M-Audio.

Since the acquisition in Q3, M-Audio has performed ahead of our expectations. When we announced the acquisition, the impact on our earnings per share was not expected to be accretive in Q3 or in Q4. In actuality, the M-Audio acquisition was accretive to our Q4 earnings per share, excluding acquisition-related charges.

In spite of the results being ahead of our expectations at acquisition, M-Audio did not reach the stretch target we had established in order for them to achieve the first earn out payment. As a result, M-Audio has the potential to achieve the first earn out payment only if they exceed the gross profit target for the second earn out period. Thus, the total potential earn out payment available to former M-Audio stockholders for the second earn out period, which goes through December, 2005, is now $45m, or roughly 750,000 shares of Avid common stock, if we assume the current value of Avid’s shares.

Geographically, our Q4 Americas business grew 23% year over year, and was 51% of total revenue. Our international business grew 56% year over year, representing 49% of revenue, with Europe being particularly strong. Gross margins for the quarter were 55.9%. Favorable currency impact on gross margin was more than offset by the lower margins associated with M-Audio and product mix factors.

As you can see in the financial statements attached to our press release, non-GAAP operating expenses were $73.7m, excluding amortization and stock-based compensation related to the acquisition of M-Audio, and a non-cash impairment charge related to certain intangibles associated with the NXN acquisition.

The sequential increase from Q3 primarily represents a full quarter of M-Audio expenses, as well as accruals of various year-end variable compensation programs. Even with this increase as a percentage of revenue, operating expenses declined from 43.8% in Q3 to 42.1% in Q4.

Non-GAAP operating income, excluding amortization and stock-based compensation related to the M-Audio acquisition, and the impairment charge, was $24.1m, or 13.8% of revenue. Non-GAAP operating profit for our video segment was $13.4m or 12.6% of revenue. And operating profits for our audio segment was $10.7m, or 15.7% of revenue.

Interest and other income was $653,000 for the quarter. Our pro forma provision for income taxes, which excludes $3.1m of non-recurring tax benefits, was $1.3m. Excluding the non-recurring tax benefits, stock-based compensation related to the M-Audio acquisition, and acquisition related amortization, and the non-cash impairment charge, pro forma net income for Q4 was $23.5b, or $0.64 per diluted share, on 36.8m shares outstanding. GAAP earnings per share were $0.61.

Cash increased during the quarter by approximately $35m, to $155m. During the quarter, cash provided by operational activities was approximately $19m, while cash from the exercise of stock options was approximately $16m. Day sales outstanding at the end of the quarter declined to 50, and our inventory turnover was 5.7 times. I will be back shortly to update our guidance for 2005. But now I’d like to turn the call back to David for a discussion of the business highlights from this past quarter and year.

Thanks Paul. As you just heard, we finished 2004 with our strongest quarter ever, which helped us to achieve the highest annual revenue and GAAP operating profit in our history. At the beginning of 2004, we had set a goal of exceeding the $500m revenue mark. And we came in way above that threshold, with $590m in revenue. That’s a 25% increase over 2003.

In a minute, I will talk about some of the specific things we accomplished within our individual target markets. But first, I’d like to highlight the key factors that contributed to our success in Q4, and in 2004 overall. The point I’d like to emphasize here is that no one area is serving as the sole driver for our success. We’re experiencing strong growth across all of our core markets.

Let me take a minute to drill down on these core markets, the first two of which are contained in our video business, post-production and broadcast, and the third being our audio business. On previous calls we have talked about the HD transition taking place in the post production industry, and the significant opportunity this represents for Avid, due to the fact that our standard definition tools are already so widely used by post-production professionals in the industry.

This transition comes with its share of challenges for our customers, because their specific HD needs vary, based on the kinds of work they do. With that in mind, we’re now delivering broad HD capabilities across our entire Avid DNA line. You may recall that at the beginning of the year only Avid DS Nitris supported HD. But today we offer Avid Xpress Pro HD and Media Composer Adrenaline HD as well.

This means our customers now have a range of HD choices from Avid. And they can select the tool that offers the capabilities and price points that’s best for them. Both Avid Xpress Pro HD and Media Composer Adrenaline HD shift in Q4, and each contributed to the 37% year over year revenue growth we achieved in the quarter.

In broadcast, we exceeded our expectations in 2004, closing the year with over 100 deals signed, bringing the total number of Avid digital broadcast conversions either underway or completed to more than 250. As we have mentioned in past calls, our broadcast installations range from large diversified customers, like NBC and Reuters, to smaller regional facilities, that are converting individual stations to Avid work flows. I will cover some of the individual deals we closed in Q4 in a moment.

