Avid Technology Inc (AVID) 2007 Q1 法說會逐字稿

Good day everyone and welcome to AVID Technologies first quarter earnings results conference call. Today's call is being recorded. Now for opening remarks and introductions I'd like to turn the call over to Mr. Dean Ridlon, director of investor relations. Please go ahead, sir.

Thank you and good afternoon. I'm Dean Ridlon, Avid Technology Inc.'s investor relations director. I'd like to welcome you to today's call. Before we begin please note that this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about projected growth of existing and new markets and anticipated results of operations during 2007.

There are a number of factors that could cause actual events or results to differ materially from those indicated by such statements including Avid's ability to meet customer needs, market acceptance of Avid's existing and new products, Avid's ability to recognize revenue in a timely manner, competitive factors including pricing pressures, delays in product shipments 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 US Securities and Exchange Commission. In addition our forward-looking statements represent our estimates only as of today, April 26, 2007, and should not be relied upon as representing our views as of any subsequent date.

Avid undertakes no obligation to review or update these forward-looking statements.

During this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. The most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of these GAAP measures to these non-GAAP measures are contained in the press release announcing this quarter's results and available in the investor's section of our website, www.avid.com.

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

Thank you, Dean. I'm David Krall and I'd like to welcome you to our first quarter 2007 results conference call. In a moment I'll hand the call over to Joel Legon, our acting CFO, who will provide a detailed review of this quarter's financial results. Then I will discuss a few highlights from the operations of each of our businesses. Finally, Joel will come back and update our financial outlook.

Following our prepared remarks Joel and I would be happy to take your questions.

In summary our revenue for Q1 was $218.9 million, which was roughly flat year-over-year and down seasonally from our fourth quarter as expected.

Broken down by business unit, our audio segment continued to perform well although down as expected from the holiday quarter. Consumer had a soft quarter as the channel prepared for the imminent introduction of our Studio 11 software. And professional video, which recently underwent management changes and is still in a rebuilding process, fell sequentially 4% in revenue compared to Q4 but improved margins and once again grew backlog.

I'll provide more detail on what we see happening in the marketplace and the actions we are taking to address these issues in a few minutes.

We are also announcing today that Avid's board of directors approved a program to repurchase up to $100 million of stock. The repurchases will be funded out of working capital.

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

Thank you, David, and good afternoon everyone. As David said revenue for Q1 was $218.9 million, down sequentially as expected and roughly flat with Q1 06. All three of our business units delivered less revenue than expected and I will review the reasons for this in a few minutes when discussing the operations of each business unit.

GAAP gross margins were slightly better than Q4 at 48.3% including $4.5 million of non-cash charges for acquisition related amortization and $338,000 of stock based compensation. Without these charges gross margins would have been 50.5%, which was also an improvement over Q4.

Video gross margins increased sequentially but both audio and consumer gross margins were down from Q4.

Audio's gross margins were lower in Q1 as they were coming off a strong gross margin in Q4 due to a favorable product mix. In addition, audio had higher freight expediting fees in Q1.

For consumer, the gross margin decline relates primarily to inventory costs in preparation for the launch of our Studio 11 video editing software during the second quarter. As expected operating expenses rose in the first quarter. The most significant reason was an increase in overall compensation due to a couple of factors. The first is that in Q4 we reversed the 2006 bonus accruals that had been booked in previous quarters so we actually had negative bonus expense in that quarter. In Q1 we began to accrue for the 2007 bonus plans resulting in a significant sequential increase.

Secondly, payroll tax and employee benefit costs increased fairly dramatically in Q1 versus Q4 due to the front end nature of payroll taxes and the normal Q1 run-up of our vacation accrual.

The company incurred follow on restructuring charges of $258,000 related to plans we implemented in 2006 for the video business.

GAAP loss before income taxes was $3.3 million and our GAAP tax provision was a benefit of $3.3 million, resulting in break-even net income and zero earnings per share on $41.8 million average diluted shares outstanding.

The main reason for the tax benefit was the positive resolution of a Canadian tax audit resulting in the reversal of tax reserves in Q1. We realized $0.09 per share in Q1 from tax benefits that were expected to be realized later in the year.

Non-GAAP tax benefit was approximately $2.3 million. With the tax benefit in Q1, we expect our tax rate for the full year to be approximately 10%.

As stated in our press release, there was a breakdown of certain items included in our results. These items total $10.6 million and consist of acquisition related amortization, stock based compensation, restructuring 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 segments results externally, we do not include these items.

Adding the $10.6 million in charges to our GAAP break-even net income results in non-GAAP net income of $10.6 million for the first quarter.

Using fully diluted shares outstanding of $41.8 million, non-GAAP earnings per share were $0.25.

