Avid Technology Inc (AVID) 2005 Q3 法說會逐字稿

Good day and welcome, everyone, to the Avid Technology third quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Mr. Dean Ridlon. Please go ahead, Sir.

Thank you and good afternoon. I am Dean Ridlon, Avid Technology Inc.'s Investor Relations Director. I would like to welcome you to today's call. Before we begin please note this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about projected growth of existing or new markets and anticipated results of operations during 2005 and 2006.

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 pressure, fluctuating currency exchange rates, adverse changes in general, economic, or market conditions, particularly in the content and creation 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 our forward-looking statements represent our estimates only as of today, October 27, 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 section of our web site, www.Avid.com.

Now I would 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 third quarter 2005 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 highlights from our different business segments. Finally, Paul will come back and update our financial outlook for the fourth quarter of 2005 and for 2006. Following our prepared remarks Paul and I would be happy to take your questions.

Now let's look at the quarter. Today we reported strong top and bottom line results with all segments performing well. Including the results from the acquisition of Pinnacle, revenue in Q3 was $204 million up 28% sequentially and up over 38% from Q3 of last year. Non GAAP net income for the third quarter was $24.2 million, up over 50% sequentially and up 19% from the third quarter of 2004. Non GAAP EPS was $0.60 per diluted share, up 40% sequentially and up 3% from Q3 of '04.

The integration of Pinnacle into Avid is going well and we're already beginning to realize the benefits from this combination.

I'd now like to hand it over to Paul to review the quarterly numbers in more detail.

Thanks, 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.

The adjustment to our GAAP financials are significant so let me take a minute to summarize the adjustments, which are all non-cash and which are related primarily to acquisition activity.

The following non-cash acquisition and restructuring related items were excluded from our GAAP P&L to arrive at our non GAAP net income and earnings per share. One, a non-recurring in process R&D charge of $32.4 million related to the closing of the Pinnacle transaction. Two, non-cash acquisition related amortization charges of $6.4 million. Three, restructuring costs of $2 million, reflecting a revised estimate of a loss on a facility vacated by Avid in 1999. Four, a non-cash Pinnacle acquisition related tax charge of 1.2 million offset by approximately $500,000 of tax benefits related to acquisition-related amortization and the restructuring. And five, $500,000 of non-cash stock-based compensation charges related to our acquisition of M-Audio in 2004.

We believe that these non GAAP measures offer more meaningful insight into normalized operating performance and will assist investors in understanding results of operations on a comparative basis.

You should also note that in Q3 we changed our presentation of operating expenses by reclassifying certain European G&A expenses. Prior to Q3 of '05 we had classified our G&A type expenses incurred in Europe, both internally and externally, as sales and marketing expenses because these costs were primarily to support our sales function in Europe.

With the change in our business in the acquisitions of Pinnacle, M-Audio and NXN, we have increased the overall scope of operations in Europe being supported by the G&A group to include not only sales but also significant R&D manufacturing customer service and other functions.

For this reason, we have decided to reclassify the G&A expenses being incurred in Europe to the G&A line in our financial statements from the sales of (ph) marketing expense line.

The amounts reclassified were $1.5 million and $1.9 million in Q3 '04 and Q3 '05, respectively. For the nine months ended September 30, '04 and '05, the amounts were $3.7 million and $5.5 million, respectively. This reclassification of operating expenses does not impact reported revenue or reported operating profit.

Now back to the results. Q3 revenues were approximately $204 million, up from the $160 million in Q2. In line with previous guidance, the acquisition of Pinnacle added more than $30 million to our revenues sequentially. Video segment revenues were $118.9 million, up 25% sequentially.

Pinnacle Broadcast added roughly $15.5 million to video revenues in Q3. So organic growth was about 9% sequentially and 8% year-over-year. Broadcast market sales were up sequentially even including -- I'm sorry, even excluding the Pinnacle impact. Post-market sales were slightly lower sequentially, primarily due to sluggish Avid DS Nitris as customers await the release of Avid Symphony Nitris. Audio revenues were $67 million up from $65.1 million in Q2.

Consumer video revenues were $18.5 million, representing the contribution of the Pinnacle consumer business for the period from closing on August 9. Exchange rates negatively impacted Q3 revenue on a sequential basis by approximately $2 million.

Non GAAP gross margins were 54.2%, slightly better than our previous guidance. As you can see in the financial statements attached to our press release, non GAAP operating expenses were $86 million or approximately 42% of revenue in Q3, excluding the end process R&D charge acquisition-related amortization, stock-based compensation related to the acquisition of M-Audio, restructuring costs, and tax items. The $13 million sequential increase in operating expenses from Q2 is related to the acquisition of Pinnacle during the quarter.