And our fourth quarter audio revenues grew by 70% year over year, with Digidesign experiencing solid growth across its business, and M-Audio now contributing to both the top and bottom lines. Q4 was our first full quarter of M-Audio results after our acquisition of the company in August, 2004.

I think that gives you a general sense of the progress we’re making at a macro level. Now I’d like to describe what’s happening in each of our markets in a little more detail. Let’s start with post-production. I just mentioned that we recently completed the transition to HD across the Avid DNA line. So we’re now into the second generation of that product family. And there are plenty of indicators that point to continued demand for HD across the industry.

In October we announced that 28 television shows in the 2004 to 2005 Fall season were being finished in HD on Avid DS Nitris systems, which represented a nearly 40% increase over the shows that were finished in HD the previous year on Avid systems. We have staked out a strong position in HD finishing for television. And we feel that we have a robust family of products that will help us hold on to this lead as the HD market evolves.

At the same time, we are continuing to push into other sectors with our HD solutions, notably the feature film market, where some of the year’s most high profile titles were finished in HD on Avid HD Nitris systems. With such a strong installed base of Avid DS Nitris customers doing TV and film projects in HD, we see an exciting opportunity to sell the new HD versions of our work horse off line editing systems, Media Composer Adrenaline HD and Avid Xpress Pro HD, to a market that will be able to take advantage of the interoperability between all of our Avid DNA systems. We’re particularly encouraged by the initial demand for our Media Composer Adrenaline HD system, which is powered by the new Avid DNxcel processing board.

Turning to the independent film market, we just returned from the 2005 Sundance Film Festival, where our presence was the most visible ever. We previewed some of the upcoming film oriented features that we’re developing for Avid Xpress Pro HD. And we offered hands on training sessions for the product. We also participated in both a panel discussion on post production topics, and a creative editing workshop with USC Film School.

But perhaps the biggest sign of our increased presence at Sundance was the number of films screened at the festival that were made using Avid solutions. I won’t go through the whole list. But many of the most high profile solutions, including Hustle and Flow, Twist of Fate, and Lonesome Jim, were edited on Avid Systems.

Meanwhile, the makers of big budget Hollywood films continued to use Avid solutions at the core of their post-production work flows. In fact, on Tuesday of this week, we announced that all the films nominated for Academy Awards in the categories of Best Picture, Directing, Film Editing, Sound Editing, Sound Mixing, Visual Effects, and Animated Feature Film, were made using Avid solutions. In addition, Avid products were used to make all the nominees for the Best Picture and Director categories at the Golden Globe Awards. And all the winners in the film categories at the People’s Choice Awards.

We take great pride in knowing that today’s film and television professionals overwhelmingly prefer our systems. But we realize that in order to maintain a leadership role in these industries, we need to reach out to tomorrow’s content creators. With that goal in mind, we are using our Free DV product to feed the base of potential Avid editors with a system that gives them a free entry point into our technology. To date we have had over 300,000 downloads of Avid Free DV. And we look at every one of those users as a potential paying customers in the future.

Moving on to broadcast, our biggest news is that we completed 2004 having signed over 100 new deals, which I mentioned earlier. The target we set for 2004 was 80 to 100. So we’re extremely pleased that we were able to exceed the high end of that range. Looking ahead, we expect the pace of our broadcast deals to increase. And we have set a target range of 120 to 140 conversions in 2005.

One of our more notable broadcast deals in Q4 was with News Press and Gazette, a nine station broadcast group that converted three of its news oriented outlets to all digital Avid work flows. The group implemented an Avid Unity for News, Shared Media Network, along with multiple Aid NewsCutter XP systems, with Avid Mojo hardware for editing, and Avid AirSpeed Broadcast video servers.

The News Press and Gazette deal reinforced two of the strengths of our Broadcast Workflow. First, that it’s scalable to a wide range of customers, large and small, and second that it allows us to gain a foothold into large station groups by starting with a relatively small number of stations. Once a station group realizes the benefits of a networked all digital work flow, it often expands the deployment of Avid systems across other stations within the group, as we saw last year with Le Groupe PVA of Canada, which we talked about on the Q3 call.

Another important aspect of our broadcast story is the reach we’ve extended across global markets. In fact, some of our biggest broadcast customers, like France TV, Reuters, and ITV, are based in Europe. And one of our larger transactions in recent months was a multi-million Euro deal with the Danish Broadcasting Corporation. That company purchased 300 Avid DNA-based editing systems, and a digital server-based collaborative workflow environment, with more than 150 terabytes of shared storage.