I would now like to get into the operating performance of our three business segments. Before I get into the specifics, I want to inform you that in the first quarter of 2007 we revised the methodology we use to allocate certain general and administrative and shared facility expenses in the segments. Accordingly, the corresponding amounts for 2006 have been reclassified among business segments to conform to the current allocation method. This change will not affect the total company operating profit. A summary of the company's operations by reportable segment will be included in our 10Q for the first quarter.

Turning back to the performance of our business segments, in addition to interest we exclude the following items from our business segment results in Q1. $7.9 million of non-cash acquisition related amortization of intangibles, $3.6 million on non-cash stock based compensation, $258,000 of follow on restructuring charges related to plans that we implemented in 2006 for the video business, and benefit of $1.2 million of tax adjustments for the items mentioned above.

Professional video revenues were approximately $113 million, down sequentially and from Q1 of last year. The main drivers for this were the low level of revenue recognized from large complex deferred deals, which were pushed out as we complete commitments required for revenue recognition and to customer migration issues, which David will talk about in a few minutes.

Sequentially video operating expenses were up $2 million versus Q4 resulting in video operating profits decreasing sequentially by $3.9 million to $1.6 million or 1.4% of revenues.

Year-over-year video operating expenses were up $4 million resulting in a $9 million decline in operating profits.

Video's operating expense increase sequentially is due mainly to the increased compensation costs at the beginning of the fiscal year, as I mentioned earlier. Year-over-year the increase is due to the acquisition of Sundance and to increase general operating costs including facilities and salary increases.

On a positive note, bookings were up 9% year-over-year and backlog increased to another record level.

We have a consistent track record of backlog components, ultimately becoming revenue and we fully expect this to occur as we deliver customer commitments over approximately the next 12 months.

Q1 audio revenues were down approximately 5% sequentially but were up 8% over last year. The sequential decline was a result of seasonally lower sales of core Pro Tool systems and end audio products being partially offset by strong live sound mixing console sales.

As a result of lower gross margins and an expected increase in operating expenses audio operating profits decreased sequentially from $14.9 million to $7.3 million or 9.2% of revenues.

Year-over-year a slight gross margin increase was more than offset by operating expense increase resulting in a $1.5 million decline in audio operating profits from Q1 06.

Consumer revenues were down from the seasonally high fourth quarter to $27.3 million in Q1. Gross margins were also down sequentially and operating expenses were down about $1 million from Q4.

As a result the consumer segment generated an operating loss of $2.4 million after posting a profit of $900,000 in Q4.

Year-over-year revenues and gross margins were down but operating expense reductions stemming from last year's restructuring resulted in a $200,000 improvement in their bottom line results over Q1 06.

To summarize the business segment results for the first quarter of 2007, total revenues were $218.9 million. Gross margins were 50.5%. Operating expenses were approximately $104 million. Operating profits decreased sequentially to $6.5 million or 3.0% of revenues.

Year-over-year a slight increase in revenue was offset by reduced gross margins and increased operating expenses resulting in a decline in operating profit of $11 million from Q1 06.

Turning to the balance sheet, cash was up over $15 million to $187.5 million. Receivables were down from $4 million and DSOs were 55 days.

Inventory was up approximately $1 million due to an increase in inventory for deferred revenue deals, offset by a reduction in stockroom levels. We remain committed to our goal of a $20 million reduction in inventory levels by the end of 2007.

I'd now like to hand it back to David to review some of the highlights from the quarter.

Thanks, Joel. At this point I'll review our business segments and provide some details around the operations of each group, starting with video.

Although there are already signs of improvement, our overall performance in professional video is not yet meeting our expectations. Revenue declined 4% from Q4 while we slightly improved our gross margins, growing 70 basis points to 53.7%.

By product line, our editing revenue declined in part due to anticipation of our new editor family release at the end of the quarter. Storage and services grew while broadcast infrastructure products were down and computer graphics were flat.

As we've discussed in previous calls, the video business unit is in a rebuilding process with a new management team that's working through several issues including new product transitions and satisfying the needs of large customers with complex work flows.

I'd like to spend a little time going over our improvement plan for this business. In the first quarter our overall bookings were up 9% from the same period last year. However, there was a noticeable drop off in our run-rate business despite the introduction of several new products late in the quarter.

By run-rate business we mean sales of our point products during the normal course of business such as upgrades and add-ons, rather than as part of large deals. In discussions with our installed base, it has become clear that they're looking for us to provide them with the ability to migrate to our new solutions in stages rather than having to do a wholesale upgrade all at one time.

Because the work flow for broadcasters is very complex, it's not practical for most customers to immediately upgrade their entire infrastructure. Therefore in response to this customer feedback, we will be diverting some engineering resources to build a migration path for our installed base.

While this will negatively impact our ability to recognize incremental revenue out of our backlog by one to two quarters, it should have a positive impact on our run-rate business and it's the best long-term strategy to meet the needs of our video customers.

