Avid Technology Inc (AVID) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Avid Technology Second Quarter Earnings Results Conference Call. Today's program is being recorded. At this time, for opening remarks, I would like to turn things over to the Director of Investor Relations, Mr. Dean Ridlon. Please go ahead, sir.

Thank you and good afternoon. I'm Dean Ridlon, Avid Technology Inc's Investor Relations Director. I'd like to welcome you to today's call. Before we begin please note that this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about projected growth of existing or new markets and anticipated results of operations during 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 US Securities and Exchange Commission. In addition, our forward-looking statements represent our estimates only as of today, July 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, Avid's CEO.

Thank you, Dean. I'd like to welcome you to our second quarter 2007 results conference call. With me on the call today are Nancy Hawthorne who will be taking the reins as interim CEO starting August 1 and Joel Legon, our CFO. I'll start by providing some highlights of the quarter, then Joel will give a detailed review of this quarter's financial results. I'll continue by providing some insight into our individual business units. Then Nancy will give an overview of our CEO transition plans and strategy moving forward. Finally, Joel will come back and update our financial outlook. Following our prepared remarks, we will all be happy to take your questions.

In summary, our revenue for Q2 was $225 million, up slightly both year on year and sequentially and in line with our guidance. Broken down by business unit, professional video rebounded with a good quarter, up about 7% sequentially and 1% year on year due in part to conversions of some large deals from our backlog.

Audio revenue was up 3% year on year although down slightly sequentially and in our consumer segment, lower sales of the TV viewing line in Europe were counterbalanced by strong sales and market share growth of our flagship Studio 11 consumer video editor.

Taken together, this was a solid quarter where we achieved a number of important objectives including recognizing large deal revenue from our backlog in video, a successful product launch for Studio 11 in consumer and progress on inventory reductions in all of our division.

Avid remains a solid Company with a diversified product portfolio and a strong balance sheet. This puts us in good shape to transition our leadership and to align ourselves for future growth.

As previously announced, I will be stepping down as CEO at the end of this month. After July 31, I will continue to work with Nancy for the remainder of the quarter to ensure an orderly transition.

I'll go over each of our businesses and what we see in the marketplace in a view minutes but first I'd like to hand it over to Joel to review the quarterly numbers in detail. Joel?

Thank you, David, and good afternoon, everyone. Revenue for Q2 was $225.3 million, up sequentially and year over year. GAAP gross margins were 48.9% including $4.8 million of non-cash charges for acquisition related amortization and $433,000 of stock based compensation. Without these non-cash charges, gross margins would've been 51.2%. Consumer gross margins increased sequentially while video and audio gross margins were roughly level with Q1. Improvement in consumer's gross margin was the result of improved mix with the successful launch of Studio 11 video editing software during the quarter.

Operating expenses increased from the first quarter as expected due to the costs associated with our participation in the National Association of Broadcasters convention in April. As stated in our earnings release, we have undertaken a strategic realignment that will result in restructuring charges of between $8 and $10 million, $1.5 million of which was recorded in Q2. This action includes the transition of video server engineering from Mountain View, California to existing Avid facilities in Edmonton, Canada and Tewksbury, Massachusetts, a reduction in space within certain facilities, and a reduction force of approximately 150 position, primarily but not exclusively in the video business unit.

GAAP loss before income taxes was $5.5 million and our GAAP tax provision was $547,000 resulting in a net loss of $6 million or $0.15 per share on 40.9 million average shares outstanding. Non-GAAP tax expense was approximately $1.7 million. Our earnings release provides a table of certain items that are included in our results. These items total $14.2 million and consists of acquisition related amortization, stock based compensation, restructuring, legal settlements, and related tax adjustments. The reason these items have been highlighted is that when we measure the performance of our business units and disclose our business segment results externally, we do not include these items. Adding the $14.2 million in charges to our GAAP net loss of $6 million results in a non-GAAP net income of $8.2 million for the second quarter. Using fully diluted shares outstanding of 41.5 million, non-GAAP earnings per share was $0.20.

Now let's talk about the operating performance of our three business segments. In addition to interest, we exclude the following items from our business segment results in Q2. $8.2 million of non-cash acquisition related amortization of intangibles, $4.6 million of non-cash stock based compensation, $1.5 million of restructuring charges related to new plans to improve the profitability of our video and consumer businesses, $1 million for the resolution of several law suits, and $1.1 million of tax adjustments for the items mentioned above.