Non GAAP operating income was $24.7 million or 12.1% of revenue. Non GAAP operating profit for our video segment was $13.4 million or 11.3% of revenue and non GAAP operating profit for our audio segment was 11.1 million or 16.6% of revenue. Non GAAP operating income for our consumer video segment was $200,000.

Interest and other income net was $1.7 million. Our non GAAP provisions for income taxes which excludes $735,000 of acquisition and restructuring-related tax items was $2.2 million. Excluding the end process, R&D charge stock-based compensation related to the M-Audio acquisition, acquisition-related amortization, tax items and a restructuring charge related to vacated real estate, our non GAAP earnings per share were $0.60.

The acquired Pinnacle broadcast and consumer operations were profitable for the quarter on a non GAAP basis.

Day sales outstanding at end of the quarter remained unchanged at 56 days. Inventory increased by approximately $30 million during the quarter, mostly as a result of the acquisition of Pinnacle which added 25 million. Cash increased during the quarter by approximately $36 million, primarily reflecting cash acquired in the Pinnacle transaction.

I will be back shortly to update our guidance for the fourth quarter of 2005 and full year 2006. But now I'd like to turn the call over to David for a discussion of some of the highlight from the various areas of our business.

Thanks Paul. Before I get into an update of our main business segments I would like to note that beginning with this quarter's call, we will start breaking down this section into three 3 categories -- video, audio, and consumer -- reflecting the recent addition of Pinnacle this past August.

Where it's appropriate, we will also provide updates of relevant market segments within those businesses as we have done in the past.

So let's get started. In our video business one of the big trends which has been driving our business for some time is obviously the transition from SD to HD or standard definition to high definition. We continue to make strong progress in this area. A survey of the eight major broadcast networks shows that at least 48 PrimeTime programs in the current television season are being finished in HD, on Avid systems. That compares with 28 shows in the last fall season marking a 71% increase for Avid.

While we are very pleased with the extent to which the TV industry has already embraced our tools and the HD format overall, there is still substantial growth potential for us in this area. 21% of the shows we tracked are still being finished in SD and another 20% are being finished in HD but on pre-existing linear-based systems.

The upcoming release of Avid Symphony Nitris, which is still on track for shipment this quarter, is expected to further accelerate our penetration in this area. We should also note that while the post-production industry has embraced HD finishing in recent years, most of our customers have converted only a relatively small percentage of their infrastructure to HD. We believe that there is pretty of plenty of room left for growth in this market.

It is also important to mention that opportunities exist in non-primetime programming as well. To give you a few examples Avid solutions are being used for HD post-production on major sports events and many morning and late-night shows, including Good Morning, America, Jay Leno, Conan O'Brien and Saturday Night Live.

In the news market we are aware of six stations that are now broadcasting news programs in HD and two of them are using HD equipped helicopters for aerial footage of breaking stories. We see this as the early stage of a trend that could have major potential for our broadcast business and it is layered on top of the opportunity we are already pursuing to convert broadcasters from tape-based to all-digital news production.

In the feature film industry, more and more post-production teams are using HD for screenings or digital intermediate workflows, where dailies are converted to HD and screened on HD monitors, saving post-production teams from the costly and time-consuming task of processing dailies on film for screenings on the set.

To give you a few examples the films Madagascar, Romance and Cigarettes, Goodnight And Good Luck, Walk The Line and King Kong are just a few recent or upcoming projects that use Avid tools for HD previews.

Turning now to the consumption of HD content, we use two benchmarks to major progress. Sales of HD television sets and subscription to HDTV services. In the U.S. sales of HD sets totaled 12.1 million units in 2004 which is a 72% increase over the 2003 total of 7 million sets.

In Japan, the growth was even more pronounced with sales rising over 200% from 2003 to 2004. As of March 2005, 10 million homes worldwide had HDTV service subscriptions and that number is expected to reach 15.5 million by the end of this year.

In the next four years the growth is expected to continue, with an estimated 52 million households subscribing to HD services by the end of 2009. These figures measure current and projected HDTV service so they give you a sense of the penetration of HD programming in the home which, in turn, drives demand for additional HD programming. Based on all the data we can see, there are no indications that the conversion to HD slowing down.

Turning to our broadcast business, we are continuing to see positive momentum in the conversion from tape-based all-digital production among a wide range of customers. This includes large enterprise facilities like CBS as well as small and medium-sized stations that can also take advantage of our scalable solutions.

As we have mentioned in previous calls, we are still in the early stages of a conversion opportunity that we expect to play out over the rest of this decade. And we feel that we are in a strong position to maintain our lead as we move forward.

