Avid Technology Inc (AVID) 2005 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. For opening remarks and introductions I'd 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'm Dean Ridlon, Avid Technology Inc.'s Investor Relations Director. I'd like to welcome you to today's call. 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 projected growth of existing or new markets and anticipated results of operations during 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 Avid's ability to anticipate customer needs and market acceptance of Avid's existing and new products, delays in the products shipments, the successful integration of Pinnacle Systems, pricing pressures, fluctuating currency exchange rates, and adverse changes in general economic or market conditions, particularly in the content creation industry. Other important events and factors appear in Avid's filings with the U.S. Securities and Exchange Commission.

In addition, our forward-looking statements represent Avid's estimates only as of today, January 26, 2006 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 the GAAP measures to the non-GAAP measures are contained in the press release announcing this quarter's results and is available in the investor section of our web site, 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 2006 results conference call. In a moment I'd like to hand the call over to Paul Milbury, our CFO, who will provide a detailed review of this quarter's financial results as well as a summary of 2005. Then I will discuss some highlights from our different business segments. Finally, Paul will come back and update our financial outlook for 2006. Following our prepared remarks, Paul and I would be happy to take your questions.

Now let's look at the quarter. We finished 2005 with a solid fourth quarter. Including our first full quarter of Pinnacle, revenues in Q4 were $245 million up 20% sequentially and up 40% from Q4 of last year. Non-GAAP net income for the fourth quarter was $30.1 million, up 24% sequentially and up 28% from the fourth quarter of 2004. Non-GAAP EPS was $0.69 per diluted share, up 15% sequentially and up 8% from Q4 of '04. I'd now like to hand it over to Paul to review the quarterly numbers in more detail.

Thank you David and good afternoon everyone. Before I review the results, I would like to remind everyone that our earnings press release, which is posted on our website, include 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 statement to reconcile back to the GAAP numbers.

The adjustments to our GAAP financials are significant, so let me take a minute to summarize the adjustments, which are all non-cash and which are all related to acquisition activity. We continue to report both GAAP and non-GAAP results because we believe the non-GAAP measures will assist investors in understanding results of operations on a comparative basis and because we feel that these non-GAAP measures offer more meaningful insight into normalized operating performance and cash flow generation capability.

The following acquisition and restructuring related items were excluded from our GAAP P&L to arrive at our non-GAAP net income in earnings per share. First, non-cash acquisition related amortization totaling $10.1 million; second, restructuring charges of $1.2 million related to vacating a facility and reducing headcount in Montreal; and (3), acquisition related stock based compensation charges and net tax provision and other non-recurring tax benefits of $394,000. Most of my P&L comments, which follow, will relate to the non-GAAP measures included in our release, which is posted on our website along with the GAAP measures.

Q4 revenues were approximately $245 million up from $204 million in the prior quarter. On a sequential basis, currency had a negative impact on revenue of approximately $4 million and a negative impact on EPS estimated at between $0.06 and $0.07. For the full year, revenues were $775.4 million up 31.5%. Professional video revenues were approximately $130 million for the quarter up 9% sequentially and 21% year-over-year. For the full year, professional video revenues were approximately $448 million, an increase of about 15% over 2004.

Organically, broadcast market sales grew more than 20% from 2004. Including the impact of the Pinnacle acquisition, sales into the broadcast market were up over 40%. Sales into the postproduction market were slightly lower in 2005 compared to 2004. We attribute this decline to delays in major product releases during 2005, but we are expecting growth in both post and broadcast in 2006. Audio revenues in Q4 were $74.5 million up 11% sequentially and 10% year-over-year. For the full year, audio revenues were $268 million, an increase of about 35% over 2004.

The low-end audio business including our M-Audio division, which we acquired in August of 2004, accounted for a significant portion of the growth in 2005. Our new live sound business took us a little longer than expected to get off the ground in 2005 but we have gained a lot of momentum and expect good growth from live sounds in 2006. Consumer video revenues were approximately $41 million in Q4, slightly below our expectations.

We expected non-GAAP gross margins in Q4 to decline from Q3 due to the inclusion of a full quarter of the Pinnacle businesses. Gross margins were 52% in Q4, lower than expected primarily due to the negative impact of currency on revenues, which flows to the gross margin calculations. In the absence of further negative currency impacts, we're expecting gross margins to firm up and be slightly higher in Q1.

Non-GAAP operating expenses in the quarter were $95.9 million or 39.1% of revenues. Operating expenses were up $10 million sequentially, primarily due to the result of the inclusion of a full quarter of the Pinnacle business in Q4. Once again I refer you to the reconciliation of GAAP and non-GAAP results, which is included in the earnings press release posted on our website.

Non-GAAP operating income was $31.4 million or 12.8% of revenues. Non-GAAP operating profit for our professional video segment was $17.1 million or 13.2% of revenue. Non-GAAP operating profit for our audio segment was $11.1 million or 14.9% of revenues. And for our consumer segments, non-GAAP operating profit was $3.2 million or 7.8% of revenue.