Professional video revenue was approximately $120 million, up both sequentially and from Q2 of last year. The main drivers for the increase were higher service revenue and recommission of recognizing revenue for the large France 24 deal that was in our backlog.

Sequentially video operating expenses were up $4 million versus Q1 due to the course of participating in the National Association of Broadcasters convention in April. The slight increase in gross margin coupled with the increased revenue resulted in video operating profits increasing sequentially by $800,000 to $2.3 million or 1.9% of revenue. Year over year, video operating expenses were up $3.5 million due to salary and facility cost increases. Video operating profits in Q2 2007 were $5 million lower than Q2 2006 due in part to a lower gross margin.

Though our backlog reduced slightly as we recognized some large deals this quarter like France 24, our backlog is higher than we would like due to outstanding functionality commitments for certain customers. We continue to work hard to convert backlog deals to revenue but it is important to note that there are several factors that could impact the timing of recognition. Based on our current plans, we are forecasting to turn the existing backlog to revenue by this time next year. Here are some additional metrics on our backlog as of the end of Q2.

We expect just under 50% to be recognized by the end of this year. We have received cash for approximately 20% of our backlog. Approximately $21 million of inventory has been shipped to deals in our backlog and roughly 50% of our backlog has come from deals in 2007 -- has come from 2007 bookings.

Audio revenue in Q2 was down sequentially but up 3% over last year due to the inclusion of Sibeliusrevenue. As a result of lower revenues and flat gross margins and operating expenses, audio operating profits decreased sequentially from $7.3 million to $6.4 million or 8.4% of revenue. Year over year, a slight gross margin increase was more than offset by an operating expense increase resulting in a $2.9 million decline in audio operating profits from Q2 2006.

Consumer revenue was up sequentially to $28.2 million with gross margins up sequentially as well due to the higher mix of Studio 11 software revenue and flat operating expenses sequentially. As a result, the consumer division narrowed its operating loss to $1 million after posting a $2.4 million loss in Q1. Year over year revenues were down slightly but higher gross margins and operating expense reductions resulted in an $800,000 improvement in their bottom line results over Q2 of 2006.

In total, results for the second quarter of 2007 were $225.3 million, gross margins of 51.2% and operating expenses of $107.5 million. Operating profits increased sequentially to $7.8 million or 3.5% of revenue. Year over year a modest increase in revenue was offset by a slight decline in gross margins and increased operating expenses partially due to the inclusion of Sibeliusresulting in a decline in operating profit of $7 million from Q2 2006.

Turning to the balance sheet, cash decline by $27.5 million to $160 million at June 30 from $187.5 million at March 31 due primarily to our stock buy back program. On our last call, we announced that the board of directors had approved a program to repurchase up to $100 million of stock. Through June 30 we have utilized approximately $24 million of our cash to repurchase approximately 706,000 shares of stock.

Inventory was down approximately $5 million from March 31 balance due to our inventory reduction program and we remain committed to reducing our inventory levels by $20 million from the 2006 ending balance by the end of this year. ESOs were steady at 55 days.

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. Last quarter, we discussed our improvement plan for our video division which included diverting engineering resources to make it easier for our install base to adopt our new platforms.

We also talked about converting large and complex deals in our backlog to revenue. I'm pleased to report we're making progress on each of these fronts. As we've previously communicated, we won't begin to see the benefit of the install base initiatives until Q3 but we are on track with our engineering efforts and expect to release software updates on schedule in late August.

With across the board revenue improvements in our broadcast infrastructure product lines and a focus on converting big deals in our backlog, we achieved modest revenue growth year on year and a 7% improvement sequentially. It's important to note that we didn't sacrifice margin to get that revenue as we grew margins by 40 basis points.

We've also been working to help our enterprise customers transform their businesses as they respond to the changing dynamics of the broadcast and post production markets, including transitions to HD and the shift in both advertising revenue and programming towards the internet.

For our professional video unit, that means realigning the business to have a greater emphasis on selling storage, asset management, and most importantly, services. In fact, Q2 was a record quarter in services, showing a 38% growth over Q2 last year which is indicative of our progress particularly in Europe where we more than doubled our service revenue year on year; however, we're not yet where we want to be in the Americas. Revenue was down year on year with product declines more than offsetting an increase in services.

We are bolstering our efforts with new marketing programs and to attracting independent producers and the education market in addition to the restructuring and redeployment of resources announced earlier today. We believe winning the hearts and minds of the aspiring professional is a key to our long-term growth in the professional video segment.