And as an aside, entirely new customers or new sites don't have these issues since all the latest releases work well together and we can continue to effectively sell these solutions even in large configurations.

Despite the drop in run-rate business, there were several bright spots worth noting. As mentioned, bookings were up 9% year-over-year bringing our backlog to a new record level. We upgraded our editing line to offer support for Intel based maps and we had an outstanding NAB generating more than 700,000 leads, an increase of more than 500 leads over last year.

A real star for us at the show was Avid's ScriptSync, a next generation script based editing tool for both media composers and Avid Express Pro customers that uses phonetic speech recognition technology to automatically sync text from the script with video clips. ScriptSync won an award from TV Technology as one of the preeminent technical innovations available in the industry. Editors tell us that ScriptSync can do in seconds what it could take hours to accomplish without a tool like this.

Another important about NAB is the specific focus we had on independent artists. In addition to highlighting our new MAC based editing products, we had 28 film school students in the booth from seven universities and trade schools. These students were shooting and editing video and then posting that video to the Web, including a special section of Yahoo! Video devoted to Avid. This Create Now program was just one aspect of our larger focus on education, independent filmmakers and aspiring artists of all kinds.

Switching now to audio, we continue to show strong performance in mixing, particularly with our DigiDesign Icon Studio Consoles and Venue live sound environment, both of which had record quarters. In fact, according to our internal estimates, we've now attained the number one market share in large format control services and the number two position in live sound consoles, a remarkable achievement given that we entered the market just two years ago.

These products combine the familiar feel of a professional mixing console with the power and flexibility of Pro Tools, which is itself the standard of the industry for digital audio recording. In fact, we're expanding beyond recording and mixing within the audio editing line.

At NAB, DigiDesign also introduced a new line of professional reference monitor speakers and previewed some new technology that enables increased interoperability with Avid video systems.

At the lower end of the audio marketplace, M-Audio continues to perform well, driven in part by strong sell through in the channel. These gains offset a bit of softness in our mature Pro Tools HD line and in our Sibelius notations software where some Sibelius 4 customers are holding back in anticipation of version 5. The net result was another good quarter for audio.

Moving along to consumer, revenues were down sequentially coming off the holiday quarter with some channel returns in anticipation of the new Studio 11 video editing product announced earlier this week. This also caused an uptake in inventory obsolescence and a drop in margins.

Despite an operating loss in Q1, we are forecasting the business' bottom line results to improve sequentially throughout the fiscal year.

In March Pinnacle entered the Macintosh peripherals market with a family of three new USB TV tuner products for the MAC, two targeted primarily for the European market and one for the US.

And as previously mentioned, earlier this week we announced new versions of the market leading Pinnacle Studio family of video editing systems with powerful new features including support for the AVC HD consumer, high definition format, Microsoft Vista compatibility and one-button video publishing to Yahoo! Video.

The arrangement with Yahoo! is one part of an overall strategy to bring Pinnacle quality editing to a larger number of users by simplifying the video editing and publishing process and making it even easier to share content on social networking sites on the Web or through private video sharing services.

Introducing a new generation of users to the fun and creative possibilities of working with digital media is part of our strategy in both the audio and consumer divisions. In addition to increasing our addressable markets, some percentage of entry level users eventually aspire to become professionals and having them as customers early ensures we are in the best position to meet their growing needs and retain them a customers as they progress through their careers.

Finally I'd like to update you on the status of our CFO search. As we've previously stated this is an important position and we want to find the best person for the job rather than limiting ourselves by operating under a hard deadline for completing the search.

Joel has been doing an energetic job as our acting CFO allowing us to take our time in identifying and evaluating potential candidates.

I'd now like Joel to discuss our guidance. Joel?

Thank you. As David mentioned earlier, we are going to reforecast our product development activities in our video business to better support the needs of our legacy customers. This effort is going to affect our expected results for the balance of 2007.

Our current expectation for Q2 is revenue in the $220 million to $230 million range and GAAP earnings per share in the range of a $0.15 loss to a $0.10 loss, excluding approximately $9 million of acquisition related amortization and $5 million of stock based compensation.

We expect non-GAAP earnings per share to be in the range of $0.15 to $0.20. This assumes a non-GAAP tax rate of approximately 16%. Gross margins are expected to improve in Q2 over Q1.

Operating expenses in Q2 are expected to rise over Q1 due to the course of NAB. Operating profits in Q2 once again excluding $9 million of acquisition related amortization and $5 million of stock based compensation are expected to be in the area of $6 million to $8 million.

Other income is expected to be approximately $1.3 million and the non-GAAP tax rate, as I said earlier, is expected to be approximately 16%.

