Avid Technology Inc (AVID) 2006 Q1 法說會逐字稿

Good day and welcome, everyone, to the Avid Technology First 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’m Dean Ridlon, Avid Technology, Inc., 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 product shipments, a 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, all forward-looking statements represent our estimates only as of today, May 4, 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 direct and 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 website, www.avid.com.

And now, I’d like to introduce David Krall, President and CEO of Avid.

Thank you, Dean. I’m David Krall and I’d like to welcome you to our First Quarter 2006 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 last week’s National Association of Broadcaster’s Convention. 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. Our results for the quarter were in line with the preliminary results announced on April 11th. Revenues in Q1 were $218 million and a non-GAAP net income for the first quarter was $16.1 million or $0.37 per diluted share. I would now like to hand it over to Paul to review the quarterly numbers in 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 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 adjustments to our GAAP financials are significant, so let me take a minute to summarize them.

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 meaningful insight into our operating performance and our cash flow generation capability.

The following adjustments were made to our Q1 GAAP P&L to arrive at our non-GAAP financial measures, 1) Non-cash acquisition related amortization and in-process R&D charges totaling $9 million; 2) restructuring charges of $1.1 million related to personnel reductions in our consumer business unit; 3) non-cash, stock-based compensation charges of $4.4 million. Our non-GAAP tax expense was $1.8 million higher than our GAAP tax expense because we removed the tax benefits related to the excluded non-GAAP operating profit items.

Again, most of my P&L comments which follow relate to the non-GAAP measures included in our release which is posted on our website along with the comparable GAAP measures.

First quarter revenues were $218.1 million, up 31% from the first quarter of 2005 but down more than 10% from Q4 of 2005. Excluding the estimated impact of the Pinnacle acquisition, revenues were up approximately 3% to 4% year-over-year and were down approximately 6% to 7% sequentially. We had anticipated a sequential decline in our revenues but we experienced a more significant decline than we were expecting. Currency had an estimated negative impact on revenues of $9 million to $10 million year-over-year but little impact on the sequential change in revenues.

Professional video business unit revenues were $116.2 million, up 11% year-over-year but down approximately 10% sequentially with all of the decrease coming from sales into the broadcast market. Excluding the estimated impact of the Pinnacle acquisition, professional video sales were down approximately 7% year-over-year and 9% sequentially.

As I said in our earnings press release, Q1 professional video revenues were negatively impacted by lower than expected sales of broadcast products including Playout Servers and On-Air Graphics as well as Add-On and Local Storage. Roughly 50% of professional video sales for the quarter were to the broadcast market and 50% were to the post-production market.

Operating profits of the professional video unit was $10.1 million, or 8.7% of revenue. Consumer video revenues declined by $11.5 million sequentially to $29.1 million in Q1 reflecting seasonality and the continuing impact of the early Pinnacle Studio 10 quality issues. European consumer video sales were well below our original plans. Roughly 60% of consumer sales in the quarter were home editing products and our consumer business unit had an operating loss of $2.4 million.

Audio business unit revenues were $72.7 million, up 18% year-over-year and down approximately 2% sequentially. In audio, we had strong sales with our traditional core products as well as strong sales of our M-Audio line of products. Operating profits for the audio unit was $9.6 million or 13.2% of revenue.

GAAP gross margins were 49.7% including acquisition-related amortization and stock-based compensation. Non-GAAP gross margins were 52.2%; roughly the same as in Q4. Higher professional video business gross margins were off-set by substantially lower consumer business unit gross margins. Consumer gross margins were negatively impacted by lower margins on PC TV product sales.

Non-GAAP operating expenses were $96.5 million, up slightly from Q4 2005 and non-GAAP operating profit was $17.3 million. Non-GAAP income before taxes was $19.3 million and our non-GAAP tax provision was $3.1 million resulting in non-GAAP net income of $16.1 million or earnings per diluted share of $0.37 on $43.2 million average diluted shares outstanding.

Our cash position was up slightly in the quarter to approximately $239 million. Decreases in accounts payable and accrued expenses consumed cash of approximately $13 million and the Medéa acquisition combined with ongoing capital spending accounted for an additional use of cash of approximately $14 million. Accounts receivables declined in line with sales with DSOs remaining in the low 50s. Inventory increased by approximately $4 million sequentially as a result of the Medéa acquisition and an increase in demo inventory related to the NAB trade show.

I will be back to update guidance for the rest of 2006 after David reviews some of the highlights from the recently concluded NAB Convention.

Thanks, Paul. I’d like to continue with an overview of our business segments starting with video. Now on the past several calls we’ve discussed the industry and market trends that drive our business. While the market opportunities that we’ve discussed on previous calls are still very much in play given our proximity to NAB, which is our largest trade show of the year, we’d like to shift the focus this quarter and talk about the products and initiatives that we just launched at the show.