Turning to audio, in the second quarter we were roughly flat against Q2 last year on organic revenue and up 3% when including Sibelius which we acquired in Q3 of 2006. At the high end, our Pro-Tools HD business is down from last year although the HD based icon console and venue live sound systems are selling well with many of the most prominent names in the music industry out on tour with Digidesign venue systems this summer.

At the volume end of the market, our Pro-Tools LE and M-Audio Pro-Tools empowered revenue grew 19% year on year reflecting a market trend towards lower cost systems for project studios and music composition. The strategy of building on our market leadership in digital audio workstations by offering a wide range of products and price points then building a robust ecosystem around Pro-Tools continues to work well.

On the lower end, M-Audio had a more challenging quarter with their business flat year on year with lower margins. This is due to a drop in audio interfaces in the MI channel attributable to increased competition as well as delayed product releases. This was offset by growth in keyboard controllers, speaker, and an increase in sales within the consumer channel.

The latest version of the Sibelius flagship product, Sibelius5, was also launched in Q2 although not until very late in the quarter. With version five out in the market for the full quarter in Q3, we expect to see increased growth for the product. Taken as a whole, our audio business continues to be stable and profitable with strong brands and new market opportunities in music education, consumer audio, and digital mixing systems for live venues. As we've discussed in previous calls, we're making additional investments in our audio engineering in order to capitalize on our market opportunities.

Switching now to consumer, I'm very pleased to report the launch of Pinnacle Studio 11 has helped consumer to deliver their highest software revenue since Q4 of 2005, 2.5 times our Studio 10 software sales a year ago. Retailers are very positive and the product is winning awards and getting great reviews. The latest MPD results for the U.S. show that our software sales market share rose to 57%, our highest market share in years and up 15% from the same month last year. This success is particularly gratifying after the misstep we had with version 10 last year. We now feel like we're back on track with a very solid release and strong momentum in the marketplace.

Our TV viewing products, however, are having mixed results. On one hand, sales in the U.S. are double what they were a year ago, but Europe, which has been our strongest market for TV viewing had a significant drop off compared to last year when sales where fueled by viewers wanting to watch the World Cup. We also attribute this to a general flattening out of the market with unit sales increasing but ASPs dropping due to competitive pressure. And some specific weakness in our business in Germany where we have now made a change in sales leadership.

As a whole, our consumer business is down 3% year on year and not projected to be profitable in the third quarter. As previously announced, we have taken action to restructure the business to lower expenses and we expect to be profitable in the fourth quarter.

I'll now turn it over to Nancy to talk about our business moving forward.

Thanks, David. Before I outline the plan for the Company moving forward, I would like to offer our most sincere thanks to David for his contribution to this Company, particularly his leadership over the last seven years as CEO. During that time, Avid has not only doubled in size but more importantly become mission critical to the entertainment and media industry around the globe. As we enter the next phase in the lifecycle of the Company, we owe David a debt of thanks for his leadership.

I'd now like to outline some of my priorities and put some recent actions into context. As you know, I will take the reins as interim CEO August 1 while we conduct a search for a permanent replacement for David. We've taken this approach of naming an interim CEO the previous two times we've conducted a CEO search so this process is not new to us and has worked well in the past.

Clearly, we want to take the time to find the right mix of skills and experience required to take the Company to the next level. So naturally, we cannot provide a specific timeframe as to when we expect to find a successor. But until we do, I will be working full-time and onsite with the executive management team and fully engaged in the operation of the Company. To ensure an orderly transition, David will be working on a consulting basis until the end of September.

Now, I know you've heard this already but I am delighted to be able to say that we appointed Joel Legon as CFO on a permanent basis. As you may know, Joel has been acting CFO for the last two quarters and has done a great job.

Now let me tell you why I'm so excited about Avid. Across our operating units and product lines we have great technology, top notch people, deep vertical expertise, 20 year history of innovation, and powerful brands. Media and entertainment is a growing dynamic space and our products are mission critical to creators and innovators. That's a great place to start.

So where do we need to improve? First, operationally. This is a Company that has grown by acquisition and become increasingly geographically dispersed. Now we must develop the robust infrastructure necessary to grow to be a multibillion dollar company. We need to remove redundancies, adopt industry best practices, and invest in critical infrastructure components that will enable us to have a razor sharp handle on our business. I believe that by improving our infrastructure, we will better enable management to track the key drivers and outcomes of the business and to become more agile in doing so.