Interest and other income net was $1.9 million and our non-GAAP tax provision, which excludes about $100,000 of acquisition related items, was $3.2 million. Excluding acquisition related amortization and tax items, restructuring charges and stock based compensation related to the M-Audio acquisition, our non-GAAP earnings per share were $0.69 in Q4. We ended the year with approximately $238 million of cash.

Accounts receivable increased during the quarter to $141 million, but DSOs were down to 52 days from 56 days last quarter. Inventory increased by about $4 million during the quarter to approximately $97 million, but inventory turns improved to 5.1 times from 4.2 times in Q3. I will be back to update guidance for 2006 after David reviews some of the highlights from the business in the quarter.

Thanks, Paul. I'd like to continue with a recap of business highlights and industry trends in our three business segments, starting with video. In postproduction, HD continued to be a key business driver for the industry as a whole and for Avid in particular. As we've mentioned in past calls, the move from SD to HD is playing out as a multi-year transition. And I'd like to give you a sense of where things stand today.

According to the National Cable Television Association, 5,000 hours of HD programming are being telecast every week on major broadcast networks, local TV stations, and cable and satellite channels. Networks such as ABC, CBS, NBC and Fox now carry 81 to 85 hours of prime time HD programming and late shows per week, along with an increasing amount of sports, movies and special programming. In addition, new networks, such as those run by the NFL and NASCAR are focusing almost entirely on HDTV content.

The demand for more HD programming is fueling sales of our postproduction tools. We mentioned during last quarter's call that we're making big gains in the number of prime time network shows that are finished in HD on our systems. And we expect this positive trend to continue as our Avid Symphony Nitris system takes hold in the marketplace. The product started shipping during the fourth quarter and we were happy with the results.

In feature film production, which has been a little slower than the television industry to adopt HD, we're also seeing a rise in the number of postproduction teams employing HD workflows, particularly for the critical task of screening film dailies.

One of the more high profile examples of this trend is King Kong, which used Avid DNX HD encoding as part of an integrated postproduction workflow, consisting of 11 Media Composer Adrenaline systems, three Avid Unity shared storage solutions, an Xpress Pro system and as many as 20 ProTools HD work stations. When the editing team for King Kong set up a side-by-side test between the HD screening and the film print, they said that they couldn't see a difference. This kind of validation underscores the value of Avid DNX HD and how it can be used to help transition the older, film-based preview process to a more efficient and less costly HD screening process, without sacrificing image quality.

On the broadcast side of our video business, HD is also gaining traction as an increasingly important part of the mix. We've talked about this before, how in addition to our end-to-end broadcast business, HD represents a significant add on opportunity in broadcast as more outlets begin carrying special events, news and sports programming in high-def.

The upcoming Winter Olympic games in Torino are a great example of this. Yesterday we announced that one of our end-to-end broadcast customers, NBC, will be the first U.S. network in history to carry out an Olympics broadcast in HD during prime time. To accomplish this, NBC has deployed an unprecedented array of Avid editing, graphics, audio and shared storage solutions on location to support the event. At the heart of this workflow are six Avid Unity ISIS systems and three Avid Unity LANshare systems, which together provide more than 100 terabytes of shared storage.

As you know, we introduced our Avid Unity ISIS system last quarter and NBC's deployment of the system demonstrates how compelling this solution is for enterprise class broadcasters and post facilities that want high uptime and are looking for massive scalability in both storage capacity and client connectivity.

In Torino, where NBC deploys a team of more than 2,500 people, our ISIS system is empowering NBC personnel to share HD files in real time over its existing standard gigabit Ethernet network. Without our ISIS system, NBC would have faced the costly challenge of building out an entirely new and different network infrastructure to accommodate the expected bandwidth of more than 800 hours of finished HD footage.

Beyond this HD storage infrastructure, NBC is also using 36 Media Composer Adrenaline systems, 29 of which are equipped with the Avid DNXL HD board, allowing them to encode HD footage into Avid's DNX HD files. The network solution has also included a number of products that we integrated from Pinnacle including five Deko 3000 HD character generators and five Thunder HD production servers. And last but certainly not least, NBC has attached a Digidesign ICON system to its shared storage network to produce audio for promos, athlete profiles and other segments.

While we're focused on HD as a major imitative for our video business, we are continuing to pursue other opportunities as well. One of these is the individual videographer segment, which we define as those professionals who typically work by themselves in areas of wedding and event videography as well as corporate and government training.

While we've always kept a watchful eye on this group and we've sold products like our Xpress Pro system to these content creators, we've never been as well positioned to capitalize on this opportunity as we are today with Avid Liquid. This is because the profile of these customers is different from our traditional customer base of professional AV editors, who are often trained on film and video techniques where products like our Avid Xpress DV and Avid Xpress Pro systems are the perfect compliment for their skills.

The individual videographer, on the other hand, is typically a computer savvy, self-taught professional with a small business, and who is looking for an easy to use product with broad capabilities such as DVD offering and native MPEG-2 editing, all within one application.

