Avid Technology Inc (AVID) 2006 Q3 法說會逐字稿

We do thank you for standing by and welcome to today's Avid Technology third quarter earnings results conference call. Today's conference is being recorded.

And now I'd like to turn the conference over to the Director of Investor Relations, Dean Ridlon. Mr. Ridlon, please go ahead.

Thank you and good afternoon. I'm Dean Ridlon, Avid Technology Inc.'s Investor Relations Director. I would 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 and 2007.

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, pricing pressures, 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 our estimates only as of today, October 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.

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

Thank you, Dean, I'm David Krall, and I would like to welcome you to our third quarter 2006 results conference call.

In a moment, I'll hand the call over to Paul Milbury, our CFO, who will provide a detailed review of this quarter's financial results. I will discuss some highlights from the quarter: finally Paul will come back and update our financial outlook. Following our prepared remarks, Paul and I would be happy to take your questions.

Overall, our revenues for Q3 were $231.2 million, up 13% from the same quarter a year and up 4% from Q2. Our professional video business had a solid quarter with record broadcast bookings driving a 23% sequential increase in that segment's backlog, and healthy demand for our HD enabled post production solutions yielding growth in our post business.

As previously announced, we had a slowdown in demand at quarter end for DigiDesign's Pro-Tools HD systems. Now that many of the best selling third party Pro-Tools plugins have been ported to the Intel based Mac platform, we expect Pro-Tools HD demand to improve in Q4.

We've also addressed the stability issue with Pinnacle Studio 10 and are now focusing our development efforts on an upcome release of Pinnacle Studio for the new windows VISTA operating system. After the end of the quarter, we made some changes in the management of our video division, and I'll talk about those in a few minutes when I review the highlights from the quarter.

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

Thank you, David, and good afternoon, everyone.

As David said, revenue for Q3 was $231.2 million, up 13% from the same quarter a year ago and up 4% sequentially. Year-over-year service revenue was up 35%, while product revenue was up 11%. Excluding the impact of acquisitions, revenue growth was 6% to 7% on a year-over-year basis and about 4% sequentially.

GAAP gross margins were down about a point from the prior quarter to 48.4%, including $6.2 million of non-cash charges for acquisition-related amortization and $324,000 of stock-based compensation. These non-cash charges reduced Q3 gross margins by approximately 2.8 percentage points.

Video gross margins were stable relative to the prior quarter while audio and consumer gross margins declined from Q2. GAAP net income before taxes was $9.5 million and our GAAP tax provision was $5.9 million, resulting in net income of $3.6 million, or earnings per diluted share of $0.08 on $42.3 million average shares outstanding. Our GAAP tax rate was 62%, up substantially from the 21% Q2 rate, but we expect that rate in Q4 to come back down.

Utilization of some Pinnacle acquired tax assets and accumulative book tax rate adjustment had a negative impact on the tax rate in Q3. Our tax rate is expected to decrease to approximately 33% in Q4. Cash taxes, which relate principally to our foreign operations are expected to be in the area of $12 million for all of 2006.

On the page following the statement of operations included in our press release, there is a breakdown of the impact of certain non-cash items on our results. These items total $0.34 per share and include acquisition related amortization, stock-based compensation, restructuring, end process R&D and related tax adjustments.

The reason these items have been highlighted is that when we measure the performance of our business units and when we disclose our business unit segments externally, we do not include these items. I would now like to discuss the operating performance of our three business segments, Professional Video, Audio, and Consumer Video.

Repeating what I said earlier in addition to interest and taxes, we excluded the following items from our business segment results in Q3, $9.5 million of non-cash charges related to acquisition-related amortization, $4.3 million of non-cash stock-based compensation, a $1.6 million restructuring recovery that relates primarily to the reversal of a restructuring reserve for real estate that had previously been identified as excess, and finally $569,000 of end process R&D charges.

Professional Video revenues were up $7.7 million sequentially and were up 6% over the same quarter of a year ago. Gross margins remained in the mid-50s, stable with the prior quarter. Video operating expenses were down sequentially, as we ramped down marketing spending from the Q2 NAB quarter and because of lower variable compensation expense in Q3.

As a result Video operating profits increased sequentially by $7.3 million to $13.6 million or 10.8% of revenues. Video performed well sequentially, but fell somewhat short of their revenue plans. However, for the second quarter in a row, Video bookings exceeded revenues. As a result, Video backlog has increased by more than $30 million since the end of Q1, mostly in Europe.