In summary, this year’s NAB was a very strong show for us. We introduced new and enhanced products across a wide range of our business segments and the reception from customers, resellers, partners and press was extremely enthusiastic. In fact, our raw leap count where the sales lead information we collect from attendees during the show was almost 50% higher than last year and represents the highest lead count we’ve had in the past five years.

I won’t have time to cover all of our NAB news on this call but I would like to share the main highlights and give you a good sense of how Avid continues to distinguish itself as a leader across the industries we serve.

The main pillars of Avid’s strategy at this year’s NAB were unchanged from prior years. These four pillars are - building great products for the world’s content creators; tying them together so our customers can work across media disciplines - we refer to this as interop; delivering open solutions based on open standards such as MXF and AAF and providing great customer service. These four categories help to delineate our new product announcements at the show.

In the first category, building great products, we had enhancement to almost all major product lines in both post and broadcast; but the big product news of the show was our introduction of a new software-only version of Media Composer priced at under $5,000 which is available for both desktops and laptops for the Mac and PC and it delivers the full Media Composer Creative Tool Set as well as comprehensive HD support.

We also introduced Avid’s Mojo SDI, a new member of the Avid DNA family which adds a serial digital interface to our previous generation of Avid Mojo accelerators. These products provide Avid with a new price point for lower-end professionals with a cost of under $7,500 for both the editor and hardware accelerator.

In the second strategic category of interop, we took several substantial steps forward this year. We showed dramatically improved workloads between Media Composer and Pro Tools, now with the ability to edit video from right within the Pro Tools Digital Audio Workstation. But the big news on interop and some of the biggest news at NAB was our announcement of Avid Interplay, the world’s first non-linear workflow engine. Interplay is truly a revolutionary product and represents a new paradigm both for Avid and for the industry as a whole. In many ways, we believe the movement to non-linear workflow will fuel the next major wave of innovation for our industry along the lines of the introduction of the non-linear editor itself in the late 80’s or the advent of shared storage networks a decade later.

Today, both of those technology paradigms are firmly entrenched as standards in the media production process but now the challenge of managing the complexity of non-linear workflow is the next frontier. And that’s what we’re addressing with Interplay.

Interplay is worthy of a little explanation. It was born out of the need to help our customers improve the efficiency of the overall media production process. Our customers have many tasks they need to complete that fall outside of the traditional editing process like finding and saving media, tracking revisions and managing sign-offs; tasks that Avid products aren’t typically involved with. Interplay was designed to tackle this challenge head-on in an integrated and comprehensive fashion.

So what is Interplay? As the world’s first non-linear workflow engine, Interplay combines integrated asset management, workflow automation and security control into a single system that offers an enterprise-wide workflow for any media production facility. In a nutshell, it connects teams to a shared data and media backbone and smoothly manages the flow of projects from start to finish using security and powerful revision control. Users can search, archive, view and track every asset associated with a project from media files to scripts, story boards, budget spreadsheets and more. They can also use the system to automate routine production tasks like transcoding and multi-resolution end-coding which up until now have been labor intensive and often required additional manpower. The system is open to any media production environment natively accommodating more than 100 different media and non-media file types. And it can link to production tools from virtually any third party.

Interplay extends work plug capabilities far beyond the editing suite so that everyone with production responsibilities can work more efficiently. This includes producers, graphic artists, assistant editors, IT administrators, writers and story board artists, video and audio editors, directors, archivists and even legal and finance departments. They can all use Avid Interplay to streamline collaboration between people and entire departments. Both facilities and broadcasters both large and small were extremely enthusiastic about Interplay; and as we mentioned in our press release earlier today, TV Technology Magazine recognized Avid as a Superior Technology Award recipient at NAB for this innovative system. We’re looking forward to working closely with our BETA customers over the months ahead to put the finishing touches on Interplay in preparation for shipping the system this summer.

In addition, Interplay interfaces are now being built directly into our content creation tools. All new Media Composers will be workflow intelligent, meaning that anyone using the system in an environment with Avid Interplay can take advantage of integrated asset management and workflow automation tools. For example, when connected to Interplay, Media Composer editors will have a live window into the asset management system and will be able to browse through the entire asset library from right within the editing interface. This is a significant step forward in the area of facility-wide collaboration.

The third category of our strategy is delivering open solutions based on open standards. This year we announced Avid’s open storage initiative which allows customers to run third party applications on Avid’s storage systems. This was big news because for years people have said that Avid’s infrastructure really hasn’t been open. Well, now we’re ending that debate. It doesn’t matter whose name is on the editing system or what tools our customers depend on most; because any third party MAC OS X or Windows XP Content Creation tool can work with our VideoRAID and Avid Unity product families. This removes one of the main barriers for adopting Avid’s storage infrastructure and based on the positive response we’ve received from customers on this initiative, we expect that this will lead to more storage sales for Avid.

In addition to opening our storage, we announced expanded capacity and bandwidth of all of our shared storage configurations including tripling the storage of Avid Unity ISIS to 192 terabytes.