I'm also pleased to report that integration of the Deko (ph) and media stream products from Pinnacle is off to a great start and we are now able to offer our broadcast customers an even more complete array of tools that we have in the past.

I would like to shift gears now and talk about our storage and networking business within our video division. Two days ago we announced a revolutionary new shared storage system called Avid Unity ISIS. ISIS, which stands for Infinitely Scalable Intelligent Storage, is the result of over five years of internal development at Avid.

This patented technology takes a totally different approach to managing the complexities of shared storage and workflow. ISIS leverages a unique, distributed intelligence architecture to interconnect individual storage blades. Each blade consist of two drives, CPU memory and an integrated twitch. These storage blades have been interconnected to form a storage array.

The distributed intelligence architecture allows the system to respond dynamically to loads placed on it, automatically shifting demand away from potential bottlenecks. Drive failures are automatically detected and the system can actually self heal in minutes ensuring ongoing data protection.

This same distributed intelligence allows the system to easily increase in size, integrating new storage blades automatically. Clients connect over standard Gigabit Ethernet, making it a perfect solution for broadcasters and enterprise class post-production facilities who have zero tolerance for downtime and are looking for massive scalability in both storage capacity and client connectivity.

As more and more of our customers deploy IT-based media networks throughout their facilities, we believe Avid Unity ISIS will create a new class of solutions for storing and networking, an area that represents significant growth potential for Avid. In the digital content market alone, nearly $1 billion per year is spent on storage and networking products.

Since we first launched the Avid Unity family of media networking solutions in 1999, we have built a very strong business, addressing the shared storage and collaboration needs of our customers. With ISIS we now have the opportunity to scale this business to much larger storage systems.

Turning to computer graphics, we recently previewed a revolutionary new technology called Face Robot which sets a new standard in facial animation for the film, post-production, and games industry. With Face Robot, processes that used to take weeks now take just days thanks to an architecture that automates steps that previously could only be done by hand. We expect to be launching this product early next year.

That wraps up the highlights for our video division in Q3 and now I would like to turn to audio.

As we reported, Digidesign had a strong third quarter with a record number of ICON D-Control consoles sold. Continued strength in our core ProTools TDM business and a solid start for our second generation Mbox 2 product.

The home recording sector remains the fastest-growing area of our audio business; and we expect the growth to continue in the foreseeable future. With the new Mbox 2 and other products on away from both Digidesign and M-Audio, we are continuing to aggressively pursue the opportunities we see in this area as well as in the consumer audio market.

Our professional audio business is also performing well with strong interest in Icon and ProTools HD among post-production, music, television, and film customers.

Finally we are continuing to ramp up our live sound business with venue systems featured on tours with high-profile artists like U2, Vince Gill, Nine Inch Nails and many more.

Moving finally to our consumer division, we just launched the latest version of Pinnacle Studio, our popular editing product line for the home video market. As Pinnacle Studio Version 10 makes its way into marketplace this quarter, our market research continues to show significant growth potential for the consumer video segment.

With the rapid proliferation of video capture devices, which includes not only camcorders but now also digital film cameras and cellphones, the estimated growth rate for the consumer video editing software market is over 20%. Pinnacle Studio is targeted directly at this customer base. Version 10 of Pinnacle Studio Plus now has the ability to capture and record in, using the popular and affordable HDV format.

We anticipate the popularity of recording in HD will be further accelerated by the release of BlueRay and HD-DVD recorders early next year.

That includes our this business overview for the third quarter. I would like to turn the the call back to Paul Marbury for guidance on Q4 and 2006.

Thanks David. Our previous guidance for 2005 full year revenue was a range of 770 to $790 million. We still expect full year revenue to be in that range but to be in the lower half of it.

Our previous guidance for 2005 full year non GAAP EPS was $2,20 -- $2.25 per share. We are increasing our full year non GAAP EPS guidance to a range of $2.29 to $2.39 per share. The midpoint of the new range is $2.34 dollars per share, $0.11 higher than the midpoint of the previous range.

Full year 2005 GAAP EPS is expected to be $0.84 to $0.94, including $32.4 million for in process R&D related to the Pinnacle transaction, $20 million for acquisition-related amortization charges and $.3 million for stock-based compensation related to the M-Audio acquisition, $2 million for facility restructuring charges and $400,000 for acquisition and restructuring-related tax items.

Q4 revenue is expected to be in a range of 240 to $250 million. Revenue from the acquired Pinnacle businesses is expected to be 5 to 7 million lower than the previously expected $70 million. Expenses associated with the Pinnacle businesses are also expected to be lower, offsetting the bottom-line impact of the lower revenue in Q4.