Our global success in broadcast tells us that the transition from analog to all digital production is less dependent on local market demands and specific geographies, and has more to do with the increasing acceptance of the efficiencies that come from producing content in tape-free network environments.

Shifting now to audio, this market represented one of the biggest growth areas for us in 2004. As I mentioned earlier on the call, our fourth quarter audio revenues grew by 70% year over year, with solid performance by Digidesign, and a major contribution from M-Audio, which we acquired in Q3 of last year.

One of the highlights of our success in audio was the introduction of the Digidesign ICON integrated consul environment, a product that streamlines the entire audio production process, from recording and editing to processing and mixing. By offering customers mixing capabilities comparable to those of the most advanced standalone audio mixing consuls, but at a far more affordable price, ICON is a compelling offering.

To give you some perspective on ICON’s success, we sold 150 systems in the first six months after introduction, in a wide range of pro audio environments, including high-end post facilities, high-end mixing studios, and educational institutions.

On the life sound front, we expect to soon begin shipping the VENUE system, which is the first consul to bring the benefits of the digital audio workstation paradigm to live sound performances. We showcased both VENUE and ICON at the recent National Association of Music Merchants, ro NAMM show in Anaheim. And the response was very positive.

At the other end of the pro audio business, the Digidesign LE line continues to drive business for us, by catering to the growing base of professional users on small budgets, as well as aspiring musicians and audio engineers interested in working with digital media. Reaching further down into what we call the prosumer market, M-Audio has done a great job at delivering low cost, high quality products to that market. As we mentioned when we announced the acquisition of M-Audio, we expect this business to contribute meaningfully to our top line in 2005.

Before I move on to the next section, I would like to share one more data point with you about our audio business. I mentioned earlier that we have had over 300,000 downloads of Avid Free DV, which we introduced two years ago. I should also point out that Pro Tools FREE, which we launched in the fourth quarter of 2000, is now up to three million downloads, which helps to build a very nice future customer base for our entry level products.

And speaking of seeding the next generation of professionals, we’re taking similar steps in our 3D business. In late December we introduced the SOFTIMAGE XSI Mod Tool, a free version of our flagship 3D animation software, designed for game developers who are interested in modifying the content of popular video games. In fact, there is quite a network of gamers out there who refer to themselves as Modders. And, in addition to spending a lot of time playing games, they also see themselves as being the game creators of tomorrow.

Modders typically scour the Web for software that allows them to build new props, characters and environments, in an attempt to alter their favorite games by introducing their own content right into the game software.

We developed the XSI Mod Tool specifically for this community, giving them easy access to professional level 3D character animation software, and exposing them to SOFTIMAGE now, so that if and when they become professional game developers, they’ll already be familiar with tools from SOFTIMAGE. We have recorded 100,000 downloads of the XSI Mod tool in less than a year. So we have high hopes that it will virally make its way through the Modder community.

That concludes our discussion of individual markets. I would like to finish by saying that we’re extremely pleased with the results we achieved in the fourth quarter, and in 2004 overall. We experienced double-digit year over year growth in both revenues and operating income, for the fifth quarter in a row, and we achieved our highest percentage growth in annual revenue since 1995.

Our outlook for 2005 continues to be positive, with an aggressive plan for continued growth in all the markets that we serve. Now I’d like to hand it back to Paul, to discuss the specifics of our outlook for 2005.

Thanks David. Our previous guidance for revenue for the full year 2005 was that revenue would be at least $700m. We are now setting our revenue guidance to a range of $700m to $710m. We currently expect revenue in both the audio and video segments to be seasonably lower in Q1 2005 than in Q4 2004. Total corporate revenue in the range of $165m is expected.

We would expect revenue to increase in Q2 to about $170m, followed by $180m in Q3, and $190m in Q4. We are also raising our pro forma earnings per share guidance to $2.65 per share from $2.60 per share. Our guidance for GAAP earnings per share is $2.41, including $2.5m of stock-based deferred compensation related to the M-Audio acquisition, $7.6m of acquisition related amortization, and $1.2m of tax benefits relating to the amortization and a special Canadian tax credit.

In estimating our GAAP earnings per share, we have not taken into account stock-based compensation expense, which will be required starting in Q3 under the FASB’s new stock-based compensation rules, as we have not yet finalized which methodology we will be using to calculate this non-cash expense. However, you can get some sense of the potential impact by looking at the historical information contained in the footnotes to our Form 10Qs and 10Ks.