For the full year we expect revenue to be in the $935 million to $950 million range and GAAP earnings per share to be in the $0.20 to $0.30 range. Excluding approximately $35 million of acquisition related amortization and restructuring and $19 million of stock based compensation, we expect non-GAAP EPS to be in the $1.40 to $1.50 range.

While we would like to be able to give higher guidance at this point, we feel it is important to respond to our customers and address their needs to help ensure our business is well positioned for the future.

At the same time we remain committed to improving profitability and enhancing shareholder value. As a result we are currently studying options to improve our gross margins and reduce operating expenses. We expect to begin implementing profitability improving changes starting in Q2 and will review the actions we choose to take on next quarter's earnings call.

I would like to note that given that we have not finalized decisions on actions to pursue, the projections I have just provided do not reflect any potential cost savings or earnings improvement.

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

Thank you. (OPERATION INSTRUCTIONS) We'll hear first from Steven Frankel with Canaccord Adams.

Thank you. David, what percentage of the business is run-rate on the video side and second question, what are the customer relationship ramifications for delaying the backlog now out until sometime in 08 rather than trying to eat most of it away in the latter half of this year?

Good question. I'm going to ask Joel to answer the run-rate percentage question in a moment but I want to just talk to you about the customer relationship issue. That has been a very important factor as we weigh where we allocate our resources. Obviously we'd like nothing better than to be able to recognize revenue out of the backlog and to start bringing that down as soon as possible and we intend to be able to do that. Joel has said in his comments that we have a very good record for pulling revenue out of backlog and ultimately being able to recognize it.

But the factor that we're trading it off against is that our success in the industry and the large number of broadcast customers that we have today already is something that we also need to be paying very close attention to. And for our existing customers, they have current systems that they need to be able to keep operational and that they want to be able to add equipment to incrementally and those are the folks who we really need to make sure we're taking care of in the short term.

So when you talk about customer relations, in essence they are very often the same customers so the same customer who's having a larger installation that might be put off by a quarter or two is that exact same customer who will be quite happy that we're helping them maintain the operation of their facility currently. And that's really where the tradeoff is.

Now Joel, do you want to comment on the percentage of run rate?

Sure. The run rate is running a little bit less than 50% of the video business segment. Depending on quarters, some quarters it may go up or down but I think 50% is a good benchmark.

And David, to release these Intel MAC products late in the quarter, sitting where we are in this quarter, what's the post-production market demand for those products?

Well, we're expecting the demand for those products to be favorable and so that was what the motivation was for delivering products on the new MAC platform because it's a popular platform. On the other hand, we also recognize that for our legacy customers, some of our new MAC products actually don't integrate into those legacy systems so that's also part of the work that we're going to be doing is making sure that we actually qualify a version of our media composer product that works with our legacy customers as well.

So for new customer sales and moving forward, we expect that release to be received very positively and as we highlighted, this new release has the new ScriptSync feature, which was very favorably received at NAB.

And one last one for Joel, what was the cash flow from operations in the quarter?

Cash flow from operations was approximately $15 million.

Thank you.

Next we'll hear from Paul Coster with JPMorgan.

Yes, thank you. Joel, first of all apologies to this but I missed the full year amortization of intangibles. What was the number you quoted?

No problem. So $35 million of acquisition related amortization and restructuring and $19 million of stock based compensation.

Okay. That leads me to the second question. The restructuring, do you think there's going to be restructuring associated with this cost focus that comes to bear from this point forward?

There's a potential for that. Right now we're reviewing all our options and we're going to be making decisions during Q2 and we will come back to you at the end of next quarter on the next earnings call to talk about the actions. Restructuring is a potential among many things that we're looking at.

Great. International revenues, what percentage of total and was there a currency impact in either the revenue or the bottom line?

Yes, the international revenues were about 53% of our business and 47% was domestic. We had about $8 million of positive FX effect over Q1 last year.

On the revenue line. What about on the bottom line, any benefit there?

Very small because it's like an actual hedge in the operations with our costs.

Got that. Okay and then last question really is on the cost side, David. You've got some long-term projects, obviously, the deferred revenue's in the bag at some point in the future. The backlog hopefully too. But the cost curve on the storage side is coming down. Is there a danger that the sort of that backlog starts to get squeezed with the passage of time as the cost comes down or am I overstating that particular point?

Well, it is true that the costs associated with the parts that go into our storage system generally are on a favorable pricing curve so over time the cost per gigabyte or terabyte becomes more favorable. We don't expect that backlog is going to be taking so long for us to recognize that we need to actually go back and reprice something, so I have not seen us have to do that.

And in general the other thing to note is that that is a favorable directional move so that the more we can take a given deal and defer it into the future the more favorable our COGs structure is for that. However, that's not part of what's motivating us. What we really are working on is making sure that we've got customer deliverables lined up that meet their requirements.