Non GAAP gross margins in Q4 are expected to be lower than in Q3 due to the inclusion of a full quarter of the Pinnacle businesses. But they are still expected to remain at or slightly above 53%. GAAP gross margins are expected to be approximately $2 million lower due to acquisition-related amortization.

Non GAAP operating expenses in Q4 are expected to be in the area of 97 to $100 million, up from 86 million in Q3 but down as a percentage of revenue. Operating expenses in Q4 include a full quarter of Pinnacle whereas Q3 included only a partial quarter.

GAAP operating expenses are expected to be about 8 million higher than non GAAP, including acquisition-related amortization and stock-based compensation. Other income is expected to be in the area of $1.7 million, about the same as in Q3.

Non GAAP tax expense is expected to be approximately $2.9 million, while GAAP tax expense including acquisition-related tax items is expected to be approximately $3 million.

Shares outstanding for Q4 are expected to be approximately 43 million. Q4 non GAAP net income is expected to be in a range of 28 to $32 million or $0.65 to $0.75 per share. GAAP net income is expected to be 18 to $22 million or $0.41 to $0.51 per share, including $9.9 million of acquisition-related amortization, $500,000 of stock-based compensation related to the M-Audio acquisition and $100,000 of acquisition-related tax items.

We are maintaining our outlook for 2006, unchanged at 1.02 to $1.06 billion or revenue and non GAAP EPS of $2.80 to $3.00 per diluted share on approximately 44 to 45 million average shares outstanding. GAAP EPS includes approximately $29 million of non-cash acquisition-related amortization, $1 million of non-cash stock-based compensation, related to the M-Audio acquisition, an estimate of approximately $20 million for non-cash Avid stock-based compensation. The estimate of stock-based compensation for Avid includes the impact of a recent decision by Avid's Board of Directors to accelerate vesting on approximately 400,000 out of the money stock options.

We currently expect Q1 2006 revenues to be down 3 to 5% sequentially, due to the seasonality in our businesses. We also expect gross margins to decline sequentially from Q4, due to the expense of complying with the EUs Hui (ph) and Rohas (ph) directives.

In January 2003, the European Union adopted two environmental directives. A directive on waste, electrical, and electronic equipment and a directive on the restriction of hazardous substances with which we are required to comply.

With lower revenue and gross margins and fairly level operating expenses we expect pro forma earnings per share to be in the range of $0.55 to $0.65 per diluted share in Q1 2006. GAAP EPS is expected to be in the range of $0.20 to $0.30 per share in Q1, including approximately $7.3 million of acquisition-related amortization, approximately $6.1 million of non-cash take Avid stock-based compensation and approximately $300,000 of stock-based compensation related to the M-Audio acquisition and tax adjustments totaling 600,000.

In the guidance we have provided, you'll notice that we are using more and wider ranges in the outlook for our financial results. This change reflects the reality of the challenge of being precise about guidance on the quarter by quarter basis, given the growth and increasing complexity of our business. For example, we have the good and the bad sides of the lumpiness of our broadcast business due to both the business realities and the revenue recognition complexities. In addition, we have our new consumer business in which there is more seasonality.

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

(OPERATOR INSTRUCTIONS) Gene Munster with Piper Jaffray.

Congratulations. You really stepped up the pace there. I guess on that front, David, I know you've been very busy with Pinnacle and getting things together. Any sort of feedback in terms of how (indiscernible) broadcast I didn't know that that was a small part of the overall Pinnacle revenue -- but how that is actually filling in and any data points you might have as far as customers starting to adopt collaborative solutions?

We've had a couple of benchmarks for us. First at IDC for those who attended they would have seen the Pinnacle booth completely rebranded to become the Avid -- entire Avid broadcast booth and we had shown a very strong integration of Pinnacle's products side-by-side with Avid's products.

So the re-branding is complete. The organizational integration has also taken place so that we've unified sales forces and the engineering team now belongs into the larger video business engineering team. So we are all working as one unit, although the group is still geographically dispersed, including locations in Mountainview and in New Jersey.

From a customer point of view, I can tell you we have met with many customers, who were previously Pinnacle customers, who wanted to just be assured that we are committed to continuing the Media Stream and Deko productlines and we are absolutely committed to furthering those productlines and are taking care of bringing comfort to those customers and also talking to them about what the future roadmap is which will be including better and closer integration with the rest of the Avid product lineup.

So I think we've got a very good story to tell. The results for the quarter, I think, show that.