The Liquid product, which we acquired in the Pinnacle transaction, made successful inroads with these professionals. And now that we've got it integrated into Avid's product lineup, we feel we have a compelling offering in what we estimate to be a $200 million annual market opportunity.

One last comment worth making about our video segment relates to Softimage, our 3D animation and computer graphics group. Last quarter we talked about how we previewed a revolutionary technology called FACE Robot at the SIGGRAPH trade show, which sets a new standard in facial animation for the film, postproduction, and games industries. Although we don't plan to officially release the product until later this year, one of our customers, the New York Design and Effects House Spontaneous, used an alpha version of FACE Robot to create the latest music video by U2. Facial animation has long been the most difficult task in character animation. And FACE Robot makes the process efficient and compelling.

Turning to audio, we're seeing a continuation toward the trend of computer based mixing in both the studio and live sound industries with an integrated system oriented approach where the recording, editing, and processing capabilities are married directly to the mixing control system. This paradigm shift, which is analogous to the migration from analog to digital in the broadcast industry, is creating a growing demand for our ICON and VENUE families, both of which did well in 2005. We had our best ever quarter for ICON-D Control sales, capping a year in which the ICON system established itself as the new standard for tracking and mixing of postproduction and lead music projects.

Through the end of the year we had sold over 800 ICON systems including D Control and D Command digital console control services, paired with large ProTools HD systems and add-ons. In our live sound business, we're seeing strong momentum building for our VENUE system with growing numbers of high profile artists using the system on their latest tours. In fact, four of the top 20 earning tours of 2005, U2, Paul McCartney, Dave Matthews Band and Tom Petty and the Heartbreakers, used our VENUE systems on tour and we estimate that more than 1,000 performances during the past year were mixed on this system.

With such well known artists validating our systems we expect that other artists, mixing engineers and live sound companies will embrace our vision of integrated digital mixing for live sound.

And while our icon and VENUE products carved their places in their respective markets, our Protools/HD line continues to show strength. The latest software version, Protools/7 delivers increased capabilities for many composition tools and virtual instruments plug-ins, with post features on the way to show at this year NAB. By enabling professionals to do more of their work directly within the Protools system we are continuing to broaden the platform's appeal to post-production pros, recording engineers, mixers, music composers, mini-programmers, sound designers and other professionals.

In the Home Studio segment, quality, flexibility, portability and price consciousness continue to drive buying decisions and those are the qualities we've always emphasized with the Protools LE product line, along with Protools M-powered software and with the entire range of M-Audio products. Demand for this category drove healthy growth for Digidesign and M-Audio in 2005.

We had our best ever quarter for the M-Box portable microstudio in Q4 and most of the sales were of the new M-Box 2 model. M-Audio also delivered several new products in Q4 including the ProjectMix control surface, FastTrack Pro/IO and its upgraded Oxygen Series Keyboards.

In our Consumer Division we are continuing to pursue two primary opportunities, the global video editing software and hardware market and the European TV tuner market. For consumer video editing software and hardware the total market is in excess of $200 million annually. The main growth driver in this market is the expected increase in the use of video capture devices such as camcorders, digital still cameras with video capture capabilities and cell phones. As more and more consumers use these products to acquire video there is growing demand for low cost software apps, like Pinnacle Studio which allows people to easily manipulate the footage they collect.

Research published by the NPD Group, a leading consumer research firm shows that the market for consumer video editing software in the U.S. grew by 16% in 2005 and that sales of Pinnacle Studio grew by 29% increasing our market share by 5 points to 50%. This puts us in a great position to continue capitalizing on the consumer editing software and hardware market as our global culture trends towards capturing and consuming an increased amount of video on global devices.

At CES we were demonstrating an upcoming version of Pinnacle Studio targeted at the delivery of content to mobile devices. While the TV tuner market is not well known in the U.S. it is a well established market in Europe and accounts for an estimated $200 million in worldwide sales annually.

For those of you who don't know, TV tuners are devices that can plug into a PC and allow people to watch and record TV directly on their computers. GFK Data shows that the European TV tuner market is growing at approximately 14% annually, driven by increasing sales of laptop computers and a rapid rise in the number of digital video broadcast or DVB stations. We believe that the TV tuner market presents a significant opportunity as computer and TV-based consumer technologies converge even further in the years ahead. This concludes our overview of our business segments. I'd like to now hand it back to Paul for guidance on 2006.

Thanks David. Our outlook for the full year 2006 remains unchanged with revenues expected to be between $1.02 and $1.06 billion and non-GAAP EPS of $2.80 to $3 per diluted share on 44 to 45 million average shares outstanding. Non-GAAP net income excludes approximately $53 million of non-cash charges. Acquisition related amortization accounts for about $31 million of the total. Stock-based compensation per FAS 123R accounts for $20 million and acquisition related tax items are the remaining $2 million.

Gross margins are expected to be 52 to 53% in the first half of the year and improve somewhat in the second half of the year resulting in full year growth margins in the 52 to 53% area. Non-GAAP operating expenses for the year are expected to be between 412 and $416 million. We currently expect other income for the year to be approximately $9 million with approximately $2 million per quarter in the first half of the year and about $2.5 million per quarter in the second half.