Geographically, Video Europe business was up 24% sequentially and 9% over the same quarter of the prior year. Video America's business was up 9% year-over-year, but was level with Q2. Video Asia Pacific business was down more than 10% both sequentially and on a year-over-year basis.

Audio revenues were up 11% over the same quarter of a year ago, but were level with Q2. As we indicated in our press release on September 25th, we were concerned about slowness in sales of the Intel-based Mac Pro Version of Pro-Tools HD. Sales of Pro-Tools HD were down both sequentially and on a year-over-year basis.

Offsetting the decline in Pro-Tools HD sales were sequential increases in Pro-Tools LE, M Audio, and the acquisition of Sabalius during the quarter which added approximately $2 million to Audio's revenue. Audio gross margins declined sequentially, primarily as a result of the impact of the lower mix of Pro-Tools HD sales.

Audio operating expenses were up slightly sequentially as a result of the Sabalius acquisition during the quarter. As a result, Audio operating profits decreased sequentially by about $1 million to $9.3 million or 12.5% of revenues. Consumer revenues were up sequentially to $30.5 million, but gross margins declined by several percentage points sequentially.

Operating expenses were reduced in the quarter, but that only partially offset the decline in gross margins. As a result, consumer operating loss rose to $2.4 million from $1.6 million in Q2. Summing up the business segment results, total revenues were $231.2 million, gross margins were 51.2%, and operating expenses were $98 million.

Operating profits increased sequentially by 38% to $20.5 million or 8.9% of revenues. The items excluded for business segment operating profits were highlighted earlier. On the balance sheet side of the business, cash was down by $78 million to $160 million as a result of our $50 million share buyback and as a result of the $21 million acquisition of Sabalius.

Receivables were up with revenue and DSOs remained just under 60 days. Inventory was up by $12 million, with almost half of the buildup coming in our consumer unit as they prepare for the Q4 holiday sales season. In addition, we had an increase in inventory related to large deals that are in the installation and acceptance process. We also had an increase in Audio inventories due to their Q3 revenue shortfall.

Deferred revenues were approximately $67 million in Q3, about the same as in Q2. With the increase in Video backlog, some of you are probably wondering why there wasn't an increase in deferred revenue. There are two parts to the answer.

First, is that we received a number of very large orders on which we have not yet made any shipments. The second part of the answer is that non-recognized deals where products have been shipped to customers are not included in deferred revenue unless we have actually been paid.

Whatever payments we receive on these deals prior to revenue recognition are included in deferred revenue and the change in the quarter is driven by the characteristics of the deals moving in and out of the backlog.

I will be back to update guidance after David reviews some of the highlights from the quarter.

Thanks, Paul. At this point I'll spend the next few minutes giving an overview of our business segment performance starting with Video.

Video had a solid quarter with strong broadcast bookings, healthy demand for our HD post-production storage and work group solutions and record revenue and services. We also implemented an important management change within Avid Video, so let me take a few minutes to dive into each of these.

Total Video revenues grew a modest 6% over Q3 of last year. By market however, post-revenues showed strong growth increasing 24% over Q3 of last year. Recognized broadcast revenue was down 7% from last year due to recognition timing. But new broadcast big deal bookings were up over 85% from Q3 of last year.

While we cannot control the timing of revenue recognition for large deals, broadcast bookings are a good indicator of ongoing demand for our end to end broadcast solutions. These deals continue to increase in size as well, with Q3 representing our highest average deal size yet.

In addition, our backlog and Video grew again this quarter and is now over 50% higher than Q3 of last year. In post, revenue from all Media Composer products is up slightly sequentially and level with Q3 of last year.

We continue to see strong sales of the HD version of our flagship Media Composer system driven primarily by the industry-wide shift to high definition production. Last quarter, we reported that 38% of the Media Composer Adrenalin units we sold were fully HD enabled with our DNXL HD expansion board included. That compared to a longer term average of only 18%.

This quarter, we saw our HD mix to increase to over 50% of units sold. Our total Adrenalin unit sales are up compared to last quarter as well, totaling over 1,100 units shipped counting SD and HD versions and HD upgrade sales. Our software only version of Media Composer saw a doubling of unit sales compared to last quarter, excluding sales to education, which have special educational pricing.

This overall mix of our business is important because it highlights the market demand for an affordable software only Media Composer, while also validating the continued demand for hardware assisted systems for high end work. In storage and work groups, we had a strong Q3, particularly in our Avid Unity family.