Second is how we address the markets we serve. There is a sweeping change going on across the media space. Our customers' businesses are changing rapidly and Avid's role in this new world is to be the thought leader and trusted partner that helps them turn challenge into opportunity. In order to earn that position with our customers, we need to have a clear corporate strategy that maps to their needs. We need to continue with our product innovation but augment that with services that leverage our expertise and most importantly, we need to have the right people with the right skills, in the right places.

To help us achieve these goals, we have engaged the consulting firm Bain and Company. Bain's mandate is to help us in evaluating our processes, systems, strategies, and culture to help build Avid and align us for future profitable growth. Avid is already on solid ground and in good shape. We have work to do to be sure but we're working from a position of strength and that's the best time to take a new approach and undertake the kind of changes that will enable us to enter a new phase for the Company.

I'll now turn it over to Joel to provide our guidance.

Thank you, Nancy. Before we talk about guidance for the balance of 2007, I would like to provide more information about the financial impact of the restructuring actions we discussed earlier. The annual impact of these actions is approximately $14 million of reduced operating expenses with a $6 million benefit expected for 2007 reflected midyear implementation.

In addition, we've been working on cross business unit initiatives to improve our profitability. These initiatives include the establishment of financial shared service centers in Europe and the U.S. and leveraging the Company's total purchasing volume to achieve better discounts for individual business units for manufacture and procurement, logistics, royalties, and IT.

The annual benefit from these initiatives is expected to be approximately $5 million and the 2007 benefit to be about $1.5 million. This brings the total benefit from the restructuring actions and the profit improvement initiative to approximately $20 million on an annual basis and in 2007 benefits being about $7.5 million.

Turning to guidance, though we are confident in our second half forecast, we are not able to predict the quarterly split with accuracy due to the follow factors. First of all, the video segment is in the middle of an R&D initiative that has refocused development resources on improving our customers' ability to migrate to our new products and improve product quality which is targeted to be completed late in Q3.

Secondly, there are several large deals in our backlog that depending on when we receive customer acceptance could be revenue in either Q3 or Q4. And the important holiday selling season for our consumer oriented products begins in mid-September and runs through mid-October. The timing of these sales has a significant impact on each quarter.

As a result of this uncertainty, I will only be providing 2007 full year guidance.

Revenue for 2007 is currently expected to be between $915 million and $935 million and GAAP earnings per share to be in the range of a loss of $0.05 to a profit of $0.11. Excluding approximately $30 million of acquisition related amortization, approximately $8 to $10 million of restructuring, $17 million of stock based compensation and $1 million of legal settlements, we expect non-GAAP EPS to be in the $1.25 to $1.40 range.

These ranges assume full year non-GAAP gross margins of 51.5%, non-GAAP operating profit of approximately $51 to $58 million and a non-GAAP tax rate of 11% for the year. These EPS ranges also reflect approximately $0.13 of EPS reduction for the cost of the Bain engagement which was discussed earlier and the CEO search and transition.

During our next call, we expect to provide our initial outlook for 2008 financial results.

This concludes my remarks. Now we would be happy to take any of your questions.

(OPERATOR INSTRUCTIONS) We'll go first to Mike Olson with Piper Jaffray.

Thanks a lot. Couple quick questions. One is you mentioned that the majority of the head count reduction is going to be on the video side. Is that in the consumer video business or the pro video business and what areas specifically are these people coming out of? If you can give any more specifics on it?

Most specifically, this was in the professional video segment although we did have a slight restructuring that also happened in our consumer video segment. But the majority was in the professional video segment and the main change was also the relocation of our operations in our Mountain View facility to relocate that work to Edmonton, Canada as well as Tewksbury, Massachusetts. That was the largest single change. There were some additional changes just structurally within other parts of the business as well though.

Okay. And then on the audio side, as you mentioned audio's typically been up sequentially in June. It sounds like there was a bit of a shift away from kind of higher end Pro-Tools offerings and towards lower end offerings. Is this something that has just changed in the market or is that sort of a one quarter type of thing?

There were a couple of dynamics going on when we referred to Pro-Tools cores. We have an exchange program where we try to offer deals to existing customers to exchange their core systems for newer models. That exchange program did not do as well as we had originally expected; however, we had increased sales of our HD cores in bundled configurations where they're bundled along with an icon console for example. So that part of the market actually grew.