Non-GAAP tax expense is expected to be approximately $10 to $12 million for the year or about $2.5 million per quarter in the first half of the year and about $3 million per quarter in the second half of the year. We currently expect Q1 2006 revenues to be down approximately 5 to 7 % sequentially. Currency, at current levels, will continue to be somewhat of a drag. In terms of Q1 seasonality the biggest decline is expected to come in our Consumer Video segment which could be down more than 20% from the Q4 holiday revenue level.

Gross margins are expected to be in the 52 to 53% area and non-GAAP operating expenses are expected to increase sequentially to 97 to $99 million in Q1. As a result of this entire seasonal decline in revenue in Q1 we are expecting pro forma earnings per share to be lower than we had anticipated during last quarter's call and fall in the range of $0.45 to $0.55 per diluted share. GAAP EPS is expected to be in the range of $0.10 to $0.20 per share in Q1 including approximately $9.5 million of acquisition-related amortization, approximately $6 million of non-cash stock based compensation and acquisition related tax adjustments totaling $500,000.

In Q2 we would expect revenues to increase sequentially and be in the area of $250 million, but we would also expect a significant sequential increase in operating expenses related to our hiring plans, our investment in NAB and other major marketing initiatives. Non-GAAP diluted earnings per share for Q2, 2006 are expected to be in the range of $0.55 to $0.65. GAAP earnings per share including $8.2 million of acquisition-related amortization and $5.2 million of stock based compensation are expected to be in the range of $0.25 to $0.35 per share.

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

Thank you. [Operator Instructions] We'll go first to Steve Frankel with Canaccord Adams.

Hi. Paul and David, was there anything other than currency that impacted the Q4 gross margin that might fall into this year as well?

Well, the Q4 gross margin was always expected to be lower than the Q3 gross margin because of the inclusion of both the Pinnacle consumer business growing from $18 million in Q3 to over $40 in Q4. And because of the inclusion of the Pinnacle Broadcast products which have lower margins than the rest of our professional products. So that was predicted. And I'm not sure I have anything else --

One comment from a product mix point of view was that on the Consumer side Pinnacle had a higher percentage of PCTV-based products which carry a slightly lower margin and some of that was due to just some sluggishness around initial studio sales, as you're aware of. That revenue was made up in part by increased sales of PCTV tuners which carry a lower margin. So that effect was in Q4 and we expect that to continue a bit in Q1.

Okay. And can you give us an update on how Liquid did in its initial quarter in Europe?

Liquid's doing fine. We are selling that under the Avid Brand. We've launched Liquid Version 7 and the product is actually being very well received by Avid customers.

And have you got into reorders yet in that European channel?

I don't know the answer for Liquid orders in particular for reorders. I mean in general we've had enough time to have gone through a reorder cycle, but I can't comment specifically around what they were on Liquid.

Okay. Can you give us an update on the customer count in broadcast for end-to-end solutions?

Well at this time about a year ago we said we were going to start breaking it out quarter-by-quarter and at a detail level. I think at that time we said we had sold over 250 digital newsroom conversions. As of this point we are now over 350 newsrooms sold. So we fell a little bit short of our expectation on a unit count, as we had indicated we were running a little bit short last quarter.

On the other hand in terms of average deal size, the average deal size for the broadcast newsrooms sold this year was up quite a bit, offsetting the lower number of deals booked. And then the other good news on the broadcast side is that we're finding that the levels of follow-on business that are coming from those newsrooms sold is higher than we had been modeling and as a result, as we said earlier, total broadcast revenues were up over 40% -- more than 20% organically excluding the Pinnacle impact.

And if I look at the Q1 guidance the expenses are significantly higher than I had modeled before. How much of that is related to not getting the Pinnacle cost structure down as quickly as you might have anticipated? Or have you decided to do some other capital things that are leading to the expense ramp?

We have built into that number that we've given you some pretty significant investment plans and hiring activity. It's really not related to getting the Pinnacle costs down as fast as we want. We have done that pretty much according to plan. I think the Pinnacle Consumer business at about eight points of profit on the revenue levels that they had in Q4 was pretty good performance.

Okay, great. I'll let somebody else ask a question.

We'll go next to Gene Munster with Piper Jaffrey.

Good afternoon. Some of the resellers that we spoke to, I guess in the post-production channel, indicated that some of the early adapters are pulling the trigger on Symphony Nitris, but a lot of them are still waiting to see how the product works, basically leaving a pipeline for Symphony Nitris in Q1. Is this what you guys are seeing or is this more kind of a pipeline over the next four quarters? Or how do you kind of balance those two?

Well we've seen strong initial demand for Symphony. One of the groups of people who've had the longest ability to look at it has been our Beta customers. And we've had a strong conversion ratio of Beta customers converting to purchases. So that was a big component of the folks who purchased in Q4. And then we have an ongoing strong pipeline during the course of this year for Symphony Nitris. I wouldn't say that it's loaded toward any particular quarter, I think that that's going to be a run rate business for us.