Absolutely. Just in terms of that channel that I guess the historical Pinnacle broadcast channel, do you feel like that is starting to open back up and I know for a while there, they had kind of been shut down for over the summer as they kind of waited to hear what your next step was.

Do you feel they have enough confidence in the roadmap now that they are going to start to pick up the order pace going back out there?

I think that you are right, that there was some concern at two levels. The channel was uncertain regarding which products would be carried forward. They were also uncertain as to which dealers would remain part of our overall dealer network. Both of those issues should be behind us; and I think we should be operating as a business as usual pace at this point.

Shifting to the consumer side, you have been criticized sharply on that. And it just seems like you are not going to cover off the ball on that front so congratulations there. As you step through can you talk about the profitability of the consumer? And is it profitable today I assume? Or maybe I shouldn't assume that but as it goes through, as we think about the consumer is this going to be enough in terms of the profitability to even move the overall needle of Avid or should we be focusing less on that?

The consumer business was profitable in the quarter. Several hundred thousand but profitable, nonetheless. Gross margins in the consumer business were higher than we had originally anticipated. So that was a good sign, a bigger proportion of the sales were home editing and software within home editing. So that was positive for gross margins.

Obviously, we are planning to significantly ramp up the volume in that business. We did 18.5 million last quarter. We are planning to get up into the 40 million plus next quarter. That's our outlook at this point in time and, obviously, we expect the bottom line to improve as we get the volumes up.

I would just add a couple of things onto that. One is that we are continuing to address supply chain issues and modification. So we talked previously about moving more of our manufacturing operations to China. That is ongoing. And we also ended up carrying a meaningful backlog into Q4 as well. So that gives us a good jumpstart onto this quarter.

So you did recognize some Studio 10 revenue, I assume in September. Is that correct?

Yes we had some at the end of September.

But the majority of the Studio 10 can is going to fill into as based on your guidance the December quarter?

Yes.

David, did you give this specific -- (indiscernible) about the timing relative to the quarter -- I know you said this quarter but mid quarter, end of quarter?

I would say between mid and end of quarter but it's still planned to be in sufficient time for us to meet our objectives for the quarter.

Lastly on a big picture perspective. Last quarter when you had the hiccup, you basically talked about nothing has changed in the big picture and I think these results are evidence that nothing has changed in the big picture. And one of the criticisms you had was related to that the low-lying fruit had been basically picked and the shift to the move to high def. And that it was going to get tougher sliding ahead and I think, David, you went to great lengths to try to address that earlier. What are you seeing -- competitively is this just an issue as we look going forward in your business? Is it just a function of when the broadcasters are ready to go and when they do go, is it obviously usually that Avid is the choice. But just competitively I don't know if Apple is even inching their way into some of these broadcast deals with some of their storage products or maybe just give us some confidence that -- I think we all agree that the curve in high-definition is upward and to the right -- that Avid is on that curve competitively?

Actually before I get to the competition piece, I want to mention two things just relative to the comments you are making about the quarterly performance in Q2 and then what Q3 shows.

I hope that our announcement of ISIS, which we just did two days ago, shows that ISIS was worth waiting for and I think that helps provide some explanation as to why many of our broadcasters saw it as an ideal solution for their needs.

Secondly, just relative to people saying that the low hanging fruit has been picked we actually had an uptick in our average deal size for broadcast this quarter. Which to us is just a good indicator that all the low hanging fruit hasn't been picked and there's still lots of good yields out there.

Relative to the competition, I can't say we have seen any change in the overall landscape this quarter. So the usual list of competitors who we talk about geographically remains unchanged. And we haven't seen new entrants or any major shift. Some people had been speculating with Paris's acquisition of Leach (ph) that there could be some big change there.

Nothing that we've seen yet has rolled into the marketplace. I think they must, they'll be having their hands full just going through integration.

Thanks and congratulations.

Rich Ingrassia with Roth Capital Partners.

You said 8% organic growth earlier. Was that in video altogether or was it just in post?

That was in video.

Do you have a sense for what you think your organic growth rate needs to be in post in order to meet expectations for '06?

We haven't given any segment growth breakdowns for '06, let alone subsegment growth rates for '06. At a high level, organically, we are looking at let's say 12% growth for our video segment -- 12% organic growth for our video segment into '06. And I would expect the broadcast segment to be well above that and the post segment to be below that 12% (indiscernible).

Steven Frankel with Adam Harkness.

Congratulations. A nice change from three months ago. I have a bunch of questions. One, high level, you had some R&D issues over the last couple quarters that prevented products from coming out on time.

David, do you feel like that is now behind you?