All of our Avid Unity systems continued to perform well from our low cost land share system to our enterprise class Avid Isis system, which is nearing it's 200th installation since we introduced it just one year ago yesterday. Our Avid Interplay rollout is also going well, although given the range of the systems' complexity at each customer location, we're intentionally managing the Interplay rollout rate so that we can ensure successful implementations at each site.

In services, we're experiencing strong growth. This area is up 35% over last year and now represents approximately 22% of our total Professional Video revenue. This is extremely meaningful as our Video division continues to evolve from a point product vendor to a true solutions provider capable of helping customers solve complex business challenges.

As most of you know, we announced a change to our management structure a couple weeks ago, appointing Graham Sharp as the new General Manager for Avid Video. Graham was previously our head of European sales and has been a long time proponent of taking a more solutions-oriented approach to the business, and his success with the strategy in Europe speaks for itself.

As part of this change, Graham has already brought the Avid Video worldwide sales and service organizations under one roof to cement a solutions-based philosophy into the approach we take with customers and prospects. This approach will allow us to deliver better value for customers, while providing Avid with additional revenue opportunities within each facility.

We also believe that the shift toward becoming a more solutions-oriented business will allow us to do a better job of reducing the hockey stick at the end of each quarter, where we often find ourselves fulfilling a significant amount of the quarter's sales in the last few weeks of the quarter. We anticipate that a more solutions-oriented approach should help us to even out the selling and delivery of systems across the entire quarter, and improve our overall profitability and revenue predictability.

Switching now to Audio, most of you are already aware that we experienced some softness in Q3 due to our transition to Intel-based Macs, which stalled the sales of Pro-Tools HD systems and Audio peripherals. The slowdown was due in part to the large number of third parties who hadn't finished developing plug-ins for Pro-Tools systems running on Intel-based Macs.

Users typically won't adopt new versions of our systems until they know that their favorite processing plug-ins will work with the new versions. So despite the fact that Pro-Tools was running on Intel-based Macs by mid-September, the lag in plug-in availability contributed to customers delaying their purchases. Now that many of the best-selling third party Pro-Tools plug-ins have been ported to the Intel-based Mac platform, we expect Pro-Tools HD demand to pick up again in Q4.

And to assist our customers in this process, we now maintain a list of ported plug-ins on our DigiDesign.com Web site. While this softness had a negative impact on the Pro-Tools HD segment of our Audio business, it is worth mentioning that other parts of the division performed well.

Specifically, we saw strong sales for the new MBox 2 Pro home recording device and a range of new M Audio Pro Simmer products we introduced in Q3. It's also worth noting the success we've been having with our Venue Live Sound product family, although still a small portion of Audio's total revenue, sales are up 80% over last year. This is particularly important because we believe Live Sound is a good growth area for us in Audio.

Moving along to consumer, last quarter we talked about some of the changes we've made internally to our consumer engineering organization and development teams to make sure this business is running as efficiently as possible. We still have work to do, but we expect that some of the changes we've already made will begin to pay dividends in upcoming quarters.

For example, recent releases of Pinnacle Studio 10 have significantly improved product stability. These latest updated versions are now working their way through the channel. Plus, we've also been working to expand the channel by adding distributors such as Target to our list of more common electronic retailers.

We're also focusing on a number of new product development efforts including an upcoming release of Pinnacle Studio for the new Windows VISTA operating system which will enable the transition of Pinnacle software to this new platform once the consumer version of this OS becomes available next year. The PCTV HD Pro-Stick that we rolled out last month is an exciting new product that addresses the increased demand we're seeing in the PC TV tuner market, particularly overseas where Germany, France, and the U.K. reported 42% market growth in this segment from mid-2005 to mid-2006.

Looking beyond these specific products, the consumer marketplace in Digital Media is currently undergoing a major transformation, with rapid evolution of new ways to create, distribute, and consume digital media. While today this business only represents approximately 10% of our total revenue, the rapid growth in content creation and distribution creates many avenues for further revenue growth.

In addition, Avid has a great opportunity to capture mind share with the next generation of content creators as user-generated content continues to become an increasingly common source of digital content that gets mainstream attention. And with tens of millions of viewers watching user generated videos online every day, a snowball affect is taking place motivating other consumers to get into the content creation game as well.

As this user-generated market evolves, we believe there is value in linking the Avid and Pinnacle brands to this movement and having the market leading position in consumer editing provides us with a solid platform on which to execute our longer term consumer strategy.

So that wraps up our business overview for Q3. Now I'd like to hand it back to Paul to update our guidance.

Thanks, David.