Just relative though to where we're seeing most of our growth as we've pointed out, we saw a 19% year over year increase in Pro-Tools LE sales and that is where we're seeing the most rapid growth. And that's consistent with what we have seen. That's a higher growth segment of the market.

Okay. And then broadcast, I hate to ask you about this, but just as far as the backlog, I know you mentioned you're taking steps to turn the existing backlog into recognized revenue. Are you working on a way to recognize broadcast deals differently? I know that's not an easy thing to do. But is there a way essentially to remove the problem of kind of building up all the backlog with unknown recognition timing?

We're doing a couple things. The first one, which I think is the most important was converting our commission plants for sales to a revenue based plan versus a booking spaced plan. So what that does is it drives the behavior to really sell what you have now so that revenue can be taken quicker versus having to wait a period of time before the revenue's taken which would mean commissions would be delayed.

So that's had a pretty dramatic effect. I believe outside of these commitments where there is no accounting fix for that, you can only take revenue associated to future commitments when those commitments are delivered under any type of accounting rules.

Other than that, we're looking at with our normal installation type work, once we move out of the discussion on commitments, we have two to three quarters it normally takes for some of these larger deals to turn to revenue and we're looking at many things including percent complete and trying to call up these deals in different phases, to be able to take it a little quicker.

So we are constantly working on that.

I could also add here that one of the technical hurdles that has been holding us back was just this issue of scalability and were we able to scale to enough seats and we've successfully been able to increase our seat count to over 200 seats and we're working on expanding it even beyond that. That's going into tests right now. So that had been one of the hurdles, a technical obstacle, and we feel like we're putting that one behind us. So that's another good indicator.

Okay. Just one last question. Sorry to make you repeat this but I dropped out at the end of the guidance. You said 51.5% gross margin and what did you say after that? $51 to $58 million something and then what was the tax rate?

No problem. So 51.5% gross margin. $51 to $58 million of non-GAAP operating profit and a non-GAAP tax rate of 11%.

That's it for me. Thank you.

We'll turn now to Steven Frankel with Canaccord Adams.

Good afternoon. I want to go back to the backlog. Could you give us a feel for how many of these systems are live today versus ones that might be waiting for commitments to get live?

I don't have exact numbers on that, Steve. I can tell you that are a percentage of the deals that are on live and are waiting for acceptance. I don't have exact numbers on that.

Okay. And could you give us an update on how the post-production business did this quarter.

One second. So for video the post business declined 7% and the broadcast business increased 10% year on year. Sequentially the post business increased 7% and the broadcast business increase 6%.

And where are you on HD penetration. You look at these new sales in post what's the HD attach rate today?

I can fill that one in. In Q1 we gave a statistic where the number of Adrenaline systems that we were selling that were either HD systems of HD upgrades was 62% of our units. In Q2 that same metric moved up to 67%. So we're seeing just a steady increase in the percentage of units that are going out with HD capability.

And were storage sales in the quarter at plan, above plan, or below plan?

I don't have that, Steve, in front of me. So we'll try to look at that during that call. If I can get it to you by the end of the call, I'll come back to you with that.

Great. Thank you.

We'll go now to Paul Coster with JPMorgan.

Thank you and good afternoon. Nancy, as you were talking through the strategic imperatives which is very helpful, thank you, nonetheless I was immediately thinking this is going to be custom lines. It's going to move to a more custom type business. And obviously with that I would be concerned about the margins. I'm probably jumping way ahead here. But why should I not be concerned? Am I wrong in thinking that we're moving towards a custom type business here?

I don't think that is preordained. I think what we've been trying to say is that we as a Company want to become more focused on really understanding where the market in the aggregate is moving so that we can stay ahead of them and be a little bit more attuned to what things they really place value on, what kinds of problems they have that we can help them solve so that we can really unlock some value from the processes and products that we provide. In no way did I mean to signal that we've made any decision that we're moving more towards a custom model.

For the services business certainly did very well here and if I'm a customer seeking to change my process flow, I want a very high touch service. There is a risk here of being dragged into this custom business, isn't there.

There's a risk and there's an opportunity. I don't think we look at it as -- in general I hear people say you don't want to do that because it's lower margin but it also is the opportunity to essentially create an ecosystem that's Avid centric at the customer and have more of an annuity model of business. And so we think it's a nice complement to our Avid products but we don't look to it to replace our products.