Okay. And then, just, I guess kind of variations of the same question here in terms of the move to broadcast. How far, are we--every quarter we kind of ask what inning are we in, what inning do you think we're in right now in terms of broadcasters moving to digital?

I think we're still calling it in the early innings. It's someplace between the first quarter and the first third of the game and as we continue to look at -- for example I had a data point just recently from our U.S. sales team looking at their station count within the U.S. and looking at the number of stations with a News Director, still places that do news. And looking at the percentage of stations that have converted and what we count in the U.S. is 81% still not converted yet.

So in terms of the market opportunity we still see that as being a very big opportunity that we're continuing to track. And as Paul said, I think there was some initial to leap on the part of some people that felt the first stations to convert would be the biggest stations. But what we're finding to be very interesting is that the deal size increased pretty substantially over the past year as Paul had mentioned and that's encouraging not only from the point of view of seeing ongoing new stations to convert, but then also add-on business occurring from our current customer base. So those are both nice factors that are moving that market forward for us.

Okay. I'm just going to take a step back and look at the big picture here and the big picture is I think some of these trends that you guys have clean and undeniable as far as move to high definition and what's going on in terms of television commercials. A fraction of them are high-def, all the things everybody knows about broadcasters moving to digital. As you look at these trends it's undeniable, as you look at your results over the last few quarters it's been lumpy and how do you reconcile this market versus your results, number one? And number two are we just getting too optimistic about the overall market?

Well, that's a really good, kind of broad question, so I'll cover it in a couple of components. First, if you just looked at the trends agreed they're undeniable. The newsroom conversion is taking place and we first identified it probably four years ago and we identified it as a conversion that would take place over the course of the decade.

And that's really how it's playing out. We're still in the early innings of it but we have every indication that it was the size we originally thought that it was, and we continue to have the success ratio, in fact, even better success ratio than we had initially targeted. Our goal -- initial goal, was to capture at least 50% market share. We believe that we are meaningfully above that rate of success in our conversion ratio.

As you talk about the conversion to HD another one that is a multi-year we think rest-of-the-decade process because frankly it took the entire decade of the '90s to put the standard definition infrastructure in place so there's no reason to believe that the conversion to HD would go any faster. And if you look deeper into our own numbers just to give you one data point, we continue to sell Media Composure Adrenalin at the $1,000 or 1,000 unit count per quarter. But if you just look at this last quarter in Q4, 25% of the systems were either HD or HD upgrades.

So that means that three-quarters of the systems going out the door are still standard definition and my belief is that it's standard definition with the intent to upgrade to HD but the conversion has not yet taken place. To give you another data point many estimates say that by the end of this year 25% of U.S. households will have HD sets. So it's interesting that our percentage of sales is reflecting somewhat the same percentage penetration of HD receivers in the home.

If you look at what's going on in digital mixing on the audio side of our business it's undeniable that that revolution is taking place too and our success with Icon I think is undeniable evidence of that. And then likewise in the lifetime environment VENUE success and with four of the top 20 it was three of the top eight tours this year using VENUE. So no question about that, and then lastly when you go to our consumer business revolution taking place in content creation at the low end of the market, content distribution and content consumption. So you can consume content on a video iPod. You can consume content on your cell phone.

All of these things are happening. But I think Avid is extremely well positioned to go after these trends at both the high end of the market as well as the low end of the market. But these are all, getting back to your original question and your original thesis, these are all multi-year trends. And you've got to keep in mind that Avid is facing these trends in the midst of also growing very rapidly. When you grow your overall revenues by approximately 30% year-over-year you've got to believe that what you're doing is you're driving down the highway while you're putting new wheels on the car. And I think we've done a very good job of staying on track, staying ahead of these trends while continuing to run our business very successfully. So I know many people would like to see everything happen in one quarter but in reality it just doesn't play out that way.

Good, great. Thanks David.

You're welcome.

We'll take our next question from Rich Ingrassia with Roth Capital Partners.

Thanks. David you mentioned TV, film, and broadcast but what are you seeing in the advertising market as far as demand for HD finishing products?

Well we--we have cited this thing earlier which was an interesting throw back to 50 years ago with the adoption of color TV where advertisers didn't switch to color advertising until 25% of the U.S. homes had color TV sets. And that's in part certainly driven by the economics of it where advertisers get paid based on the ratings of their ads. And if you look at the ability to even measure HD advertising in particular the infrastructure is just getting put in place today so they're not pure matrix that would even give you a defined ROI but it's the same thing that happens with the conversion to color happens with conversion to HD we'd expect that by the end of this year advertisers would be switching over to HD production in full force. That's just a guess though because that's not set in stone but I would say that the good news part is that it's yet to convert so that opportunity is in front of us.

Okay. Two more questions if I may. Can you help me reconcile what you just said about market growth and gains in market share and consumer video editing with the actual Pinnacle results that were obviously below given your lowered expectations for the quarter?

Well there are two dynamics going on with Pinnacle. We look at the market in two pieces. One is the combination piece of software plus hardware which is a big part of Pinnacle's business so it's Pinnacle software sold with Pinnacle branded hardware and then also Pinnacle software sold with Dazzle branded hardware. That's one segment.