Gross margins are expected to remain at around 56% in Q1 and Q2, and then increase to around 56.5% for the second half of the year. Pro forma operating expenses are expected to be approximately $292.5m for 2005, an increase of 13% compared to revenue growth of approximately 20% for the year. In Q1, we expect operating expenses to be approximately $70m, down almost $4m from Q4.

In Q2, operating expenses are expected to rise approximately $3m, primarily as a result of the cost of the NAB Trade Show. Operating expenses are expected to rise further in Q3 to approximately $74.5m, and to $75m in Q4, as we invest in the people and programs we need to support the growth of the business.

Although investing is necessary to grow our business, we’re taking steps to minimize the chance that our expense growth will get ahead of our revenue growth. GAAP operating expenses, which include acquisition related stock-based compensation and amortization are expected to be approximately $72.7m in Q1, $75.6m in Q2, $76.9m in Q3, and $77.4m in Q4. Pro forma operating profit, assuming $705m of revenue, the mid-point of our range, is expected to be approximately $104m.

GAAP operating income will be approximately $94.1m, including $2.5m of acquisition related stock-based compensation, and $7.6m of acquisition related amortization. Net other income is expected to be in the area of $600,000 in each of Q1 and Q2, followed by $700,000 per quarter in Q3 and Q4.

Pro forma tax expense for the year is expected to be approximately $7.6m -- $1.7m in Q1, $1.6m in Q2, $2m in Q3, and $2.3m in Q4. GAAP tax expense is expected to be lower than pro forma tax expense by about $600,000 in Q1, and by about $200,000 in each of Q2, Q3, and Q4.

Pro forma net income for the year is expected to be approximately $99m, or $2.65 per diluted share, based on $37.4m average shares outstanding, including $1.2m of tax benefits, $2.5m of acquisition related stock-based compensation, and $7.6m of acquisition related amortization. GAAP net income would be expected to be approximately $90m, or $2.41 per diluted share.

For the year, we would expect our cash to increase by about $100m, to $250m. These conclude my remarks. David and I would now be pleased to take your questions.

(OPERATOR INSTRUCTIONS). Steven Frankel with Adams, Harkness & Hill.

Great. First quick housekeeping item, David, what was broadcast revenue in the quarter?

I’ll let Paul take that one.

Yeah, in rough terms, broadcast sales grew well over 25% for the year, and for the full year represented more than 25% of total revenue. I don’t have specifics for Q4. But the growth rate sequentially end year over year was over 20% as well.

Okay. And we talked a little bit about Adrenaline. What’s happening on the Standard Def side? And what are the early returns on the HD upgrade? Are you seeing those bundled with new units? Or are you selling chiefly into the installed base?

We’re selling them both ways Steve. Just to give kind of an overall sense, we had our best Adrenaline quarter ever in Q4 since the introduction of Adrenaline back in 2003. So it was good news right there. And then in terms of what units we sold, we continue to sell Standard Definition units of Adrenaline.

We sold kits that let people upgrade their current Adrenaline systems to HD-based systems, by selling the DNxcel board separately. And then we also sold now systems that are full blown HD right out of the gate. So we’re selling a mixture at this point. And I would expect, looking forward, that we would continue to see a mixture of all three going into the future.

And how was Nitris relative to the last couple of quarters in your expectations?

Well Nitris continues to do well. I believe it was up from Q3 to Q4. And it, well, we gave you the data in terms of finishing in high-end post on Nitris, and it being used on a large selection of the prime-time TV programming. So Nitris continues to do very well. And the market for HD, we see continuing to expand and be still in the early innings.

Okay. And then the guidance for next year looks like a 15% operating margin. What’s it take to go higher than that, as we start to think longer term?

Well, I think probably it starts at the top line. If you just follow the guidance through, you’d see that in Q4 of ‘05 the operating margin is actually already above 15%. It’s closer to 17% I believe in the numbers that we gave you. So it takes continued increases in volume.

Our plans don’t necessarily count on additional expansion of gross margin from here. As you know, the increasing proportion of our business that’s coming from audio has a negative impact on our gross margins, because audio’s gross margins are substantially lower than video’s gross margins. On the other hand, audio’s operating profitability is still higher than video’s.

But some expansion of gross margin is possible from there. And then it takes continuing to run the business from an operating expense perspective, to keep operating expenses growing slower than revenues.

Okay. And one last quick one. When you bought M-Audio, you talked about their ability to source offshore much better than you have traditionally. In the plan for ‘05, is there anything about taking some of Digi’s or Avid’s traditional products and sourcing them the way M-Audio builds products?