In Q4, we are expecting higher revenues in each of our business segments. Sequentially, we are expecting revenues to increase by at least $10 million to as much as $20 million. With this range for Q4, our full-year revenues are expected to be in the area of $920 million, which is lower than our prior outlook.

In addition to somewhat lower full-year revenue from Audio as a result of our Q3 issues we discussed, we are being more conservative in our outlook for the consumer business holiday season and we are also being more conservative about the timing of revenue for our Professional Video business unit. In addition, a number of large broadcast deals that were previously included in our Q4 plans have been pushed out to 2007.

Other income is expected to be approximately the same as in Q3. GAAP tax expense is expected to decline to approximately $5 million, and GAAP EPS is expected to be $0.15 to $0.20 per share. Similar to Q3, the Q4 GAAP EPS estimate includes the following items, $9 million of acquisition-related amortization, $4 million of stock-based compensation, $1.5 million of potential restructuring charges, $2 million of additional related tax charges included in the $5 million GAAP tax expense mainly resulting from a higher percentage of the annual tax provision being allocated to Q4 for GAAP.

These items total approximately $0.40 per diluted share on approximately 41.7 million average shares. Now let's look at the outlook for Q4 from the perspective of how we measure the performance of our business internally, which is the business segment operating results. As I mentioned when we were talking about Q3 results, the business segment results do not include the items I just discussed.

In Q4, along with increased sequential revenues, we are expecting an improvement in our gross margins. The higher gross profits resulting from the sequential revenue and gross margin increases are expected to be partially offset by increases in operating expenses in Q4. Business segment operating profits are expected to increase by $4 to $6 million from the Q3 level.

Cash is expected to increase to approximately $200 million at year end, the expected improvement in cash flow is a result of both higher net income and a planned reduction in working capital due to reduced inventories. In the past at this time of the year, we have provided guidance for the following fiscal year. However, given the uncertainties I've previously discussed regarding the timing of large broadcast deal orders and large deal revenue recognition, for the time being, we plan to provide guidance only for shorter periods where we have more visibility.

Today, I will only be providing a high level review of our expectations for Q1 2007. I also want to give you a heads' up that we are looking at a transition of sorts in the tax area in 2007. Although there has been no significant change in the Company's economic tax position or outlook, there are changes coming in terms of our book taxes.

We still don't expect to pay any meaningful amount of U.S. taxes for a number of years and our cash tax obligations continue to relate primarily to our non-U.S. operations. However, after a number of years of sustained U.S. profitability, we expect during 2007 to reverse at least a portion of the 100% valuation allowance we have against our deferred tax assets.

This is a very complicated area, so I will try to keep it at a high level. If any of you require additional clarification after this call, I will be happy to spend the time with you to achieve that clarification. So what is likely to change in 2007?

Assuming we reverse a portion of our deferred tax valuation allowance in 2007, we would actually have a very low or even a negative GAAP tax rate in 2007 due to the tax benefit of the release of the reserve. Adjusting for the discreet reserve reversal, I would expect our normalized GAAP tax rate for 2007 to be in the mid-30s.

What I would also expect to happen in 2007 related to the deferred tax asset valuation allowance reversal is that our non-GAAP tax expense and our cash tax expense will begin to diverge. In other words, our non-GAAP tax rate will start to become higher than our cash tax rate.

I know that many of you have models for Avid's P&L that exclude certain items such as amortization and stock-based compensation and you focus more on cash flows. To assist you in the tax transition, I would estimate a non-GAAP tax rate for 2007 that would be in the mid-20s and an estimated cash tax rate of 14% to 16%. This compares to 2006 where our non-GAAP and our cash tax rates were both approximately 14%.

So, now that we all understand the taxes, let me give you our high-level outlook for Q1 2007. Q1 revenue is expected to be in the range of $230 to $240 million, which is lower than Q4 due to normal seasonality, including the post holiday seasonality in the consumer business.

As a result, business segment operating profits are expected to be in the range of $16 to $18 million. Business segment operating profits do not include acquisition-related amortization or stock-based compensation. Interest income is expected to be approximately $2 million in Q1.

Non-GAAP EPS is expected to be between $0.30 and $0.35 per share in Q1, excluding approximately $14 million or $0.28 per share of non-cash charges for acquisition-related amortization and stock-based compensation net of related taxes. GAAP EPS is expected to be in the area of $0.05. Diluted shares outstanding are expected to be approximately $41.8 million.

Referring back to our tax discussion, this non-GAAP calculation uses the tax rate in the area of 25%. The impact of the roughly 10 point increase in the non-GAAP tax rate in Q1 is approximately $0.05 per share.