Okay. Will the Bain study also evaluate whether or not there are synergies across these three businesses?

Absolutely. That's one of the things we'd like to try to get at. We definitely to try to get at and define the ways in which this collection of assets could be made to act together where each business could potentially feed into the other businesses either in terms of people or products or intellectual capital or marketplace benefits. So, yes, we are extremely focused on that as a possibility.

Is the opposite also true? You'll be looking at the value that might be created from breaking up the business?

I think any intelligent look at any business requires you to be open to whatever the data tells you. We certainly have no agenda to do that.

That sounds very reasonable. And then finally, Joel, excellent presentation. But all the same, I missed something at the end there which was the non-GAAP charges that go into the pro forma calculation for the full year. I got the $17 million of stock comp, the $1 million of legal. There was one other item and that was - ?

Let me repeat them all to you. So we had $30 million of acquisition related amortization. $8 to $10 million of restructuring. $17 million of stock based compensation. And $1 million of legal settlements.

Thank you. Thanks very much.

Okay.

We move now to Andrew Abrams with Avian Securities.

Just one quick question for Joel. You were talking about the conversion of the broadcast backlog and I think I missed what you said at the very beginning of your presentation in terms of when you expected the existing backlog or last quarter as the stopping point, that backlog to be completely recognized?

It is our expectation that the backlog that exists as of the end of the second quarter will be recognized, will be turned into revenue within 12 months from now. So sometime during our third quarter next year we believe all the revenue will have turned to backlog.

Now that includes new backlog that's been built in the second quarter? Is that correct?

That's correct. Our ending backlog at the end of Q2, we expect all of the backlog that existed then within 12 months to turn into revenue.

Can you break out what was new to the second quarter and go back to first quarter and give us an update on where you think that will play out.

I had not been tracking that but we -- the France 24 deal we were talking about was a large order and that wasn't backlogged. So we did fairly good. We believe tracking against our 12 month commitment against the March 31 as we said and we believe - we're hoping to - as we flush out the commitments and back to the product roadmap from the redirected focus we have now to accelerate that process and to turn our backlog to revenue much quicker than we're doing right now.

Just one other quick thing. On the consumer hardware side, can you kind of break out what sold well and what didn't? I think you mentioned that the TV cards -- I shouldn't say cards anymore. Did not sell well? Can you kind of go through each of those individual products?

TV tuners -- this actually gives me an opportunity to mention another good thing about TV tuners is that we did gain share in the European market in TV tuners but the overlying factor was the market itself went down in total revenues. So if we look at our charts we can see that seasonally it was up last year with the World Cup and this year it was down. But the good news in that was that our market share increased during that period of time.

Relative to the other hardware that we sell, we sell video acquisition hardware that goes along with Studio under the Pinnacle brand name as well as under the Dazzle brand name. And those products are more legacy products for us. We continue to sell them but that overall market will continue to decline; however, there are other segments in that category of video hardware that we do expect to be growing segment and we will be investing -- we are investing in product development in the hardware space, products that will reach the marketplace either late this year or early next year. But we don't have additional details that we're going to be providing on that right now.

Thanks.

We'll now go to [Andy Aronda] with Needham and Company.

Hello. Thank you and good afternoon. How would you characterize the macro environment in the broadcast business in the U.S. and overseas?

Okay. Well, just relative to broadcast market drivers, we've talked in the past about it tends to go in cycles. Often it's boosted by Olympic and election years. So this year, 2007 tends to be a little bit of an off year. But if you think about what the environment is overall, there's no question that the marketplace conversion from tape based to all digital network production is continuing to march forward and that driver we don't expect to go away.

We do expect that at the end of the day broadcasters will convert most or all of their tape based operations to digitally networked operations. We have in generally found the European market to be a bit stronger than the U.S. marketplace and the reason for that we believe is just because of the nature of the European market tends to have more state owned broadcaster who exist and they can invest on different cycles that are not so much influenced by short-term economic cycles.

The U.S. marketplace tends to be more economically focused and is driven more by shorter term trends. So as dollars for example in advertising are shifting from on air to internet, broadcasters are being very careful and cautious about the investments that they're making in that area; however, we are seeing them continue to make investments and broadcast groups of stations are continuing to convert stations on a periodic basis.

We don't expect people to convert all their stations at one time because it tends to be a pretty sizable capital expenditure. But the ongoing conversion is continuing along and we are continuing to get new deals booked on a fairly regular basis. The number of new deals that came in this quarter was very comparable to the number of new deals that came in the same quarter last year and the deal size is comparable as well.