I would add to that David that the items in our backlog are based on firm contracts with customers with pricing fixed indeterminable already.

To give me one last question, customer concentration on the professional video side, was there any that's worth mentioning or is that not a factor?

When you say customer concentration, you're meaning?

Did you have 5% customers, 10% customers, anything of that nature?

No, nothing of that size.

All right. Thanks very much.

Okay.

We'll take our next question from Mike Olson with Piper Jaffray.

All right, thanks. One thing on kind of the broadcast revenue recognition side, are you waiting until you've decided on a full time CFO before pulling the trigger on changes in broadcast revenue recognition or are you in the process of making changes now and if so what are you doing at this point?

Well as the acting CFO I can tell you that we are in the midst of studying that right now and we are working on actions that we can take as early as this quarter and possibly next. So that is not waiting for a new CFO to come in.

Okay. And is one of those potentially moving to a percentage of completion model or something of that nature or is that kind of off the table at this point?

First of all, percentage complete is not off the table but it's not the panacea that many people think it is for companies like ours. As we talked about, we're working on delivering commitments to some of our largest customers so that's what's holding things up until we deliver that. And there's no revenue recognition rule or model that would allow you to take revenue on those types of projects where there's commitments outstanding before those commitments are delivered so those would not be potential revenue recognition contracts anyway. We're looking at a number of methods, one of which is revenue recognition and we're going to apply what is best for us and keeps us in compliance with the rules.

Good. That makes sense, and then just a second with Studio 11 coming in May here, do you think we can return to a profit in consumer in the June quarter and I guess if not, when do you think we can expect to see an operating profit in consumer?

Right now we're expecting a return to profitability in Q4. It may be sooner than that but what we're looking at in our own internal forecast is Q4.

Okay, thank you.

Sure.

Next we'll go to Jim Ricchiuti with Needham and Company.

Hi, thank you. Just with respect to the revenue guidance that you're giving now for the full year, I guess previously you were looking somewhere along the lines of 8% to 10% top line growth and you talked about some of the issues in the broadcasting business. But I'm just wondering, in general beyond some of the issues in broadcast, are there other factors that are causing you to be a little bit more cautious on the revenue growth that you see out there?

Well specifically the new thing that we're discussing right now is related to our run-rate business and the fact that in having conversations with our customers we're realizing that they would like help from us as they're moving their systems from our current generation to our next generation systems and we need to provide intermediate steps for them to migrate in a more piecemeal fashion to the new systems. So it's because of our need to reallocate some of our engineering resources to accommodate that that it's actually pushing out our ability to meet all the deliverables against our backlog as quickly as possible.

Okay. So David it's not also, you're not seeing any issues either that will cause you to be a little more cautious on either the consumer video business or the audio business? It looks like in the audio business you're seeing pretty good momentum.

Audio has been and continues to be a reliable performer for us. In our consumer business we're, I'll call it cautiously optimistic about Studio 11. Obviously if we go back to Studio 10 that was a real trip out of the gate and I think people are still just being very careful until we see the initial product reviews come out of Studio 11. That said, we've had a very favorable pre-release reviews of that product and so we feel that we may have a real winner on our hands. We think Studio 11 is a great product. So until we start to see actual market data on that though, I think we have reason just to be a little bit cautious and but we're cautiously optimistic.

Okay and you may not want to answer this, I don't know, but if you look out the next couple of years, can you give us a sense as to what kind of operating margin target you would like to work towards?

Well as we've talked about before, we've talked about the range of low double digits as being what we think the operating profit model is for the business. We don't have any reason to be changing that at this point. Joel, I don't know if you have a comment.

That's right. It's in the low teens is what we're looking at right now.

Okay, you have a long way to go to get there and I'm just wondering, as we look out at 08, do you see some of the benefits from some of the changes you're making in broadcast and then potentially some of the cost improvement measures that you're considering, can you give us a sense as to how we might think about improvement in operating margins 12 months out?

Well there are a number of things at play here. One for example, the investments that we're making in our current customer base and helping them migrate actually helps us in the long term because it reduces the costs associated with migrating customers. So when we have the right products in place and the right stepping stones, the overall amount of service overhead that goes along with servicing those customers starts to go down.

Right now some of our service resources in fact even our sales resources are spending time in the field working with customers on project related issues. That's not the right thing for them to be spending their time on. They should be working with customers on new business opportunities. So we see the ability to lower the amount of expense that we're pouring into that part of our business.

The other thing as Joel mentioned, we're just overall looking at improving the profitability of our business and we're looking at what are the lower profit areas of the business and looking at how we migrate those into higher profit or higher margin elements of the marketplace.