These conclude my remarks. Now David and I would be happy to take your questions.

[OPERATOR INSTRUCTIONS]

Our first question will come from Steven Frankel with Canaccord Adams.

Paul, could you start by explaining why you saw such pressure on gross margins on the consumer side, and what's being done to address that? And then David, if you could give us some explanations as to why you feel that the software-only version of Media Composer isn't cannibalizing the hardware side?

The gross margin issues in the consumer business were primarily related to the PC TV side of the business as opposed to the home editing side of the business, which had margins that were fairly stable. There was some operational changes during the quarter that resulted in some, what we think are one-time hits to gross margin, some air freight issues and the like that again we don't expect to occur in Q4.

So we're expecting a pretty good improvement in the margins in the consumer business in Q4. We also are expecting an increased mix of home editing revenue in Q4 relative to the PC TV revenue.

And Steve, relative to your question about the Media Composer version that is software only and why it doesn't seem to be causing cannibalization, we actually think that there's a market that existed for people to buy second systems. So they're using the hardware accelerated version, perhaps, in a work environment and then purchasing a second system for use in a mobile application or for a home environment.

So it has allowed us to tap into a market that has been previously underserved. There are still advantages that people get from the hardware acceleration of our higher end systems, and I think that's also a differentiating factor for customers who need the higher performance.

And then if you might just give us a little more insight on the delays you were talking about in Q4 relative to the Video business and what confidence you have that that revenue does get recognized in '07?

Specifically, I think the statistic that really stands out is that if you just look at our performance in Q3 of this year, for example, and you see that the broadcast business is down 7% compared to Q3 of a year ago, and yet you look at the fact that our bookings are up substantially over that exact same period of time, and you see the significant discrepancy that can exist between revenue recognition timing and the time that we've actually booked the business.

So when we look at what's happening in Q4, we see strong deal flow coming in that has happened perhaps late in Q2 or during Q3, but we know that it's not going to be coming to revenue in Q4. We do estimate that the majority of that would most likely be falling at some point within 2007. Although, again, some of our deals that are in the pipeline right now do extend beyond 2007.

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

Our next question is then from Richard Ingrassia with Roth Capital Partners.

Richard, you may have to un-mute your line or pick up your handset? We're not hearing any response, we'll come back. We'll next then go to Steve Lidberg with Pacific Crest Securities--that's Lidberg.

There we go. A couple of questions. First of all as you look at the delay that you're experiencing on the Video side, is it an execution issue with regards to getting the systems installed? Is it an acceptance issue on the customer part? Or what's really driving these--driving the delays?

Also, as you look at the booking success that you've highlighted, have the implementation times extended beyond the traditional nine months that we typically looked at with regards to these deals?

Good questions.

The primary thing that is happening is not related to execution, but more related to on the customer side, them looking at what it is they're trying to accomplish. So as we mentioned previously today, the deal sizes continue to get larger, and as a consequence of that, the larger the deal in general the more complex it is, the more complex it is, the longer it takes to do installation, and also the longer it takes to fully educate and train all of the operators on how to use the new system.

In addition, the introduction of Interplay adds one more level of complexity. Interplay is a very powerful system, but it is also something that has certain features today, it will have additional features a year from now, and depending on what are the specific features that a customer is looking for, they may actually choose a configuration that's not going to be available until at some point next year.

Yes. At least with respect to two particular deals of which I'm aware that were in our earlier forecast for Q4, one of them we've moved out of Q4 into Q7 because of changes on the customer end, really not executions on our end and the other one, at this point in time, it's sort of on the edge, and we've just decided not to include it in the forecast at this point in time because it's so close to the end of the quarter that we might not get there for one of a number of reasons, not being execution on our side, but on the customer side, potentially.

Paul, what do you mean by on the edge? Is this a cancellation or--

No, no, no, just on the edge of the quarter in terms of the deal being done, accepted by the customer.

Okay.

It's too close to the end of the quarter for us to be willing to count it in the outlook at this point.

Fair enough. Final question is, as you look at the focus on a solution sale relative to the broadcast business, how has that changed versus the solutions that you've been providing to the broadcast customers over the last several years?

The solution sale that we previously had, let's roll the clock back to two or three years ago, in general, it was editors connected to shared storage and that was a system that was more easily sold and installed.

Sure.

As we look at what that system looks like today, it very often includes ingest, shared storage, play out, connected to a newsroom computer system and now has a Media Asset Management Solution overlaid on top of that, and in some case that Media Asset Management Solution may require integration with Legacy components that the customer may have already had.