Well, certainly, the delay on ISIS is behind us now that we have done the announcement and we are, in fact, shipping the product. So we did recognize some ISIS revenue in Q3. And we will be qualifying larger and larger configurations as we move forward.

Relative to Symphony Nitris we, as you know, last quarter moved it into this quarter and we, as I had earlier mentioned, we are on track for shipping in this quarter. I think moving forward what we are trying to do is actually build a little bit more of a buffer into the system so that we are not reliant on exact ship days for products. And I think that is something that will make everybody's lives a little bit easier.

So that is part of our overall plan moving forward.

If you look at that post business, how much marketshare do you think you've lost this year to Apple, whether it's because of a shift to lower-cost platforms or because you didn't have tighter support?

What is your sense of what's going on in the marketplace?

Separating our market and post into different segments at the high end of the market we really don't compete with Apple there. We compete more with Autodesk, for example, their discrete division. What we have there is a new product that many people are waiting for and that is the Symphony Nitris system.

We think any delay we saw in the high end of our market is simply that, a delay. And we are expecting to get a strong rebound in Q4 as a result of shifting Symphony Nitris.

In our core post market, which we target to the television production, commercial, editorial, feature film, we see continued strong performance from Avid. I cited the figure earlier of our over 70% growth in the finishing of prime time HD shows, using Avid-based systems. So we really don't see any major change in marketshare there as well.

I think the place where you are identified where you're identifying where lower end competition is entering the market; and that's from larger players like Apple or Adobe, as well as some regional players like Kanopis in Japan. They've got strong HDV product.

That is a more competitive part of the market. That is actually where we serve the market with our Xpress Pro products and I'll just give you a data point. We actually had a record number of Xpress Pro units that we shipped this quarter.

So that's an area of a lot of activity but we are actually doing well down there also.

And in that market, Pinnacle suffered for six months with the European channel not buying a lot of liquid because they thought you would discontinue that product. Now that you have decided to support it, has that channel begun to repurchase liquid?

It is too early to tell on that. We have got a launch upcoming lots of new version of liquid coming. And I think that will be a good test case for us to measure that. But that is really more of an upcoming fact that we are going to need to look at.

Was the book to bill or should the book to bill in broadcast be above 1 in Q4?

We just don't relate to that kind of statistics, Steve. So I don't even know what the answer is.

I'm just referring to the fact if you have a bunch of ISIS business that didn't get recognized in the past that sounds like it'll get recognized in Q4 and just do you think you've seen the peak in broadcast orders for the year? Or you might have a strong finish for the year in broadcast from an order perspective?

From an order perspective, I would expect a strong finish. We just -- in the third quarter we had a very robust quarter in our broadcast business in terms of the number inside deals that we did recognize in the third quarter.

Actually some of the broadcast deals that we recognized in the third quarter were originally in the plan for the fourth quarter. That sort of falls into that lumpiness question that we talked about earlier. We got sort of the nice side of lumpiness this quarter. We got some deals that we weren't necessarily planning on, but we won't have those deals again next quarter. So but from a booking perspective we're expecting a strong quarter.

Jim Ricchiuti from Needham & Co.

Just a follow-up to the broadcast bookings impression (ph) . Can you talk about the orderbook for ISIS? What is -- just some sense on how so many folks have seen it and just what the response has been so far?

Just to give you a data point without putting exact revenue numbers on it we have got orders in hand for roughly 33 systems and a near-term forecast of another 73. So we've had very strong response so far to the system and we are expecting that to continue.

David, any color you can give on the customer profile of those?

It is -- in general, if you were to classify it, it is an enterprise level post or a broadcaster. It needs to have high client count, high reliability, high availability storage. And the beauty of the system because it has distributed intelligence, it actually can be expanded in size very easily.

You know from seeing the press event that we held it can actually automatically assimilate new storage when it is added into the group. You don't need to bring the storage system down to expand the storage or to actually change the allocations within work groups. So ISIS is truly a very very different architecture than anything that we have ever had before and anything else that we have seen on the market.

And we think that the advantages of it, the fact that it is able to provide very high bandwidth to very high client numbers in a highly protective environment -- in fact to the point of being self-healing -- that all of those factors are going to be significant differentiators. And based on the orders that we have seen we can tell that it is a very valuable component for broadcasters.

Have the orders that you've seen, have they been fairly broad-based geographically?

Yes we have actually had beta sites during trials that were worldwide. And so those -- we've had the opportunity to put it in front of customers during this beta process worldwide. We have had the system under NDA for a year that led to the problems that we ran into in Q2, which is somewhat of an unusual circumstance for us, but the beauty of that long NDA period is that it gave us the ability to let customers actually consider it and to design it into their facility expansion plan.