Moving now to the fourth category of our strategy, delivering excellent customer service, I’d like to highlight a major new initiative we’ve launched at NAB called ALEX for the Avid Learning Excellerator. For many of our customers, ensuring that all members of their production teams are properly trained is a significant challenge and this challenge grows as new products are introduced, businesses expand or staff turnover occurs. With ALEX we are now able to offer facility-wide instruction for our customers through web-based classes provided directly from Avid on virtually all of our products. The response we received at NAB for this type of learning tool was overwhelming from broadcasters, post-customers as well as educational facilities. Several schools discussed adding ALEX as part of their course curricula in media education and it is also available for independent professionals seeking to advance their skills. We’re not aware of any other company in our industry that offers this kind of training and we’re looking forward to creating an entirely new revenue stream for Avid’s video business with ALEX.

These are all just a few of the high points of our announcements at NAB. For anyone who is interested, we’d be happy to talk off-line about other news items from the show. You can also find information about all of these items on our website.

In addition to our NAB news, there were other key developments in our video business that I’d like to touch on. The first was our acquisition of Medéa Corporation in January which rounded out our storage business with a new line of low cost, high performance RAID storage devices for professional content creators. As with other acquisitions we’ve made in recent years, Medéa helps to further strengthen our business by giving us access to proven technology that compliment an existing product area - in this case, RAID Storage.

Along similar lines we also acquired Sundance Digital, a developer of broadcast automation and device control software for broadcast station equipment. This acquisition gives us further leverage in providing an increasingly wide range of tools for our broadcast customers to produce, manage, control and playback television programming. Both the Medéa and Sundance acquisitions represent targeted opportunities within our video business and will continue looking for ways to compliment our internal development efforts with outside companies that play into our broad strategy of delivering advance solutions to professional content creators.

Turning to audio, we reached a major milestone selling over 1,000 units of our Digidesign Icon system since the product was introduced just two years ago. Typically, large format audio consoles are slow to catch on but Icon has really defined its own category by consolidating all of the major audio production processes into a single environment. This has made Icon the top choice of a wide range of audio professionals from the engineers who mix the Grammy Awards to the top Oscar-winning film mixers in Hollywood.

At NAB Digidesign also demonstrated a new version of Pro Tools software that offers smooth interop with Avid editing systems, support for Avid Unity ISIS and a host of new mixing capabilities for audio professionals. In other areas of our audio business, M-Audio delivered a very strong quarter as a number of new products performed above expectations including the Micro Track Mobile Digital Recorder, Studio File BX 5-A Speakers, FireWire 410 Mobile Recording Interface and Project Mix Control Service. We continue to expand the distribution of M-Audio’s products beyond the music industry channel to the consumer channel in the U.S. and we are now implementing the same strategy in Europe.

In our consumer business, Paul mentioned that we were negatively impacted by some of the earlier quality issues around Pinnacle Studio 10, particularly in Europe. I am pleased to say that we have substantially addressed those issues in Pinnacle Studio Version 10.5 which is being branded our Titanium Edition. This version is being rolled out through worldwide distribution and is also available from Pinnacle’s website. In addition, we’re continuing to leverage Pinnacle’s powerful distribution channel by exploring, licensing and distribution opportunities of third-party consumer products. Our most recent example is the [Ro-Ku] Sound Bridge which enables users to listen to internet radio and digital music files on home audio systems.

That wraps up our business overview. We’re very encouraged by our strong showing at NAB and by the positive responses from our partners and customers. We expect the products we unveiled at the show to contribute to Avid’s continued growth and success during the rest of 2006 and beyond.

This concludes our overview of our business segment. I’d like to now hand it back to Paul for guidance on the balance of 2006.

Thanks, David. Our outlook for full-year revenue is a range of $940 million to $970 million and our outlook for non-GAAP EPS is a range of $2.15 to $2.40 per diluted share on 43 million to 44 million average shares outstanding. Non-GAAP EPS excludes approximately $55 million of charges net of a $1 million tax benefit. Except for the $1.1 million restructuring charge, the other excluded items are all non-cash charges; acquisition-related amortization and in process R&D account for about $37.1 million of the excluded charges and stock-based compensation accounts for approximately 17.4 million. Including these charges, GAAP EPS would be expected to be in a range of $0.90 to $1.15.

Non-GAAP gross margins for the year are expected to be in the area of 52.5% to 53%; GAAP gross margins are expected to be approximately 50% including $24 million of acquisition-related amortization and stock-based compensation. Non-GAAP operating expenses are expected to be between $395 million and $400 million. GAAP expenses would be higher than non-GAAP by the amounts previously mentioned. We currently expect other income for the year to be approximately $9 million. Full year GAAP tax expense is expected to be $14 million to $16 million and non-GAAP tax expense is expected to be $15 million to $17 million. The reason for the higher non-GAAP tax expense is that we exclude benefits related to charges excluded when we calculate non-GAAP income

We expect revenues for Q2 to be in a range of $218 million to $225 million. The guidance that we’re giving for Q2 reflects the deferral of revenue that is associated with customers who require the feature set in Interplay was expected to ship in Q3. We expect Q2 operating expenses to increase by $4 million to $5 million from Q1 due to NAB spending and the acquisition of Sundance Digital at the beginning of the quarter. As a result, we are currently expecting non-GAAP EPS to be in a range of $0.30 to $0.37. GAAP EPS is expected to be at break-even to $0.07 per share and includes $4.5 million for stock-based compensation, $9.7 million for acquisition-related amortization and in-process R&D charges and other tax benefits of $1.1 million.