In addition with our acquisition of Sundance, we now have the ability to provide automation capabilities as well. So from our point of view, it's all a great story, because there's much more that we can offer when we provide a total solution, and it's reflected in the fact that average deal sizes are going up. But that additional complexity means that it just requires more careful and thoughtful planning,implementation, integration, training and rollout.

Okay, I'll turn it over, thanks.

Our next question is from Sam Doctor with JP Morgan.

A couple of questions, first of all, on Studio 10, this is the second holiday season now with the Studio 10 product. What kind of projections do you have for sequential pickup in demand? And also, how do you overcome the customer perceptions based on existing reviews and things like that on the stability of the product?

Well, we are expecting a seasonal uptick in demand for Studio 10 as a consequence of it being Q4 and the holiday season, so that's something that we expect to be an uptick in the business. We've introduced some new variations of the product that I think will also help to overcome some of the initial negative perceptions associated with our first introduction of Studio 10.

These include the Studio Titanium Edition, as well as the introduction of the 20th Anniversary Studio edition which is available in Europe. So we've got some branding changes which I think are going to give us a new look to the product and also encourage people to take a fresh look at it.

There's no question that the initial quality issues around Studio just got us out of the gate on the wrong foot and we're now in the process of overcoming that, but it was a setback.

What could the sequential pick up be, what kind of price increase should we look for?

Sam, we're not providing any guidance by segment at this point.

Okay. Second question I had was, you've already had some issues in terms of the transition for the Macs moving from the (inaudible-heavy access) processor to Intel processors. As you go through the transition on VISTA, what does that do for demand for some of your products? I'm sure that the impact would be less severe, but does that have an impact at all? And what about upcoming core architecture and improved GPU performance, does that have any impact on the mix of hardware with software only?

These are questions that play out differently depending on what segment of our business that you're talking about.

Right.

Take, for example, in Audio, since the vast majority of our business in Audio is on the Mac platform, Studio VISTA is not as significant a factor. But if you think about in any part of our business, where in the Professional segment, customers will be most interested in getting our application, and so therefore if our application isn't yet ported to Studio VISTA, they're actually willing to continue to run Studio--excuse me, they're still willing to continue to run XP during that time frame until we get running on Windows VISTA.

Okay.

So we have a time frame for porting our professional products to Windows VISTA over the course of 2007. On the consumer side, it's actually more important to get a VISTA version out earlier because in general those products really need to be running on whatever OS the customer is already buying and they're not going to let their decision of what OS to buy be influenced by our software being there or not. So it's a more important factor to get it done quickly and we're already in the process of doing that port over to Windows VISTA.

And what about on the hardware side, the impact of improved GPU performances. Does that have an impact on the perceived need for hardware exploration?

That's an area that we have actually been focused on, not related to VISTA, because in fact VISTA, in some cases actually gets in your way of that because it consumes GPU processing cycles that are available. In some cases, the OS itself will now be competing for GPU cycles that are available on the computer.

But we recognize the increased capability of GPUs several years ago and in 2003 we made a big shift over to hardware acceleration that augmented the fundamental CPU and GPU processing capabilities of a computer. So simply put, as the CPU gets faster, as the GPU gets faster, our application gets faster automatically, but our hardware acceleration is always capability on top of the fundamental capability that comes with the system.

In addition, as we look at our hardware acceleration, we focus on areas that are not as efficiently done using a GPU, for example, Codex are notoriously difficult to operate on a GPU, because they can't be so easily multiple threaded, which GPUs are exceptional at processing. We actually have processing that is dedicated to doing things such as product performance.

Okay, and finally just a housekeeping question for Paul, can you just let me know what the CapEx and the cash flow from operations are for the last few quarters?

The CapEx was around $5.5 million, and I actually don't have a completed cash flow from operation statement at this point.

Okay, thank you.

[OPERATOR INSTRUCTIONS]

We'll next go to Barbara Coffey, with Kauffman.

Yes, good afternoon. As I take a look at the shift from the Mac platform to the Intel-based Mac platform, will there be a similar issue with plug-ins or associated products that need to be lined up for that product to have traction? And then as a second question, what are you seeing--how do you see the post production houses ramping? Are they currently dual processing with standard def and high def, or are they complete --at what stage are they shifted over to high-def processing?

Hi, Barbara, this is David, I wasn't sure I understood what you were referring to on the switch over to Intel-based Macs. That's a problem that we're in the midst of right now, but you were referring to it as a future-- I wanted to make sure I understood, you're referring to that relative to other products that we sell?