The other segment is the software only piece. So when I was talking about the market growth that was actually MPD data that we had based on video editing software only. That's the data that we're tracking and that's the part of the market which had grown for Pinnacle 29% year-over-year and for the market overall 16%. If you take the aggregate, though, the hardware plus software market has actually been declining slightly and so the net result of software plus hardware and software only is roughly the same as last year.

Okay thank you --

So in the growth segment within a larger market. That's what's happening.

And finally, it actually looks like Paul you were able to squeeze software and expenses fairly tightly in the fourth quarter. Were you indeed able to reduce some of the overhead in this Pinnacle operating structure? Or were our estimates just a little too high?

You're right. I think we were able to do better than even what we had planned in the fourth quarter. I think in answer to the earlier question I said in terms of Pinnacle's bottom line earning almost an 8% profit on somewhat lower than previously expected revenues was achievable because we were able to get the costs down faster.

Okay, thanks.

We'll take our next question from Paul Coster with J.P. Morgan.

Yes, good afternoon. I'm speaking on behalf of the people who want everything in one quarter David. Can I just ask you in the first quarter first of all the guidance. Is that on a currency neutral basis?

Yes.

Okay. Paul, what's the latest thinking on the tax accrual rate? Is there any chance in this calendar year of us moving to a fully tax accrual basis or not?

I don't think so.

Apple. To what extent is it winning market share from you in your post-production segment and what percentage of your revenue is sort of competing with Apple in any event?

Sorry. Did you ask -- I'll get this question. If you look at our post market and separate it into high end posts and then lower end posts, at the high end market that's really not where we're seeing the direct competition from Apple although I think you could certainly find instances where Apple has achieved some sales into the high end account. But primarily those accounts tend to be loyal Avid customers and we've done quite well there with our high end products, DS Nitris, now we're selling Symphony Nitris in there and as we mentioned we've had good reception there.

In addition, our Adrenaline business continues to deliver 1,000 plus units each quarter. And in fact we had higher ASPs even this quarter than last quarter. So we continue to see strength at that end of the market where we primarily compete directly with Final CutPro and products like Premiere Pro is in the lower end of our market with our products like Avid Xpress Pro and now with Avid Liquid. That's the primary area and I actually think that Apple'd biggest competitor is actually Premiere Pro. For a long time, Premiere Pro had that space uncontested and Apple has moved into that space competing with Adobe. I think that may be one of the reasons that caused Adobe to come out with their new production suite. I think that's targeted at the Final Cut Pro equivalent.

So you don't see market share loss to Final Cut Pro at this time in a meaningful way in your business segment?

In the quarter - mid to high end market we are seeing continued strength. I mean just to give you data points. If we look at Assurance contract renewals we are continuing to have strong and in fact strengthening Assurance contract renewals which is one way that customers make long term commitments to companies and that percentage is in the mid-80s. So that's just one indicator for us of ongoing commitment to Avid products.

Okay. And in sensory Paul can you dissect it for us a little bit? I think it's a little bit higher than people would like.

Yes. It's a little bit higher than what we would like too. I think we've got some programs that we're going to be working on across the different business units in 2006 that will hopefully get us some improvement there. But as I said earlier inventory turns got back over 5 times in the fourth quarter in a little over 4 times in the third quarter. So at least in the most recent quarter the increase in revenue is directly related to the 20% sequential increase in volumes.

Okay. What are the constituents in terms of finished products and progress and also to the extent that you can tell us what product lines constitute most of that inventory would be helpful.

Yes. I'm afraid I don't have all of that detail easily available here.

Okay. And then finally international revenues, first is domestic. What was the breakout there please?

For the full year or for the quarter?

For the fourth quarter, yes.

For the fourth quarter. I think it was 47% Americas and 53% international for the full year. It was about 49% Americas and 51% international revenues.

Okay, thanks very much.

You're welcome.

Thanks Paul.

We'll take our next question from Chris Rowen with Robinson Humphrey.

Hi. A couple of questions here. First of all, you guided down to sequential decline in March and attributed that to the Pinnacle consumer business, but looking back at Pinnacle's last two years they were typically flat to up in consumer with the driver being people buy their PCs and then get some software for them following the holiday so what's up with that?

I can't comment on a lot of the Pinnacle historical stuff. I'm not sure what numbers you're looking at but I think the numbers that I have in my mind have a pretty significant decline for Pinnacle from Q4 of a year ago to - from Q4 of '04 to Q1 of '05 adjusted for the various business divestitures that they had. So as I look at the numbers stripped out for all of those divestitures they had a huge quarter in December of '04 as I recall just before the company began to get marketed for sale and then the subsequent several quarters were off.

One thing you might want to look at just to check the data you've got. They had a different system here than Avid does so a Q4 isn't our Q4.

I understood. I'm looking at the numbers here but we can handle that offline.

Okay.

Secondly, what percent of the post-production revenue and I'm just looking ballpark figure here is high end versus lower end, i.e. competes with Apple versus Dazzle?