So that is how we are able to come right out of the gate with a very robust order backlog.

Last question. Just again, any sense as to how we can see the revenues roll through the year on ISIS? Are there any constraints you'll face earlier in the year? Will these be systems that will be more loaded towards Q2 in the second half of the year?

I don't think there's anything unique about it. I will say that just relative to where we expect to take ISIS later in the year, one of the things obviously that is an inherent component of the architecture is the expandability of the system. And we are getting a number of orders that are for maxed out systems which gives us a strong indicator that those customers will be looking for more storage, as we are able to expand the capacity.

So that is something that should be happening later in the year in '06 and we will expect demand for taking it beyond our current limits of 64 terabytes.

Thanks a lot and congratulations.

Paul Coster with J.P. Morgan.

First of all, can I just start on ISIS. I think I heard there about $11 million of orders. Is it accelerating the development of that pipeline now that it is actually officially available? To what extent is the demand going to be capitalized by actual deployments with success stories associated with them?

I think the answer to all of the things you are implying are yes, in general. Once the product gets out in the marketplace and starts being seen, other people get a chance to look at it and then decide whether or not it is appropriate for their facility.

So we are expecting that to happen in this case as well. We also have some announcements that will be forthcoming of some of the early adopters of ISIS that will just give an indication of the sorts of implementations that people are using currently.

In fact we already have some at least two broadcasters who have put broadcasts on air using ISIS-based systems.

To what extent does it change the way in which you are going about the sales process and the value proposition associated with your technology? In other words is the workflow now leading the sale or is it storage? Has anything changed as a result?

Interestingly, it is both. And then one thing that you didn't mention which is sustained bandwidth or another thing we called linear sustained bandwidth. It is the fact that in ISIS, system scales linearly with the addition of each new 8 terabyte engine that gets added to it.

So the beauty of that is that as a customer needs to expand their client account, they can do so in a very predictable way. And what we're able to offer for our customers is the level of scalability in a single storage pool, which no other system can provide. A single storage pool that actually would allow 64 terabytes of connectivity to up to 100 clients.

You can't get that kind of real-time media streaming performance from any other system. So it is a very different value proposition and in fact, it enables new workflows that previously were not even possible.

Can you just share with us channel inventory both on the consumer side of your business? And the -- there's been some noise about channel inventory for your dealer network in North America? Perhaps you can just share with us where we stand?

From the perspective of -- ?

I think the channel in Europe for Pinnacle was drawn down to very, very thin levels. Presumably you are going to see a replenishment of the channel inventory there and here in North America, there was the sense that the new products were causing a little bit of backup of channel inventory. Can you comment on those two?

The new Pinnacle products?

No. Here in North America it was related to Avid. The -- no, I guess it would be the storage product principally.

Yes I actually don't have any information on that and we really don't, in terms of our professional video business we really don't put much inventory in the channel. It is typically a sale, based on an end customer order. In the case of the European consumer channel, Jeff Hastings the GM for consumer, has been spending a lot of time working on getting that business and channel ready to receive the Studio 10 product and that is our game plan for '04. I'm sorry. For Q4 -- where we expect to more than double the business that we had from the consumer business on a sequential basis.

My last question, if I may? I may have sort of blanked out at that point, Paul, but what exactly is the reason for the revenue range being revised to the lower end for the full year?

In the fourth quarter? I guess it's several reasons. Our outlook for the revenue from Pinnacle Broadcast combined with Pinnacle Consumer is about five to seven million lower at this point than what it was when we did the earlier guidance. On the Pinnacle Broadcast side, one of the factors is that as we've gone out in the field and gotten more of a direct hands-on understanding of what Pinnacle Broadcast inventory was in their channel, there was quite a bit of sale into that channel in the second quarter before we owned the company that is impacting our ability to sell into that channel right now. And that will continue in Q4 as a short-term factor for us, before we get beyond that.

So that was one of the reasons. And then the other issue with respect to bringing the revenue range down somewhat, is that we did recognize more broadcast deals in the third quarter than we had originally anticipated. Some of those were deals that we thought we were going to recognize in Q4 and now that they've been pulled into Q3, obviously, we can't recognize them again.

So we factor that in to the equation as well.

Chris Rowen with Robinson Humphrey.

Two questions. The first one, I noticed in your press release on the ISIS storage set, it was going to be sold into or that it was available for resellers. And I was wondering are you changing the channel on that? Are you still planning on doing direct sales into broadcast? And the second question is, at a high level what percent of existing installed base of media composer seats do you think will go to Xpress Pro versus Adrenaline?