For Q3, we currently expect sequential increase in revenues combined with a sequential decline in operating expenses. Therefore, we would expect a significant improvement in EPS in Q3 versus Q2, as much as $0.25 a share improvement. For Q4, our current expectation is for another significant sequential improvement in EPS based on increased revenues partially offset by slightly higher operating expenses.

Our results for 2006 continue to be back-end loaded with more than 40% of our full-year EPS expected to come from Q4 results. We expect to end 2006 with approximately $315 million of cash.

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

[OPERATOR INSTRUCTIONS] We’ll take our first question from the line of Gene Munster with Piper Jaffray. Please go ahead.

Hey, good afternoon, buddy. David, just to revisit a high level question from previous calls, the trends in your business are undeniable and your competitiveness remains strong but there still is puzzling difficulty with meeting expectations. Can you talk about how much of the fluctuations over the last quarter specifically but even the last couple of quarters has been related to issues with the Pinnacle, the transactions related to Pinnacle, maybe competitive challenges, market challenges, just help us -- if you look at 100% of the challenge, maybe think 70% is related to Pinnacle, 10% --? Just sort of some parameters to think about at least some of the challenges and then I’ve got a follow-up question.

Sure. Okay. So just to break down again at a high level if you look at the biggest change in our expectations, initially when we were targeting hitting over a billion dollars of revenue this year versus the range that we just gave today, I’d break it into three buckets. One-third of that has been directly the result of lowered expectations for Pinnacle’s consumer business and we all understand what the issues are there relative to initial product quality on Studio 10. As I mentioned, we believe that we have those behind us at this point with Studio 10.5; however, we’re still having that impact flow through the system. So that’s the first third of it.

The second third is related to our lowered expectations for Pinnacle’s broadcast products, in particular Media Stream and Deco. And the cause for that, we believe, is that as we purchase Pinnacle’s product line and have now made that part of Avid’s product line, it is not yet integrated with the rest of Avid’s complete workflow and as a consequence, it’s actually easily targeted by competitors to sell directly against one-off basis. Now as we integrate those products into Avid’s family, we believe that that weakness will be eliminated; but where we are right now is in a transitional period where the product line is vulnerable and that’s what we’re seeing happen competitively.

The last third I’d break into two buckets. One is, as we mentioned, our slight decline in our storage business and then the other piece was just the delay in revenue associated with big deals in broadcast. And that comes associated with revenue recognition issues that we have had on an on-going basis and at this point what we’ve done is just said, “Look, let’s set expectations at a level that incorporates the complexity of recognizing revenue around big deals and let that be the new base line moving forward.” We believe that by unwinding those revenue recognition complexities, it will be easier for investors to look at the business and to get a better sense of what’s going on.

On that big deal side, the big deals in broadcast, the market as far as moved to digital workflow is debatable how much has been captured but obviously less than half. Do you think that some of the bigger broadcasters have essentially already switched over and there’s just less business out there? Is that part of the problem because delaying big deals, there must be something going on beyond that?

We don’t actually believe that, in fact, we continue to see growth in the size of some of these big deals that were coming. In fact, two deals that came in late in Q1 - in fact they weren’t even booked in Q1 - they actually are coming in in Q2 in terms of us signing the contracts for them; but two deals taken together represent a total contractual coverage of roughly $15 million. So those sorts of deals continue to come in and, in fact, we’re seeing deals that are even bigger than that; so we don’t feel that there has been a complete capture of all of the large opportunities and, in fact, we continue to see many of those in front of us in our broadcast pipeline.

One final question and then I’ll turn the call over. Three years ago you guys lowered price on Adrenaline and it had a significant impact on the demand of Adrenaline. It just seems like you guys hit the sweet spot in terms of the pricing. Do you expect that same kind of acceleration with the recent price change in Adrenaline?

There are two things that we’re hoping to achieve. Adrenaline, itself, has been lowered - or, in fact, if you look at it -- the other way to look at it is to say that in essence we’ve preserved the price point at roughly $23,000 but we’re now giving much more value to that by incorporating the DNxcel capability. So it now has inherent HD capability right into that Adrenaline configuration.