So I'll just give you a specific example. In our TV tuner business, overall we were providing a very broad set of products to the marketplace but after we've done an analysis of it, we've been able to see what segments of that market are actually lower margin and lower return and we've been moving out of that into the higher margin segment, which includes the USB stick format, so that was the impetus for our move into that segment.

That same approach is being used in all aspects of our business and we are as Joel mentioned, we are very thoroughly going through our business and making that movement.

I would add the consumer, with our expectations, our optimism around Studio 11, that is a software based product so it's got much higher margins so we're hoping that will improve our profitability there too.

Okay and this is the last question and I apologize if it was asked. I joined the call a little late and you may have commented on it, but just in general, what's the investment environment? How would you characterize the investment environment for your customers in broadcast right now?

It is different depending on what region of the world that you're looking at so I would say that in Europe we have seen for a number of years now a pretty robust investment environment in part due to the fact that it tends to be more dominated by state run broadcasters who are looking at more of the long term picture regarding their investments so year after year they continue to make ongoing investments.

I'd say in the US there was a little bit of a slow down last year as I talked to many broadcasters and just heard that they were slowing down their investments a little bit but in talking to them, most of them seem to be saying that they're looking at reinvesting this year. So I'm expecting 07 to be an improvement and then 08 to be even better than that as we get into full swing around Olympics and elections.

Thank you.

Moving on we'll hear from Chris Rowen with Soleil Securities.

Hi, thanks. Joel, can you just quickly give me the revenue segment numbers, the revenue by segment numbers again? I didn't catch them all.

Okay. One second. The breakdown of the $218.9 million we had video was $113 million, audio was $78.9 million and consumer was $27.3 million.

Thanks. And then David, I kind of apologize in advance for the disagreeable nature of this next line of questioning but I guess I just don't understand if you've got large projects that are already contracted, why you would shift resources away from that for small projects that aren't yet contracted.

Well, sorry, that's not actually what the shift in focus is. It's primarily related to in both cases very often the exact same customers and in one case you're looking at the next project or a future site that's under development versus supporting them in their existing site. So obviously this is a decision we've made after talking to our customers about where they would be benefit from our resources being applied and in many cases what customers really need to be doing is making sure that they are staying on the air every day with efficient and productive system; and we're making sure that we've got the resources applied to keep them working efficiently.

Regarding the longer term objective, we fully expect that we're going to be able to deliver the full set of project requirements necessary to be able to recognize revenue out of our backlog and it is as we recognize, it's a trade off to be made. It will require us to push the recognition out by a quarter or two.

But this decision was made in concert with discussions with our customers.

And I guess some of these projects, I realize some of these things go in and out of the backlog so it's not the same projects that have been in there for a year or two but even without that it would seem that if you're telling a customer that deal that you signed two quarters ago, now we're not looking at implementing that until the end of this year or early next year, it would seem that they would have an out then to go find another vendor. Not saying they would want to but how do you hold on to somebody under those circumstances?

Obviously anytime where there's a change in the date or scope of the project you need to talk to your customer again. Those are things that if there is a customer who's being negatively impacted, we deal with those on a one-on-one basis. We have not had a case where we've had a customer walk away or choose to renegotiate the contract. That is a possibility but we're not anticipating that's what's going to happen.

I would add to that that in most of our backlog is a large percentage of payment that has already been made, number one. And number two, it's not like nothing happens until the last day we deliver a commitment. In some cases customers are either using equipment, waiting for some other functionality that they can use in addition that was built into the deal and so forth so it's not like nothing happens until the very end then we deliver this big system. No, inventory, services on site, things have been paid for. We have to defer the revenue until we deliver that final commitment though.

Right, and some cases this will have no impact on their on-air date. They'll still be on air on time but it'll just mean we haven't fulfilled all the elements of the contract until later.

Okay, thanks. And then the final question on that is just can you give us an example of one or two of the product situations where you're having to help customers migrate from old to new or link old to new, just to give us an idea of what product areas they're in and specifically does any of it have anything to do with Interplay?

Yes, Interplay actually is the best example of that. Interplay is a new workgroup environment that we've built. The previous generation product was called Workgroup 4. So what we have is an entirely self contained environment that can be based on Workgroup 4. That's where the majority of our existing customers are today. Our new product, Interplay, we have 150 customers who have already bought the product and the migration path from Workgroup 4 to the Interplay environment requires a significant upgrade in terms of the individual editors that you have.

So what we need to do is build a transition path that lets for example people use the same editors that they currently have or be able to buy new editors from Avid that work in a Workgroup 4 environment.

So during this transition period we will need to be able to be building and selling products, which can be sold into either environment.

Okay, that helps a lot. Thanks.

Next we'll hear from Alan Davis with D. A. Davidson.

Hey, gentlemen, just a couple of quick questions here. As you look at the revenue and the amount you brought it back for the year, would you say that's evenly distributed, 50% of that is kind of a drop in your run-rate business and 50% as a result of your backlog business getting pushed out? Is that fair?