Right. On the Video side, is there any issue with the equivalent of plug-ins or anything else that we need to have our ears open for, the way that there was a plug-in issue on the Audio side?

Good question. I think that the answer to that is no for the reason that I mentioned earlier that in most cases, our customers who are on the high end are actually going to buy the system that we recommend to actually run the software that we're selling. They're in general willing to continue to run XP software until we've got our application ported over to VISTA.

It was a bigger issue for the Audio business because they tend to buy--be more allegiant to a certain platform and would want to make that shift and then have our product run on that, but the choice sequencing is different. Relative to your question on post houses and the mix that folks have today, we're estimating that about roughly a third of post-production seats have converted over to HD at this point. Which means that the rest of the infrastructure that folks already have at their houses are still processing SD.

If we look at the mix of work, it also reflects about that same percentage as well. If we talk to a typical post house, what we find is that they're doing anywhere from 20% to as much as 40% of their work in HD, but still the majority of it is being done in standard definition. But looking forward, almost every customer that we talk to intends to upgrade all of their seats eventually to full-blown HD capability.

Thank you.

You're welcome. Our next question is from Gene Munster with Piper Jaffrey.

Hi, it's actually Mike Olson here for Gene. I was going to ask you a question you just answered about how far we are through post production, but can you give any sort of idea of how it varies by geography or any high-level estimates on that?

Sure. Where we're seeing the most rapid transitions--in fact, I would say it's probably over halfway is in Japan where HD has been in full swing for a decade at this point. Second behind that is probably the U.S., where I would say as I mentioned to Barbara, it's probably a third of the way converted.

The furthest behind or the slowest to make the conversion is in Europe. And one of the fundamental reasons is that Pal as a standard was actually better quality than NTSE to begin with. So the differences or the benefits of going to HD are not as noticeable as they are here in the states.

However, we are seeing that transition happening, it just seems to be maybe a couple years behind where the U.S. is, and then if we look beyond those regions and look at either Africa or Latin America, there's not a whole lot of HD work being done because there's not distribution networks for actually delivering HD content and there's not much of a consumer market of HD sets. So I would say those regions are just going to be the later ones to switch over.

Okay. On the broadcast side, you guys recently launched this new station product for smaller broadcasters. My question is, are we at a point in the analog to digital newsroom transition that smaller stations are becoming the primarily focus, or are there still some of the larger guys out there?

For us, by weighted average deal size, we're still seeing the deals getting larger. We are seeing an increase in the small broadcaster business, and that's why we're targeting products explicitly for that, but if you look at the weighted average deal size, it's--as I mentioned earlier on the call, Q3 was another record for us in terms of deal size. If we look at what's coming in our pipeline, we continue to see some deals that are even larger.

Okay, thank you.

You're welcome.

[OPERATOR INSTRUCTIONS]

We'll next go to [Mirach Susesky] with Investor Capital Corporation.

Hello, everybody. Just a quick question here. First, just to comment, I appreciate your long overdue effort to really pair the detailed guidance that you always give.

I know Dean, and I have told him on numerous occasions sometimes less is more, particularly given the nature of your margins that you operate in. So basically, the question that I have is kind of a big picture and if you could just comment on the competitive landscape, if you see any new or interesting technologies out there or trends that are worth noticing that may give you some cause for concern or just you're looking at?

Well, I guess speaking of what we're seeing on the broadcast side, and I guess this is also very relevant when you think about the fact that our revenues have been lagging bookings, we have not been seeing any deals shift over in any major way to the competition. We feel like we've been capturing more than our share of the deals, and the fact that they're increasing in size is also something that's telling us that the conversion is taking place.

We're able to deliver more and more of the solution in one place. So we feel good about that. So I'd say on the broadcast side, we haven't seen new entrance, we haven't seen any major shift in the competitive factors.

Likewise, if we look at the competitive landscape in our post business, you may be aware there were not significant competitive announcements that happened this year, so for the year 2006, for example, Apple did not introduce a new version of Final Cut Pro, so that actually let our introductions at NAB really get a lot of attention and we got a lot of customer interest in that.

Obviously we don't expect that situation to persist forever, but I would say that in the year 2006, we had no major shift of new entrance or no major change in market share. Looking at the consumer space, worth noting is that in spite of the difficulties we've had with Studio 10 and initial product quality, it's still worth noting that in both the U.S. marketplace as represented by the MPD data and in Europe as represented by the GFK data, we're still the number one market share leader.