Just going back to your first question, in terms of ISIS and is there any change in the channel there. There is nothing explicit about how we are handling ISIS sales that changes the way we are addressing the channel. So that is something that is -- should be business as usual there.

And then in terms of media composer seats, and where those customers might migrate. In general what we are finding is that media composer Meridian-based seats moved to (indiscernible) media composer based Adrenaline seats. Where we are selling Xpress Pro most often is actually to new users. In fact one area of strong growth for us in Xpress Pro units is actually in education. So those are all new seats.

Steve Lidberg with Pacific Crest Securities.

David, I was hoping you could talk a little bit about the post business. And you obviously highlighted the migration to HD that is occurring in the marketplace. I guess, could you correlate that back to what we are seeing in terms of post-revenue being largely flat on the year-over-year basis? Is that a function of more units but at a lower ASP? Some mix related in that the lower end of the market is growing faster than the higher end?

Yes. I think both of those things are issues that are going on right now that, in the mid range of the marketplace, we have had some things that have been product-related for us. For example, we have had some delays in getting media composer Adrenaline onto the new MacOS Tigers. That product came out just recently. We also do not yet have a Mac-based HD version of media composer Adrenaline. At the least the support coming as well.

We have also pointed out the Symphony Nitris HD system had a delay. Those are all things that, ultimately, the revenue we get is based on the products we are shipping. So if we have product delays that actually causes revenue delay as well. But you are right, also, to point out that there is a lot of activity going on in the low end of the marketplace and we are seeing very strong unit count numbers there.

But because of the fact that it is competitive market, the ASPs for those are lower and, therefore, from a revenue point of view it ends up evening it out.

Jumping into the broadcast side of the business, is your station count goal for 2005 still the same? North of 400, I think?

Well, I think what we said that -- police said was that starting from a position of around 250 at beginning of this year, we would like to do somewhere between 120 and 140 total broadcast deals. And we haven't, for some time. They are breaking it out on a quarterly basis. We can update that on an annual basis.

Regarding our goal for the year, we are running somewhat behind in terms of the number of deals that we would like to have booked by now. But the good news is that the average deal size is, I think David mentioned earlier, is up more than 25% compared to last year. So that is offsetting the number of deals so far.

Paul, with regards to acquiring Pinnacle. They had accounted for their North American business on a sellthrough basis. I believe you generally account for audio on a sell-in basis. How should we think about the accounting treatment of that consumer business?

The consumer business that we are talking about as a segment is Pinnacle Video consumer business. That is -- we will continue to do that on a sellout basis. On the consumer channel, our audio business in the U.S., I think you said North America -- in the Americas. Our audio business is really a different channel. It's to the music industry channel as opposed to the consumer channel -- customers like Guitar Center and we do take revenue on the basis of sell in, manage the channel inventory very closely with those customers as our partners and expect to continue to do it that way.

Then two last quick questions. Headcount at the end of the quarter and then -- from a cash perspective, you paid out about $70 million with the acquisition of Pinnacle. What did you end up acquiring from a cash balance perspective when you completed the transaction?

From a headcount perspective, we ended the quarter at a little over 2600 people of which about 530 were Pinnacle -- came from the Pinnacle acquisition. So the rest of Avid headcount was down by about 10 people for the year for the quarter.

And the second question was -- oh, cash. I'm sorry. Cash. Cash acquired in the Pinnacle transaction was about 42. We ended up with cash up about 36 million for the quarter and that is after the severance payments, transactions -- deal transaction costs and the like.

Barbara Coffee with Brean Murray.

When you are speaking to the broadcasters that have both systems, how fast are they looking at your additional systems at where there was some overlap with Pinnacle?

I'm not quite sure I understand.

Wasn't there some overlap with the Pinnacle broadcast of products you already had?

Perhaps you are talking about the Vortex server?

Yes.

Yes okay. So in terms of Vortex that productline from -- previously from Pinnacle chemical has been discontinued in terms of further development. However, there are roughly 40 sites worldwide that have that system in place as a working function system. And we are committed to fulfilling the service contracts on all of those sites.

However we have had a number of customers talk about converting to Avid-based solutions. And we are actually just dealing with those on a case-by-case basis. There is nothing urgent, there is no requirement for customers to shift because they have got working systems today. But it has been an area of high interest for many customers.

I hadn't realized the number was quite so small. I thought the overall was a little larger. Thank you.

That concludes the question-and-answer session today. At this time, Mr. Krall, I would like to turn the conference back over to you for any additional or closing remarks.

No further comments. I want to thank everyone for joining us today and invite you that should you have any further questions, please feel free to contact us directly. And we will look forward to speaking with you again next quarter. Thank you.

This concludes today's conference.