I would say it's closer; if I had to put a number on it, I would say one-third, two-thirds to be honest with you but it'll vary depending on how we, as we time out these commitments so 50/50 is not bad, so anywhere between 30% to 50% for one or the other works.

Okay so one-third kind of your run-rate business, two-thirds--

I would say the other way around.

Okay. And beyond Interplay are there any other significant examples you can give us in terms of kind of the stage to migration approach?

The main thing is Interplay and the editors. Those are the two main things that we need to make sure we're creating a migration path from Workgroups to Interplay and have the ability to sell our editing family into either environment.

Okay, and is this also largely the result of the constrained budgets of your broadcast customers? Is that kind of the other main reason behind this?

Well it is a good question because ultimately you could go back to a broadcaster and say boy, wouldn't your life be easier if you just migrated to the wonderful world of Interplay all in one fell swoop. And it's not just budgetary. It's actually falls down to if they've got a show that's under production now, nobody wants to do a significant shift to their infrastructure while they're in the middle of a show season. The other thing that's an important factor is training so you have people who are all trained on a current environment. If you want to move to the new environment, there's a new set of training that's got to be provided so the people know how to use the tool set and that just takes time. So the process for moving from one to another is straightforward and clear but it does require an investment and diligence in the rollout.

Okay and would it be a fair assumption to look at maybe the December quarter as when things start to get back on track from a number of different aspects?

That's a good time frame to be thinking about.

And Joel, lastly, I don't think you mentioned the pro forma tax rate of 16%. I may have missed this. What's the GAAP rate tax rate assumption?

10% for the year.

10% great.

Let me just correct something I said. When we're talking percentages of run rate, I'm talking specifically about the video business. That's not something that's extrapolated across the company for all our business segments. We were talking just in the video business. We don't disclose specifics around our total company run rate, but with this issue we were just talking video, okay?

Okay, thank you.

We'll take our next question from Andrew Abrams from Avian Securities.

Just a quick question on backlog. As it rises here, maybe you can give us some color on the aging of the video backlog and how much is kind of what we would call old backlog, which are projects that you're working on that are going to be affected, that have been affected by the deferred revenue side and then new projects where there's less of a question about when they get recognized, either shorter projects or projects that have been designed not to be in that kind of category. This is more color than anything else.

I'll take that, David. I would say that maybe 25% to 30% of the revenue of our backlog is focused on what's being deferred out here versus items that are running through every quarter. Typically one to two quarters we get something in, it comes right out. The ones with these commitments we've been talking about is roughly 25% of what we call our backlog.

Thank you.

And I just want to be clear on the tax rate question I gave, 10% I gave was in non-GAAP rate. The GAAP rate is 40% excluding the discreet items but I believe you wanted the non-GAAP rate, which is what I quoted you, the 10%.

Thank you.

We'll take our next question from [Merrick Czisuski] from Vestor Capital Corporation.

Hello everybody. Just a quick couple of questions here. When can you start purchasing the stock under the new authorization, that's one. Two, if there is restructuring, are you looking at facilities or people or a little bit of both and thirdly, just kind of a macro picture, are there any competing new products that are out there that are perhaps grabbing extra attention from you guys? Thank you.

On the repurchase, we've been authorized to restart. We have authorization to start as soon as we can. There's some restrictions that we have to wait for and as soon as we are allowed we will start that process.

As for the restructuring or the other cost savings you were talking about, we're looking at many, many different things. We're not taking anything out of our list of items to be looked at, so that process could include facilities. It could include people. There's a full list of things that we're looking at and we're working through that right now to make our decisions and we'll come back to you next quarter with the specific review of the actions we're taking.

Okay and I'll just address the component competitively. I think the place where you see the latest and greatest that everybody has to offer is certainly at NAB. Speaking about our video business and at NAB we saw new product introductions from Apple for example. They showed their new Final Cut Studio. That is something which I think many people are probably waiting to see what it would have at NAB so that's out there. We introduced our new ScriptSync technology so we showed our new offerings and there were other offerings there at the show but I think that the general consensus and this is also based on talking to members of the press, nobody felt that there was any major tectonic shift in the landscape. There was not any big thing from any one competitor that really shifted the overall competitive nature of the business.

The fact of the matter is that we operate in a competitive business. In a situation like that you need to rely on your strength as a business. For Avid we believe it to be long standing positive relationships we have with our customer base and we do have what we believe is the best customer base in the world.

We actually quoted a statistic at our press briefing about this past year's 2006 prime time TV show lineup and 92 out of the 93 prime time shows created last year were actually produced using Avid's tools. So that's a customer base that we're very proud of and you can see why we go through such great pains to make sure that we're taking care of them.