Great. What is the pricing environment like in the post- production business?

There continues to be a pricing pressure in the post-production marketplace. This is with the introduction of software based solutions that can obviously do more for a lower investment. We have our own software based solution that we introduced several quarters ago which is Media Composer software and that competes in that market segment. That does tend to be where we see the most price competition.

One more quick question. Do you anticipate continued operating losses in the consumer video business in Q3?

We expect a loss in Q3 and a profit in Q4.

Great. Thank you.

And by the way, that's not new. We had expected that previously.

If I could just jump in for a second to provide an answer to Steve's question on storage. So our storage business was slightly below forecast for the quarter but this is driven in part by large deal acceptance and the mix of products in those deals and the -- it was just very slightly below our forecast.

(OPERATOR INSTRUCTIONS) We'll go next to Chris Rowen with Soleil Securities.

Hi. Could you give us an indication of who your closer competitor is in high end audio and how big they are relative to Avid or Digi.

We have competitors in different parts of the market that we serve. So for example in digital audio workstations, Digidesign is by and away the market leader. We don't have somebody who's really close. We have people with smaller market shares probably on the order of 10% per competitor with companies that tend to operate more regional. So there might be -- there's a Swiss company for example. There's a British company. None of them has anywhere near the market share that we have with Pro-Tools.

But we have different competitors when we look at the different parts of our product lines. So for example when we talk about consoles we may compete with Yamaha or Euphonix and those are companies who aren't also offering a digital audio workstation to compete with Pro-Tools. So our broad product line means that we face different competitors in different aspects of the market that we're serving.

Okay. And then in terms of the broadcast market, what percent would you say are probably digital now and how many years do you think it will take to get to say 80% converted?

Based on our estimates and this is in looking at customer conversions that we've already done and then looking at what are the conversions that are available ahead of us, it's approximately in the 30% category that has converted so far. And there are additional conversions that obviously we anticipate to take place in the future as I was mentioning earlier, on a fairly regular basis.

The question of when will we be at 80%, I can't exactly predict when that would be but I would guess that will still take a number of years. Maybe five more years before we could be at the 80% mark. And that's just looking at the length of time it's taken to convert the initial 30%. I don't think that there's going to be one event that gets everybody to convert all at once because customers will continue to need to allocate their capital budgets across all of the stations that they own.

Okay. That's helpful. Thanks.

And by the way, though, if I could add one more thing, many of the initial stations that we converted we put in standard definition configurations so for example to do news programming in standard definition. Now many of those stations are going back and revisiting and upgrading those stations to HD and in many cases the conversion to HD is exactly the same as the initial investment that took place to convert to SD. So it gives us another opportunity to go back and convert people up to HD. So the customers who have already done the initial conversion still have additional investments that they're often making.

But do you see the broadcast market as kind of playing out more like your audio business is now where it's a steady grower? I think that in the past there might have been some expectation either by you or investors or just generally in the space that there was some inflection point. But now it seems to be settling into just a very good business but nothing that's going to change radically one way or another. Is that fair?

I think that is more of a steady business not an overnight business. But we're also seeing aspects of the business come online as we're able to do a couple things. So I mentioned earlier for example that when we solve that technical hurdle of scalability, we actually now have the ability to go into larger broadcasters and give them solutions which can meet their needs today. And that had been an obstacle. So there were technical hurdles that were holding us back which we believe that at this point we are knocking those down and will be in a position to meet their needs with products that are in some sense off the shelf.

The other thing that needed to happen and we're building this capability is our professional services capability which allows us to go in and effectively help customers migrate from their analog or tape based production methods over to digital methods and that's in many ways every bit as important as the technology because customers need to be trained, the employees need to be trained. Sometimes you need to do things slightly differently than you've done in the past and all of these things need to be in place before a broadcaster can flip the switch and base their operation on this new method.

So we now have more and more capability that we've put in place that allows us to do these things in a more predictable fashion.

Great. Thanks a lot and good luck.

Thank you.

And there appear to be no further questions at this time. Miss Hawthorne, I'll turn the conference back to you for closing remarks.

I'd like to thank you all for joining us today. Should you have any further questions all of us will be available for follow up after today's call. We look forward to speaking with you next quarter.

And that will conclude today's conference call. Have a pleasant day.