The other part of this, though, is the software-only Media Composer. So now a prospective Media Composer customer has the two choices of taking a software-only system or a hardware accelerated version. So we do expect to see increased sales as a consequence of the new pricing for Adrenaline and we’re also expecting to capture an increased portion of the market with the new $5,000 software-based Media Composer; and just to give you a sense of how we believe that that market configuration will be adopted, the recent announcement that we just had around Wexler Media, with them having the $2.5 million purchase, Wexler purchased the software-based Media Composers in combination with Unity configurations. And this is consistent with our view that increasingly customers will look at shared storage as an inherent component of your editing configuration and Wexler has chosen to purchase that configuration.

I guess one final question is that you had all of two weeks to kind of gauge customers’ response to the “more feature at the same price,” I guess, with Adrenaline. Has that filtered through? Have you seen an initial bump-up or does this take kind of quarters to generate the buzz?

It takes a little while for us to get the complete response from end-users. I can tell you that form a reseller point of view, because we do our reseller training at NAB, that the reception was very positive for that and our resellers feel optimistic that that will be a configuration that people are looking to purchase.

Okay. Great. Thank you.

David, Gene, if I could just add one point to what David had said about the large broadcast deals, just to kind of give you an example of that, right around the end of the first quarter we signed two large contracts with two different broadcasters and those are sort of the master contracts under which they expect to place orders. And the estimated orders coming out of those two large contracts are approximately $15 million worth of business for the Company. It’s all based on existing -- or it’s based on the currently offered technology including Interplay. On the other hand, based on the size of the deals and the customer’s requirements for how those will get rolled out, there will be very little of that $15 million that will actually be revenue in 2006.

Okay. Great. Thank you.

We go next to the site of Paul Coster with J.P. Morgan. Please go ahead.

Yes. A few quick questions on guidance, if I may? First of all, Paul, I missed your comments about deferred revenues and Interplay. Could you just repeat that and explain to us the rationale for it?

What I said was that the guidance for revenue that we provided for Q2 anticipates that there will be some deals for which we will not be able to recognize because they include Interplay which doesn’t ship until Q3.

Okay. Got it. Right. And then as we look at the guidance, it sounds like we will see 218 to 225 in the second quarter and a slight increase in revenues in the third quarter - is that correct - and then a bigger increase in the fourth quarter?

We’re expecting a pretty significant sequential increase in Q3 as well as in Q4.

Okay. And then what is the mix shift in the business as we progress through the year? Should we assume that there’s a shift towards broadcast or how do you see these things playing out there?

Yes. I would say so. As you shift out through Q3 and Q4 some of the new product in the Media Composer family as well won’t ship until late this quarter so we’re not expecting a big pick-up in that this quarter; but that will also add to the ramp in Q3. But the fourth quarter relative to the second quarter is based on a significant ramp-up on sales to the broadcast market based on orders that we expect to be taking in this quarter and next quarter as well. And then, obviously, as well in the fourth quarter gives an expectation for a typical ramp up in the consumer business in the holiday season.

And my last question is in the third quarter I believe operating expense comes down in absolute dollar terms owing to at least the NAB costs passing through the system; but then when you say that OpEx goes down in the fourth quarter, is that as a percentage of revenues or in absolute terms and if it’s the latter, how do you do that?

I don’t think I said that. What I said was in the fourth quarter we expect another significant sequential increase in EPS based on another ramp up in revenue from the third quarter offset slightly by higher operating expenses in the fourth quarter.

Oh, I’m sorry. Okay. Great. That’s my questions. Thank you.

Thank you. We’ll next go to the site of Sasa Zorovic with Oppenheimer. Please go ahead.

Thank you. So my first question would be regarding your guidance for the remainder of the year, how much of it is coming from the new products announced at NAB?

Sasa, I don’t have a break-out of that; but as you know most of our new products are new versions of existing products. So that would lead you to believe that a very significant proportion of the revenues in the let’s say third and fourth quarter are coming from products announced at NAB, but it would be the new version of Media Composer as opposed to the older version; it would be the new version of Broadcast Solution including Interplay instead of it’s predecessor product.

And then are you planning a new version of [Inaudible] Leader this year beyond 10.5?

Studio?

Yes.

We’ve not made any announcement of a new version of Studio; the main objective that we had so far this year, Sasa, was fixing some of the initial product quality issues related to Studio. And, as I said, Studio version 10.5 has just been released. It’s now working its way through worldwide distribution. In fact, you can even buy a copy up on Amazon. That’s all that we’ve announced right now. However, that’s not the only thing that we sell in our consumer business. So there are things that you should expect our new versions of products in our PCTB line as well as some brand new products that we’re launching in our Dazzle product line.

What are some of the steps that you have taken in order to make sure that some of the quality issues do not sort of repeat in terms of - I don’t know - QA or release cycles to maybe adjust for a longer QA or something like that?