So there hasn't been a change in our market lead position there as well. And on the Audio side, Pro-Tools still remains the industry standard as a digital Audio workstation. In general, if you look at Avid's business, there hasn't been a shift away from our products in any sector that we can tell.

Our next question then is from a Neil Gagnon with Gagnon Securities.

Hello, David and Paul, Dean.

Hi, Neil.

On the consumer side, what are you expecting in general this fourth quarter versus year ago?

We're not--we're not breaking out the segment guidance in detail, but in the outlook that we've provided, it's probably a level of revenue that's lower--it is a revenue level that's lower than a year ago.

And can you explain why?

From my point of view, it's just the lingering impact of the initial Studio 10 quality problems. If you look at revenues in the consumer segment, in essence, the launch of Studio 10 last year, if we look at that, it was actually the most successful launch in Europe that they had done in their history in terms of initial revenues from the product.

However, the product quality problems then emerged and ended up having a negative impact on it, and they hurt our ability to do a subsequent delivery of product into the channel. We're working through that.

We don't have a brand new version of Studio that we're launching at this holiday season because what we did is we spent all of our time fixing the product quality problems associated with our initial version of Studio 10. So I'd have to attribute the reason why it's not higher than last year's strictly do to legacy or residual impact from the initial Studio 10 launch of a year ago.

Okay. Second question, you didn't provide any guidance for '07, lots of things moving around, but in the past you've talked about the rate of organic growth you would like to achieve and operating margins that you would like to achieve. Have they changed?

The long-term rate of organic growth and operating margins? I think with respect to the organic growth rate that we think we can achieve, 10% is a number we've been using and is still a good number.

With respect to the operating profitability model, obviously we have lost a little ground there in the last year, but--and we've got some work to do through the budgeting process and into our strategic planning process early next year, but I'm not sure whether we'll modify the long-term operating profitability target or not, but I know that whatever we come up with will be a lot higher than what we have right now. A lot of room to grow there.

A lot of room to grow. Thank you.

Our last question today will come from Chris McDonald with Kennedy Capital Management.

Good afternoon, gentleman. A question on post production. With sales up 24% year-over-year seems really healthy. I'm wondering if you can highlight a particular product that's perhaps driving that performance?

It's not one product, it's actually several products. We introduced our new lower end digital non-linear accelerator family member called Mojo SDI at NAB. We have had strong growth in that segment of our business. We also have growth that's being driven at the high end by our Symphony Nitris product which is a multi-stream real time HD finishing product.

In addition, what we're finding is that those systems are very often sold attached to shared storage, and we continue to have very good growth in our shared storage solutions, the Avid Unity family from land share to Unity Media Network all the way up to Isis systems, and as we mentioned, we're approaching our 200th installation of Isis. Those altogether in the post market have been very successful products for us.

Okay, and then on Interplay, I believe the launch happened maybe a little bit later in the quarter than you had originally planned earlier in the year, at least. I was just wondering if that had any impact on the performance in the quarter and how--I don't know if you can quantify how much revenue recognition was tied to Interplay, if you were able to recognize revenue on the broadcast deals that were--that you had expected tied to Interplay as well?

Yes, I can't quantify the exact amount of revenue that was tied to Interplay deals, but I can tell you that there was revenue attached to that. When we mentioned during-earlier on the call that we managed the rollout of Interplay, what we did specifically is we were making sure that the features and capabilities that we had available in Interplay were matched to our specific customers who were looking for those features.

So we have customers lined up who are looking for subsequent releases of the product. Those obviously can't be recognized until those features are delivered. The fact that the initial release of Interplay came later in the quarter absolutely had an affect on how much revenue we were able to recognize.

So these are all consequences of just the larger and more complex deals that we are seeing these days, but we want to be very careful in terms of how we roll this out so that we can make sure our customers have a very positive experience. Obviously the application area is in general a live or on-air environment and we've got to make sure that it's rock solid for our customers.

Okay, and then lastly, I just want to make sure I heard right earlier. Do you actually have some deals that have been booked in backlog that you'd expect to deliver outside of 2007, I guess meaning in the 2008 time frame?

Yes.

Okay. Thank you.

And with that, this does conclude today's Q&A session, I would like to turn the conference back to David Krall for closing remarks.

Thank you. I would like to thank all of you for joining us today.

We look forward to speaking to you again next quarter as well as at our upcoming Investor Day that's going to be held on December 13th in our Tewksbury, Massachusetts headquarters, so we hope to see you there, and obviously should you have any further questions about today's call, please feel free to contact us directly. Thank you all for joining us.