You know, it’s not built into the numbers, if that’s part of your question. I think David can answer the –

Yeah, strategically that’s the intent. So we’re doing, in essence, a complete CM contract manufacturer review in China. And there’s about five separate manufacturers that M-Audio uses, which actually turn out to be different than the ones that we currently use at Digidesign.

So we’ll be going through a process of, in essence, kind of bidding the work from one versus the other. And I believe the natural fallout of that will be some cost savings there. In addition Steve, I can give you a specific data point on Nitris. The units from Q3 to Q4 went up 25%. So, and Q4 was our highest for the year in terms of units of Nitris. So we continue to see growth in that product line.

Great. Thank you so much.

Rich Ingrassia with Roth Capital Partners.

Thanks. Good afternoon everybody. David, given that your verification of the product lines, I guess namely M-Audio being in the mix now, how much can we look to ad spending as a leading indicator of the Company’s revenues? And, this being an odd-numbered year, what are you thinking about ad spending in ‘05?

Well, we didn’t talk specifically about ad spending forecasts in this call. We have talked about it in previous calls, when the forecasters have updated their numbers, like Universal McCann or On the Media. What I’d say, if those numbers continue to be consistent in their forecasts, we’d expect this year to be a better year than last year in terms of ad spending. So the overall environment seems to be positive.

But I think what you got to in the beginning of your question is actually a correct point, that with our increased diversification, and M-Audio being one example of that, we’re actually less dependent or less correlated to ad spending, because the consumer marketplace where M-Audio sells a fair amount of its equipment, as well as through the MI channels, tends to be less dependent on ad spending. And it’s really being driven by some trends, such as the explosive growth in home recording studios. And that’s an area that is really running independent of ad spending.

Okay thanks. And on broadcast, can you kind of, if you can, in a few more specifics, on the success of penetration of AirSpeed and some other call them low end broadcast products for small and mid-market stations?

Yes. Actually, we cited in the script the fact that we are now penetrating some key station groups that are in the mid to lower market segments. And that is something that we had expected was going to be a follow-on area of development. In our evolution of selling into broadcast, the first stations to convert were squarely in the mid-market, and some of the higher end stations.

Now what we’re finding is that the larger groups are beginning to convert. And then the lower market groups are beginning to convert. And in all cases, it’s pretty much the same justification. It’s a productivity improvement that they can base on savings of head count, and the increased productivity they can do with fewer people. And, in addition, there is higher quality work product. So we continue to see those benefits flowing out in the marketplace. And the market for it continues to grow.

Okay. And that, in consideration, the target of broadcast deployment for this year of 120 to 140, are you still defining those deployments in the same way, either by size of market or size of sale?

Yeah. We have a definition, an explicit definition that we use in terms of looking at what it means for a broadcast deployment. And we do have a minimum threshold for that, which is roughly around $100,000 per deal. So we don’t look at things that are lower than that. Some of our competitors, just to give you a contrast, some of our competitors consider two editors hooked to a play-out server to be a network news solution. We actually stay away from configurations like that.

For us, at the core of our broadcast news solutions, is an Avid Unity for News solution, or an Avid Lanshare solution, which is a true shared storage environment for news production. That is the definition that we use in terms of measuring our number of deals. And, as you notice, we upped the lower end of our target range by 50% compared to last year. So it’s a pretty big step that we’re taking up. But we think that it’s consistent with what we’re seeing in the marketplace. And we already have a pipeline that we believe can support our making that estimate for the range.

Okay.

Actually, you asked one other question, just about AirSpeed deployment. And this quarter was actually very robust for AirSpeed. We just completed the play out capability for AirSpeed. And that was one of the drivers for it. It previously was limited to ingest only. And now we’ve begun to ship the play out capability of that as well.

Okay. And Paul, CapEx and G&A for the quarter, just to wrap up? And that’s all I have.

CapEx for the quarter was a little under $6m. And depreciation, I think, was between three and four.

Thanks.

Gene Munster, with Piper Jaffray.

Good afternoon, and congratulations. If we could just take a look at first of all the MA. I know that people kind of talked about this. Could you break out what the actual contribution amount MA was for the quarter?

Not exactly. The audio segment was up 70% year over year, as David said. Excluding M-Audio, the audio segment was up over 20% in both Q4 and for the year.

Okay. And in terms of distribution, can you just recap new distribution partners from audio, kind of in 2005?

Do you mean in terms of what our plans are for expanding distribution of M-Audio over what their current distribution is?