Well, I think there was an unusual set of circumstances or an extraordinary set of circumstances that happen around Studio 10 because Studio 10 was being built and put into the pipeline right as the acquisition was taking place; and in retrospect I think a lot of pressure may have been building internally at Pinnacle prior to the acquisition to make sure that that release stayed on track. Subsequently, after the first version was released we realized that the initial product quality was actually very different than what we would have chosen to ship as a shipping product to customers. So we -- I don’t even think that the systems or personnel need to have anything different other than not have the extraordinary pressure of an acquisition going on at the same time.

That said, we have put other things in place to make sure that we are ensuring product quality on shipments to customers and I think that you will find that moving forward we are operating a much higher standard. I’ll just give you one data point that I just got - the return rates for Studio 10.5 are almost a third of what the return rates were for version 10.0 and 10.2. So we think that 10.5 has done a substantial portion of the work needed to get that product up to the quality that we need.

Thank you.

Next we’ll go to the site of Richard Ingrassia with Roth Capital Partners. Please go ahead.

Thanks. Good afternoon, everybody. I’d like to get back to high level customer dynamics if that’s okay. What degree, David, would you say that Avid customers who have historically bought in the middle price range for lack of a better word have been moving up market to the HD intensive, the high-end Nitris family, versus moving down-market to the more price competitive sub-$5,000 price-point?

Well, in general when we look at an Avid customer, usually they own several of our systems. So what ends up happening is you’ll find somebody who is working with Media Composer Adrenalines for off-line work and then they will finish that on a DS Nitris or, now, on the newly started shipping Symphony Nitris product. So people tend to have a mix and they may - that same customer may have had versions of Express Pro running on laptops. The portion of the market that we were really absent in was the below 10,000 range; something in between $1,600 and $10,000 and that business was in some cases being forced down because for people to go up it was a big leap to go from 10,000 to 25,000 where Adrenaline was previously priced.

So what we’ve done, now, by putting in the software-based Media Composer and Mojo SDI is we’ve now given a target price point that’s in the $7,500 range which we think is in another important sweet spot that we were previously missing and I think that we will be able to up-sell business from Express to Pro customers into that market segment.

On the other hand, if we look at the Adrenaline customer and you say, “Well, geez, are you worried that the Adrenaline customers are going to now go down market?” That was the reason for putting the DNxcel board into the Adrenaline product to now give that real time DNXHD encoding and overall acceleration to the Adrenaline customer-base. So we feel like we’ve really filled out our product line in an important way.

Okay. Thanks. And just one more - historically one of the more predictable traits of your video business, I guess, has been pricing power and in that sense I’m a little concerned about storage becoming a larger portion of the mix. Can you maybe characterize the - in a general way - the expected rate of price erosion in your new storage solution versus industry bench-marks and more agnostic, off-the-shelf solutions?

Let me just kind of make two parts of this comment. The first is relative to a potential belief that some people may have that the margins in the storage business are not good. I should just clarify that. Our margins, for example, in our ISIS business are very good and comparable to our other post-products. And the reason for that is that there’s an incredible amount of software value add that we provide for the overall solution that gives differentiating capabilities. So by no means is that comparable to something that might be a piece of dump storage. So that’s one part of it.

Relative to erosion, the biggest thing that let’s us charge less for storage when we end up lowering our prices for a given size of storage system is actually the underlying cogs going down because, as you know, storage prices have been declining faster than [Moore’s] Law, has been causing improvements in processor pricing, so the storage market is an inherently downward driving trend and the way to maintain prices is to continue to offer more and more storage at the same price and then to continue to provide value-added software which we do with the Avid Storage Solutions.

Okay. Thank you.

We go next to the site of Steve Lidberg with Pacific Crest Securities. Please go ahead.

Good afternoon. David, with regards to the broadcast business over the last couple of years you’ve had a lot of success in North America. As you look at the business going forward, is it transitioning to being more of an international opportunity for you or how do you look at kind of your penetration into U.S. opportunities?

Good question. I actually feel like the U.S. and Europe are fairly parallel in terms of their progress that they are making. If we look at our new deals that we got in Q1, roughly comparable out of both of those markets which is what you’d expect if you just looked at the overall opportunity there. So we’re not seeing a slowdown in either market; both are continuing as expected. The one place that I think is just lagging a little bit is Asia, although we’re continuing to see our business in Asia grow. It’s just not currently at the size that would be representative if you just looked at the overall size of the collected economies there. So if you think which market is going to be later to develop, I think it’s going to be the Asian market but I think it will be every bit as big as the U.S. and European markets.

And David, as you look at introducing a lower cost solution for the broadcast facility, how do you think about distributing that product or service. Is the model shifting to be one where you’ll actually have more direct -- indirect business or will it continue to be primarily a direct sale?

That’s exactly right. The first order to decide how to do it is actually what the customer wants. Very often customers will choose to work with Avid directly; however it’s more common in smaller markets than in larger markets that customers will want to work through a reseller because they are buying some product from Avid but they might be buying cameras and other gear and they’d like to buy all of that together from a local reseller and get the support locally.

So in those smaller markets it tends to be more of a channel business and we would expect to see that trend with our lower cost broadcast solutions.