We'll take our next question from Chris Rowen from Soleil Securities. He has a follow up question.

Hi. Joel, just to clarify. Earlier you said the pro forma tax rate was 16% so just to get us all on the same page, could you give us the quarter and the year pro forma and GAAP for the tax rates?

The pro forma for the quarter was 16% and the pro forma for the year is 10%. For the GAAP rate for the year is 40% without removing the discreet items and for the quarter the GAAP rate was around zero, I'm sorry, 20%. The GAAP rate for the quarter for Q2 is 2%.

2% or 20?

Let me restate that. The GAAP rate for Q2 is zero. Sorry. And the non-GAAP is 16%.

Okay. And then for the year it's 10% and 40%.

Correct.

So that would mean the quarter--

The 40% is excluding discreet tax items.

Okay but the 40% would suggest that the quarters after the 0% in the first quarter might be as high as 50% or 50%.

So to put it apples and apples for you, 20%, if I include all the discreet items for the year it would be 20%. Does that help?

Yes, that helps. Thank you.

We'll go now to Chad Bartley with Pacific Crest.

Hi, thanks for taking my question. I apologize if I missed this Joel but did you break out the rough mix of professional video revenue for the broadcast versus post-production?

I had not yet. Give me a second. The split is 47% post and 53% to broadcast.

Okay. Thank you very much.

You're welcome.

Moving on we'll hear from Joe [Arsenio] of Arsenio Capital Management.

Yeah, I wanted to ask you about your share repurchase and how you came to the $100 million figure. I guess the cash flow in the last quarter was $15 million from operations and you've got $187 million it appears on hand. So how did you get to the $100 million number? In other words, I would imagine that you would look at your quarterly operating cash flow and perhaps if you didn't really need in pursuing the business, you could allocate that to repurchase, so does that mean you believe your cash flow for the year will be $100 million?

Basically the approach we took was to take our projections for the year. Take our starting cash balance, determine where we think we're going to end up with cash, deduct from that what we consider cash needed for operations to come up with an amount of excess cash available for repurchase and we used that to determine the level of stock that we wanted to recommend to be repurchased.

Okay. I guess the obvious question is, is this really the best use of that money because it seems like a problem with the business is not its stock price. It would appear to be a question of the expense, or so it would seem. And I guess I mean as a shareholder I'm enthusiastic about the repurchase, don't get me wrong. It's great but I'm not necessarily convinced it's the wisest use of the money.

When we looked at this, we looked at a three-year projection. We feel we've taken a very conservative look out and we are comfortable with our cash flow projections to afford for this. As we did mention, we are taking a look at actions to improve our profitability, which will only increase those cash flow projects as we go forward.

And we'll take our next question from Chris McDonald of Kennedy Capital.

Hi, good afternoon. I was wondering if you could quantify the dollar value of the backlog since it's been conveniently delayed, if you would be willing to provide us that number.

That is not something that we have disclosed, that we disclose.

Is there a particular reason why you're unwilling to do that?

Well, it's not a GAAP figure number one and talking company to company, there could be many, many different definitions of what backlog is so we do not feel comfortable putting something out there that when compared to other companies, probably would not be compared accurately.

And just a question on the new incentive compensation plan that you put in place, I'm wondering if you could provide us with the thought process behind that, the changes that you made and help us understand what those profitability targets might be and how they might relate to I guess maybe the existing guidance that the company provided.

I'm sorry, when you're referring to the incentive compensation plans, are you talking about for our American sales teams?

Oh, no, just the; you filed an 8K earlier in the month I believe that outlined company-wide incentive comp changes and that was what I was referring to.

Okay, well then relative to our bonus plan for the company?

Exactly, yes.

Okay. Well, our bonus plan for the company is something structured for each business unit looked individually to determine what we would consider to be a performance improvement relative to what it's capable of achieving and looking at its performance from the prior year. So we look for year-over-year improvement and then we also look at reaching absolute levels of achievement so that we can properly incent our employees.

So it's like a bonus plan that I think you would find commonly at most companies. One of the changes that we did this year, in part due to investor comment last year, this year we've made it be the case that our individual business units can attain their profit sharing metrics individually as measured by their own performance as a business unit.

Last year we measured them individually and collectively and we didn't meet the collective threshold so nobody at the entire company got profit sharing last year even though one or more of our business units had individually merited that. So we made a change to this year's plan to be able to accommodate outstanding performance on individual business units.

Joel I don't know if you have anything to add to that.

That's right on.

At this time I'll turn the conference back over to Mr. David Krall for any ending or additional remarks.

All right, well thank you. I'd like to thank you all for joining us today and invite you that should you have any further questions, we will be available for follow up after today's call. So thank you for joining us. We'll look forward to talking to you next quarter.

Once again, that does conclude our conference today. We thank you for your participation.