Or maybe from when you acquired it.

Oh, okay. Well, one of the things that we’ve done is looked at places where we had distribution that didn’t currently carry M-Audio products. And we can push their products into that, and vice versa. So we’re going through a level of that.

The other thing that’s happening though, independent of distributors we already have, is that M-Audio is expanding its distribution into the lower end consumer space. So we’re beginning to get penetration into what we call the big box stores, Best Buy or Comp USA. And we’ve got some products that we’re looking at putting into that sort of broader based distribution.

Is this going to be an actual, like an online store? Or will it be, do you think, actually when you walk into Best Buy?

It would be on the shelf.

Okay. And in terms of the broadcast, you talked about 120 to 140. I know in previous questions you’ve kind of gone through it. Is it safe to say that the size of those deals, are potentially a bit smaller, even though you raised the absolute number?

You know, it’s interesting. As we’ve looked at it from quarter to quarter, there is some variability, depending on what the particular mix is for a given quarter. But I could give you an example. In Europe this past quarter, the average deal size kicked up significantly.

So we really can’t make a call that there’s a trend happening there. What’s happening is we initially have been having strong penetration into the mid market. And now what we’re finding is that we’re getting larger stations, deals like we had put the announcement out on DR, where that’s a very large multi-million Euro deal. And then also now we’re getting smaller stations.

So I’d say the mix is expanding. But I am not sure that I could call a clear trend on what that average is.

Okay. And in terms of VENUE, when is VENUE actually available? When’s it going to be in the market?

Within the next several months. There is a -- we’ve got a target to get it out within, I think, about a month or so. But I think there are some things that could delay shipments. So until we get specific data on when it’s shipping, I am not going to pre-announce when the exact date is going to be. But it’s, I’ll just say, very soon.

Okay. And I apologize if this has been asked. But thoughts on NAB, and then one follow-up question to that.

Okay. Well, in terms of NAB, of course as you and everyone knows, that’s our big trade show of the year. And I think that we are going to have as good an NAB as we typically do. So we obviously have got some surprises in store that I think our customers are going to be very happy about.

In terms of what I think are going to be the big things to emphasize at this year’s NAB, my main one, if I were to guess a particular theme, I think it will be an ongoing significant emphasis on HD, that will be happening in post-production. And probably the big trend in broadcast is going to be more and more products targeting the deliver of complete digital work flows for broadcast. So we think that our product offerings are going to be right in the sweet spot of what the big themes for NAB are going to be this year.

Okay. And lastly Paul, just in terms of the tax rate for 2005, I know a lot of people have been asking questions regarding early expectations (indiscernible) excuse me, for 2006. Just any early thoughts on that? Because we have potentially down year over year in earnings from 2005 to 2006, based on a potential change in tax rates.

You know, at this point I really don’t think so. I’ll just give you sort of an update of our NOL position at the end of ‘04. We had over $350m of shelter against future U.S. taxable earnings at the end of ‘04. This includes NOLs, and tax credits that are over $130m. And then we still have $120-130m worth of deductions related to our 1998 SOFTIMAGE acquisition to add to that. And then, in addition, at today’s stock price, employee stock option exercises could generate another $120m of future tax deductions on top of all of that.

So we’ve got over $400m worth of future U.S. taxable income that we can shelter. And as another sort of data point, in 2004, our reported profit before tax in the P&L is about $70m. But our U.S. tax return is going to probably show a loss of close to $20m in 2004, because of all of these items that I just mentioned, including the stock options deduction. So we’re still losing money as a tax payer in ‘04. That’s likely to continue in ‘05. And I am not going to make a specific comment to ‘06 at this point in time. But there are a lot of sort of -- there’s lots of data that says that our tax accrual position could continue as in 2005.

For 2006?

Yeah.

But just kind of rough numbers there, are you talking about $400m? And just looking at the operating profit target, I think the street is looking for around $120m and $105m you just said for fiscal ‘05, and $120m for fiscal ‘06. So that would make me believe that it’s probably comfortably out past ‘06. Is that – ? And I don’t want to put words in your mouth. But is that reasonable? Or should we just kind of wait?

Yeah. I think it’s reasonable, what you just said. So you didn’t put those words in my mouth. Those are your words. But it is very reasonable, what you just said. We’re just not prepared to make an additional sort of statement at this point in time.

Okay good. Thanks. And congratulations.

Chris Rowen with Robinson Humphrey.

Thanks. My questions have been answered.

Jim Ricchiuti with Needham & Company.