Great. And lastly, what was the headcount at the end of the quarter?

2,700.

Thank you.

We go next to the site of Ian [Bagnon] with Bagnon Securities. Please go ahead.

Good afternoon. When you had an issue with ISIS in the second quarter of ’05, deferred revenue built up, will we see that trend again this year and can you give us any idea of the magnitude?

Well, in order to hit the expected sales levels for Q3 and Q4, our plans do call for a ramp up in orders to broadcast customers starting this quarter and continuing in Q3. In terms of the way we do accounting for broadcast deals, we don’t - as soon as we book an order even when we ship a broadcast order - we don’t necessarily create deferred revenue. We only book deferred revenue when we get a cash payment from the broadcaster which is typical to get cash along the way. So with an increased rate of orders for broadcast and, therefore, presumably increased deposits related to those you would see increases in deferred revenue.

I guess what I’m driving at, Paul, is we’ll see some trend which will suggest to us, “Yes, your orders are going up and they can ship in the following quarter.”

Yes.

Thank you.

Next we go to the site of Chris McDonald with Kennedy Capital Management. Please go ahead.

Hi guys. With some of the revised guidance being driven by timing on large broadcast deals, I’m wondering if the Company would consider ever publishing a backlog number on the broadcast business just to give investors for confidence or a better look to business going forward?

It’s something that we can give some more thought to. We don’t have a decision on that at this point today; but we can think about it because I know, especially in the current environment, it would be an important leading indicator for you.

Okay. Yes. That would be great. And then just one other question on options expense, it’s pretty significant when you look at the P&L on a GAAP basis and I’m just curious what the Company might be doing to reduce options expense going forward?

Well, that’s something that’s really under consideration by the competition committee of the Board of Directors at this point in time. Over the last several years the Company has substantially reduced the number of shares in its key employee stock option program. On the other hand, the value of the shares has gone up making the black [inaudible] value of an individual share higher. But the Board is stepping back from the whole thing and taking a look at alternatives to the current stock-option-based program, looking at restricted stock, looking at the dilutive issues and probably will be making some decisions over the course of the summer. But obviously the trend would be toward less, not more.

Okay. Excellent. Thank you very much.

We go next to the site of Vincent [Damasca] with Sentinel Asset Management. Please go ahead.

Good evening, gentlemen. Just to clarify some points, I guess, with regard to the earnings guidance and looking at the mid-points for the non-GAAP given for Q2 and then I guess the sequential ramp. If I just did the simple math and taking a full-year mid-point of 225 and backing into Q4 assuming once again that Q2 is at the mid-point as well, you’re looking at a significant jump from Q3 to Q4 in earnings. Is that likely to be seen and then my second question would be with one month already in the bag for Q2, have you seen the pick-up in broadcast orders?

I didn’t get the first question.

Well, the first question -- I’ll walk it right through. You had $0.37 in Q1, prior to taking the mid-point of Q2 of 33 1/2, a $0.25 sequential increase subsided for Q3 and to get to the mid-point of fiscal ’06 on GAAP guidance of about 225, you would have to be billing about $0.96 or about 42% of the full year’s earnings in Q4.

Yes.

Is that likely to be seen?

That’s the plan. In terms of the sequential increase in revenue that we’re expecting in Q3 that’s somewhat audio business driven; but substantially professional video business driven as opposed to the consumer business making a big contribution to that and the professional video business sequential increase is based on a pick-up in sales into the broadcast market as a result of the initial shipments in recognition of deals with Interplay that ships in the summer and the first full quarter of the new Media Composer family of products; and then going on into Q4 our plans call for in terms of ramp-up a substantial ramp-up in the consumer business revenue in the Q4 holiday season from the expected Q3 level or today’s levels along with continued improvement in the video business on the basis Of the business expectations we have for both post and broadcast sales.

Okay. Thanks. And then I guess just the second one on the broadcast side you were saying that you typically start to see a ramp in Q2 in orders from broadcasting and have you seen them with one month already behind us?

I just don’t have that data right now to break that out. In the second quarter obviously with NAB taking place in the third week of April not a lot would happen in the first few weeks of the quarter in anticipation of NAB so it would all be very recent activity. David, I don’t know if you want to comment on some of the lead issues and other things from NAB, but it was pretty positive.

Yes. It was very positive and the other thing was one thing that you’ve already mentioned, Paul, which was those two deals totaling $15 million in contracts that happened in the beginning of Q2. So that was actually a great start to Q2.

Thank you very much.

We go next to the site of Justin [Flowerday] with T.D. Asset Management. Please go ahead.

Hi there. Just wondering on a consumer business in 10.5, is there going to be a difference between - in terms of quality between those that buy the products for the first time and those who are already running let’s say 10.0 or 9-point, one of the 9 versions, and upgrade - is there going to be any type of -- or have you heard of any type of instability issues for the upgraded platforms? Thank you.