For us, the vast majority of our revenue is in high end.

Okay. And then, finally regarding the revolution in content creation and consumption that you talked about do you have any concerns that someone may come out with a hosted video editing offering with a move towards all these video blogs and such and people kind of being one-off users of these things. It seems like a hosted video offering could potentially be a threat to the revenue model for you and others in the video editing space.

Yes. If you're talking about in the low-end space, I think that that is absolutely a possibility for having an application that is net served and you just download the components for example. We're still a little bit away from that. In fact, when we even looked at web fulfillment of orders of Pinnacle Studio the program itself is too large to be downloaded that way so we still only sell it over discs, but it is something that in the future I think creates opportunities for companies to offer web based editing. One thing to keep in mind though is as you try to use any higher resolution at all the bandwidth of your network connection starts to become a problem and one thing that you don't realize until you try to upload something is that most connections to the Internet are asymmetric. That's where the term ADSLs comes from. The download speeds are always much, much higher than the upload speeds. So people start running into some real problems when they try to do things like that that are web hosted, but it is something that I think in the future creates an opportunity to expand the user base of people who added content so we find that interesting.

Okay, thank you.

We'll go next to Jim Ricchiuti with Needham & Company.

Paul or David, I'd like to maybe understand a little bit more about the dynamics of your full year guidance relative to your Q1, Q2. Q1, obviously now that there's more seasonality with respect to the consumer business [inaudible - technical difficulty] products that have rolled out and broadcast. I mean has something changed the way you look at your full year business versus the first half? Is there some more aspects of seasonality to it versus, say, a year ago?

Yes. I think the first thing is the seasonality that is associated with the consumer video business. The level of revenues that we would expect in the fourth quarter '06 versus the first quarter of '06 is substantially different - substantially higher obviously and -- end of fourth quarter. So there's a factor that we really didn't have as we started out the year a year ago. And then in addition to that we do have some significant product releases that are scheduled for the latter half of the year so revenue is skewed toward the back end of the year.

Okay. And Paul are you seeing anymore seasonality and -- in the past you haven't in the M-Audio business?

No.

So as you look at '06 the waiting in the second half would you say is being driven more by your new product release schedule?

A combination of new product releases and the seasonality of the Pinnacle consumer business.

Okay. And you've talked about some increased hiring. I wondered if you could maybe elaborate on that. Where you're putting resources. Where you see the need to expand over the next couple of quarters?

Well we've got some needs kind of across the company in most functions so I think we're planning to hire a couple of hundred people or more for the year and I think it's probably more sales focus certainly than it is G&A focused but we've got some investments in R&D as well. So it's across the board.

Is it more shell focused on the video side versus audio?

It's both.

Okay. I apologize if you dealt with this but I joined the call a little bit late but how would you characterize the overall environment in broadcast business, the pipeline you're seeing and I assume you gave an update on ISIS as well?

Well no. Actually we didn't talk specifically about ISIS in the Q&A component so I can tell you that we have had a large number of successful installations that we completed in Q4. I've got a list in front of me of over 20 stations that we've successfully installed in Q4 and another list of stations that are in progress. So the demand for ISIS continues to be strong and the installations that we've been proceeding with have been going very, very well.

In terms of the overall broadcast market outlook, it looks very healthy right now. In general, in Olympic years we tend to have good uptick in business overall for broadcast and we would be hopeful for the same thing this year as well.

Okay. David 20 stations. How many customers would that have involved individually? Rather these are staging groups I would assume.

No. These are all different stations and therefore different customers.

Okay. And can you give just a rough ASP on those?

We don't breakout the exact ASP. It's sub $1 million, I'll say that per station. And then one other data point that we gave was that it was actually a pretty significant growth year-over-year from where we were last year. So we're seeing the average deal sizes increasing.

Okay, thanks a lot.

Sure.

We'll go next to Sasha - I'm sorry. We'll go next to Steve Lidberg with Pacific Crest Securities.

Good afternoon guys. With regards to the consumer business I guess the disappointment in the December quarter can you speak to where you saw weakness? Did that primarily reside out of Europe and I guess maybe one of the businesses that was more effected by foreign exchange?

Well yes to that part because they do the majority of their business in Europe so foreign exchange has a stronger impact there. We had supplier issues in Q3 which led to production shortages in Q4. In fact the main supplier of Pinnacle products went bankrupt and this delayed our first channel fill in Q4 which obviously then it's something that you ultimately can't make up in the quarter. We are up to full production now but there was no way during the holiday quarter to completely compensate for that.

Another thing which I think has been somewhat visible is that the original quality level of Studio 10 was disappointing to us, and this had a negative impact on sales in particular in online sales, they were 40% below our expectations. So those were both drags for the business in Q4 so we've made the appropriate changes. We've got a release coming out this quarter that we think will address all the problems in Studio 10. So we believe that we're going to be getting that back on track, but there was no way to recover for all those things within the same quarter.

And I would imagine the supplier issue was primarily on the hardware/software combined product?