Hi. Good afternoon. David, I wonder if you could comment on the strength you saw in the video business. How much of that do you think is also some share gains, both in broadcast and your traditional host? You may not have hard data. But what’s your sense in terms of the competitive landscape over the past year?

Okay, sure. Well, we’ve talked about historically that over the past four years we feel that we have been winning more than the rest of the competition combined, which, in essence, by definition, says we must be getting 50% or more of the market there. When we look at our incremental rate in deals where we are up against a competitor, our success rate is generally much higher than that. So it feels to us like our incremental success rate is expanding beyond that 50% category, into the higher 70-80% range.

So in terms of how the market feels to us, it feels good. It feels like our position is strengthening. And certainly we’ve got new products that we’re now introducing into the marketplace, such as we just talked about, AirSpeed, both ingest and play out capabilities, that certainly strengthen that position.

If you look at host, and what’s going on, I have to separate the post marketplace into a couple different categories. At the higher end, where we talked about in film, as well as in high-end television production, we are clearly continuing to do very well there. So, given the statistics on the Academy Award winners, and in the high end there, we are doing very, very well. We are very happy to see that. And then in the prime-time TV programming line up, and specifically HD finishing of those shows, we are also continuing to do very, very well.

If you look at the lower end, we call it the intermediate space, or the low-end professional space, we watch and we continue to see new offerings, as something to pay attention to, whether they’re coming from Apple or Adobe. And those are obviously very important competitors for us to pay attention to.

But I guess I would just point out that in Q4, for example, we actually had a record in terms of number of units of Xpress Pro that we sold. So that hit an all time high for us. And so we feel that we’re doing well in that segment of the market also. I think that it’s a growing segment, and that all players are probably experiencing some growth. But we’re happy to see ourselves hitting new records in that area.

On the broadcast side, you talk about an acceleration in the pace of conversion. How much is that? Is that due to just industry economics, or things are better in the industry? Or is there just -- there are some other drivers that are moving that forward?

Certainly a combination of things. We talked a little bit earlier about ad spending. I don’t want to dwell too much on it, because really what is the driver here is that these are coming out of CapEx budgets. And broadcasters will tend to be pretty consistent about spending their CapEx budgets, and not be too closely tied to what’s happening in any given year. The main reason for that is that these are capital investments that are intended to carry the broadcasters forward for the next 3, 5, or 7 years, and to eliminate that spending in any given year would probably be short-sighted.

So we think that the overall trend is one that is driven on cycles that are somewhat insensitive to short-term fluctuations. Part of the reason why I think we’re seeing more and more conversions happening at a faster rate, it’s kind of two specific trends happening at the same time. One is that it’s just becoming more acceptable to use completely networked all digital solutions for news production and play out. So it’s becoming more of an industry norm. And more and more broadcasters, in fact it’s getting to the point where it’s almost unanimous, that they view that ultimately they will replace tape in their work flow.

So the acceptance overall is one big factor. But another driving factor is that the economics just continue to get better and better. So the cost of acquiring media digitally in the first place becomes more and more affordable, as we’ve seen new camera offerings from Panasonic or Sony or Ikegami. And those are things that drive the acquisition side. And then the cost of storage continues to go down.

Avid continues to offer more and more compelling price points of our own product line, with laptop-based editing, etc. And so we’re able to just offer some offerings that are so compelling, that now people who were on the fence just begin to say boy, now is the time to switch.

Okay. And just one final question on the audio business. You talk about the fact that M-Audio seems to be exceeding your expectations. How much of the strength that you saw in M-Audio in the December quarter was perhaps due to seasonality that maybe you didn’t anticipate as you were looking at the business early on?

I don’t think I would attribute a lot to that. And we wouldn’t expect, we’re actually not expecting in our own internal numbers for M-Audio revenues to come down in Q1.

Okay. Thank you.

Brian Gagnon with Gagnon Securities.

Two questions for you. First is on the product I can never remember the name of, the one where you get mastering quality HD off of SD streams.

Yes. Okay. You’re probably talking about our DNX HD compression technology.

Right. How many people are actually using that now? And is that becoming an important factor in moving people over to wanting to use a Unity with HD?

Yeah, great question. I think we put out an announcement earlier in 2004 that talked about two shows that had come out using DNX HD. I think they were Casino and The Benefactor. So they were examples of using DNX HD in actual production. Just for those who aren’t familiar with the term, DNX HD is our own encoding standard, that takes HD content and actually encodes it into standard definition data rates.