Well, just to let you know about how the process is managed, for somebody who has purchased any version of 10 prior to today, they actually have a free upgrade pack to 10.5 because the first and most important thing is making sure you take care of the customers and that they are satisfied with the product. So anybody who upgrades to 10.5 will have the complete and exactly identical version of 10.5 as somebody who just went out today and purchased 10.5 off of Amazon. So they will be identical in terms of what they are able to run.

Okay. Great. Thanks.

And ladies and gentlemen, we’ll take our final question from the site of Joe [Arsenio] with Arsenio Capital Management. Please go ahead.

Yes. I wanted to go back to this issue of Interplay. It sounds like this is a great product but it seems to have the effect of pushing revenues out. Is that a correct analysis?

Well, the short-term effect of Interplay is to do that because it doesn’t ship until Q3. So that’s the short-term effect. Longer-term the impact that we think Interplay has is it’s a great unifying piece of software that can tie together an entire enterprise. It does enable us to sell larger systems which may, in fact, take longer to fully implement; but that doesn’t have to be the trend because it also applies to smaller facilities, as well.

So if we think about this, then this is essentially a very significant plus after or in and after Q3; but between now and then it’s one of the principal causes of this revenue deferral. Is that correct?

That’s exactly right. Because what we think -- we made every effort to message the product thoroughly at NAB that, in general, will mean that any customer considering making a purchase in Q2 will be thinking about Interplay and will be hopefully making the decision to add that to their overall facility. The portion of customers who we believe fall in that category will have to have the revenue associated with that sale deferred until we actually ship the system in Q3. So we think that this is a short-term impact, we’ve included the effect of that in our guidance for Q2 and we expect that it will end in Q3 when we begin shipping the product.

And one further question on that. Is Interplay going to be one of these kinds of enhancements that’s sort of B1, B2, B3 and so on that you’re going to be introducing additional improvements to Interplay as we go along and how do you plan to price those out if you’re going to do that?

Interplay will be a product line that we continue develop and enhance over time. I would not expect any discontinuity in the pricing for Interplay so I don’t think there will be any disruption caused by some dramatic shift in pricing. What you should expect, though, is ongoing integration and ongoing filling out of the overall feature set for both post and broadcast environments.

And would your older - I don’t want to keep asking the question but - would your older products be backward compatible to Interplay or do those folks have to upgrade?

Oh, we’ve -- there’s two parts to this question. To get the functionality of Interplay, people do need to upgrade to it. But there’s another part of your question I’m saying, “Well, gee, if somebody had already integrated into a previous work group environment that Avid was selling, does that product need to be rebuilt in order to fit into Interplay environment?” And the answer to that is, no, it doesn’t need to be rebuilt because we’ve maintained the API or Application Program Interface from the previous generation. So a person will be able to get a full feature set on Interplay that they may have had in their workgroup 4 environment.

So at NAB your customers, then, were not drive crazy by this. They viewed this as a distinct positive as opposed to a reason to pull out their hair?

Absolutely. In fact, what was a very interesting thing, customers were enthusiastic because they absolutely understand the set of challenges that they’ve been facing that Interplay is targeted to address. In essence, if you think about workflow management, a lot of where our customers spend their time is actually not editing, it’s looking for media, trying to store it, trying to make sure that it’s been archived successfully, pulling it back out of archive, checking status; long list of things that editors don’t need to do or the editing software doesn’t do but that people actually producing media need to do. So what we’re doing is we’re solving an overall enterprise problem for our customers. If you think about it in a broad sense, the analogy in the business world is providing a solution like SAP, so enterprise resource planning for an entire business. Interplay does that for a media production company; so whether you’re a closed house or broadcaster large or small, you actually now have workflow management of your media production process.

That’s great. Thank you very much.

Ladies and gentlemen, I apologize we do have one final question which comes from the site of Paul Coster from J.P. Morgan. Please go ahead.

Yes. Thank you very much. Paul, you’ll have $315 million, what’s that $7.50 a share or thereabouts at the end of year. Are you going to do a buy-back, and if not, why not?

Well, we - management - at this point don’t have any authority from the Board to do a buy-back. It’s a topic that comes up from time-to-time that the Board considers taking a look at the level of cash, the stock price, the issues in the business and strategic opportunities and that sort of thing; and thus far has made a decision that they don’t want to do a buy-back. So I’m sure it will come up at future Board meetings and if they decide to change their mind, you’ll be the first to know.

Okay. Thank you.

Ladies and gentlemen, that does conclude today’s question and answer session. At this point in today’s presentation I’d like to turn the conference back over to your host for any additional and/or concluding comments at this time.

Paul, you meant that within the constraints of Reg FD, right?

Absolutely.

All right. I want to thank you all for joining us today and say that should you have any further questions, please feel free to contact us directly. We’ll look forward to speaking with you again next quarter.

And ladies and gentlemen, this does conclude today’s conference call. At this time we’d like to thank you for your participation. You may now disconnect and have a great day.