It was on the hardware side of production.

And with regards to the broadcast business as you look at, I guess, new deal activity that would be turned into revenue kind of six to nine months out, are you seeing as much business today internationally as you are domestically or how is the mix of broadcast changing as I guess you look at the total opportunity?

We're seeing good growth in the business in both Europe and in the U.S. I think if there's been a place that's been slower to take off it's been in Asia although we had a very good quarter in Q4 with our sale to SMG, the Shanghai Media Group. It was a multi-million dollar sale but was an important win for us against some stiff local competition, so I think it shows that we've got a very strong offering in Asia as well. So there hasn't been a major shift. The U.S. continues to do well. Europe continues to do well and we're seeing an uptick in business in Asia.

I guess also on the broadcast side, as you alluded, to deal sizes are going up. Is that also pointing to increased implementation times? That's where we maybe saw revenue six months after a deal was signed. It's stretching out longer than that?

Good question and I think the answer to that would be that implementation times would be extended if complexity of the installations was increasing. We haven't seen that as much as just larger systems being installed and these get easier for us over time as more things just become comfortable and we're more familiar with it. So I haven't seen an increase in the amount of time for implementation so it's just been overall the installations being larger.

Great. And Paul two quick questions. Can you give me a headcount at the end of September as well as at the end of December? And then I guess as you look at the allowance for receivables went up again this quarter after jumping significantly in September. What is going into that allowance? Thanks.

In terms of headcount, headcount was relatively flat. We ended September at 2,621 and ended December at 2,613. So eight people lower in December than September.

Great. And the allowance question?

And the allowance question, I'd have to go back and look specifically at what's in there. The --

We can take it offline.

The receivable - the big change in the receivables allowance over the course of the last year I think in terms of the December '04 balance sheet to the December '05 balance sheet I think there's about a $13 million increase in the allowance. Eleven or 12 of that increase in the allowance is sales returns allowance related to the consumer business that didn't exist there in '04 and is now part of that allowance. So that allowance against receivables is not a bad debt allowance. It's got three components to it. Bad debt allowance which is let's say around 5 million and then resell or rebate reserve allowances and sales returns allowances that make up the bulk of that account.

Thank you.

Okay.

And at this time we have time for one more question and it comes from Sasa Zorovic with Oppenheimer.

My question was you used give guidance or ratings are basically of the new deployment space into the broadcast side for the year. Either you didn't give it or I didn't write it down. Basically what you would be expecting for '06.

Sasa, you're cutting in and out, so we're not getting the question.

So let me -- can you hear me better now?

Yes.

So basically you used to give in the past that kind of a range or like guidance if you would for the number of broadcasting deployments you would be expecting for the year. You either didn't give it or I didn't write it down.

We didn't give it.

Could you give us at least - directionally do you think it would be probably less than last year or what you sort of delivered here would be more than that?

I don't think -- if we were giving a number it wouldn't be lower than this in this year. We're certainly looking for continued rapid growth in the broadcast business overall in terms of revenues.

So if you were to see sort of -- if you looked at the lower end versus the higher end sort of post production markets which would you say would be at this point sort of growing faster in terms of - not in terms of units but rather in terms of dollars?

Well there's a few things. I guess if you just say which one's growing faster I think the lower end of the market's probably growing faster because we're seeing a significant increase in seat count. Just to give you an example in our own business, Xpress Pro had a record unit quarter in Q4, so our best ever, and we also had a really strong quarter with Mojo which is our standard definition low end IO that goes along with Xpress Pro. So that part of the business is doing well so we're participating in that. The higher end of the business I would say probably isn't growing but it's a substantial replacement opportunity. So it's not growing as rapidly as the low end but it represents bigger dollars and that infrastructure is converting over to HD.

Would there be any potential of maybe ASP pressure if you would if the performance of the lower end improves?

I think that's a classic battle that goes on and that the burden in essence is on the higher end to continue to improve performance and functionality to support the price points. I'd look at our own Adrenaline product which we obviously are very to in terms of what the ASPs have been over the past almost three years now since it was introduced. And those ASPs have remained roughly the same over that entire period. So as long as we continue to expand the performance and capabilities of the product we see the price point able to stand and we also are always looking for ways to improve the performance.

Just to add to that comment I think when David's answering that question he's talking to the high end editor revenue and low end editor revenue. In our professional video business in the high end of the business in addition to the editor revenues we have the growing service revenues being sold into that space as well as the continuing growth out of the storage sales.

And worth adding onto that we also had a record sale in our workgroup products. So we're seeing higher desire among customers to have the capability to work together in collaborative solutions and so in Q4 we had a record in our workgroup sales.

Thank you.

Okay, thanks Sasa.

And at this time, this concludes the question-and-answer session. I'd like to turn the conference back to Mr. Krall for concluding remarks.

All right. Well thank you for joining us today. Sorry for running over, but should you have any further questions, please feel free to contact us and we look forward to speaking with you again next quarter. Thank you.

This concludes the Avid Technology conference call. We thank you for your participation and you may disconnect your phone lines at this time.