The beauty of that is it actually means that somebody can get into HD production, without having to turn over their entire infrastructure. And you already alluded to the fact that you can use it on a Unity, without actually having to change your entire infrastructure. So that is something that lowers the barrier to entry for somebody wanting to move into HD production.

The other beauty of DNX HD is that it is designed specifically for mastering, and for multi-generational use of creating content, which is typically what you have to do when you’re going through the creation of a program. Other codecs for HD production weren’t created with that in mind. Those are acquisition formats.

Do DNX HD offers a very different capability to the post-production community. And we are seeing significant up-tick for it. And in particular what shows is in our own volumes of DNxcel boards that are sold, as well as full blown Adrenaline HD systems. This has also been a capability in Nitris systems for some time. So it now allows us to conform all the way from Xpress Pro through Media Composer Adrenaline HD, and now up to a full blown DS Nitris system. So we now have an end to end HD solution, that somebody could take with them and, for example, work on a laptop. And no other vendor can offer something like that.

Good. My last question is, this is the first time you have given quarterly numbers out as far as I think you did today. And is this a change? Or did I miss something? And does that give you just much more confidence in the way the business is going?

No. It’s not different than what we did a year ago at this time.

It’s this time of year when we give the full year guidance by quarter. So it’s a Q4 results thing that we do.

I just must have some dyslexia. Thanks guys. Congratulations.

All right. Thanks Brian.

Our final question today will come from Randy Scherago with First Albany.

Could you just talk about NXN, which you acquired probably it was about a year ago. It gave you capabilities in media storage that you didn’t have before. If you can just talk about the expanding market for video storage, and any sort of parallel that it might have with the data storage markets, and what potential competitive framework is out there as far as competitors who might actually have similar products in the marketplace today?

Sure. Okay. So NXN specifically, the market that they served, at the time of our acquisition, was in 3D production. So what people might call production asset management. So not only keeping track of your 3D media assets, but also keeping track of where you are in the production pipeline. So it actually helped content creators keep track of how far along on a given project that they were. And there is check-in/check-out capabilities, as well as, in essence, scheduling capabilities.

So this was an offering that gave a 3D content creator the capability to manage their entire production with one software package. And it’s delivered on a central server, with individual client packages, which run on people’s desktops. So that’s how it was at the time that we bought it.

Now what we looked at when we purchased NXN was we realized that the benefits that they were delivering to 3D content creation applied more broadly to audio production, as well as video production, both in post, as well as in broadcast. So we’re looking at the opportunity to take the media asset management capabilities of NXN, and deliver them across all of the markets that we serve broadly.

If you look at what that means relative to our storage, we can now provide something that I think people refer to as intelligent storage, where now the storage understands something about the media that’s being stored in it. And it’s a way of marrying content plus the meta-data associated with that content. This is something that is very important in the content creation community. And it’s one of the frustrations that people have today, when meta-data is either lost, or contained in multiple databases, spread across multiple storage systems.

So to boil it all down to just one thing, what we believe this is going to do is create an opportunity for our customers to be way more efficient in the future, to track their media assets way more effectively. And it will be yet another way for Avid to really differentiate our offerings in shared storage.

And does this sort of preclude EMCs and the McDATA’s from jumping into the video storage space?

Well, I think EMC certainly, in essence, showed their hand in a similar way with the purchase of Documentum. So that gave them the capability to have intelligent storage for document management. However, I would say that documents are different than rich media, and have different properties and characteristics. And the NXN Alienbrain product is specifically designed for rich media.

So I believe that we have a differentiated offering. And I think that, certainly, when you think about the large storage players, they all look at our market as a potential interesting area. I don’t think that they know it as well as we do, because we already serve this customer base through all of our other offerings. So I think we have a head start, and a differentiated offering.

However, I think the good news/bad news part of this is that if you look forward in the future, probably the largest volumes of storage in the future are going to be consumed by the world’s professional media creators, which is the market that we serve. So it wouldn’t surprise me if the larger storage vendors are eyeing our market, and trying to figure out how they could carve off a piece of that.

But you don’t feel threatened today by them? I mean there is – ?

Well, I would say we are always paranoid. But we are always doing things that we can, that provide significant differentiation. So maybe a good way to say it is we see a significant opportunity. And we are doing things to pursue that opportunity, which we believe will provide a differentiated and compelling offering for Avid customers.

Thank you very much.

And that is all the time we do have for questions today. I will turn the conference back over to our speakers for any additional or closing comments.

All right. I guess I would like to close by saying thank you all for joining us today. Should you have any further questions, please feel free to contact us directly. So we will all look forward to speaking with you next quarter. Thank you.