Avid Technology Inc (AVID) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Avid Technology's Fourth Quarter Earnings Results Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tom Fitzsimmons. Please go ahead, sir.

Good afternoon. I'm Tom Fitzsimmons, Director of Investor Relations for Avid Technology. I'd like to welcome you to today's call. With me today are Gary Greenfield, Avid's Chairman and CEO; and Ken Sexton, Executive Vice President, Chief Financial Officer, and Chief Administrative Officer.

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 our performance. There are a number of factors that could cause actual events or results to differ materially from those indicated by these statements, such as competitive factors and pricing pressures, our ability to anticipate customer needs, our ability to execute our strategic plan, and adverse changes in general economic or market conditions.

Other important events and factors appear in our filings with the US Securities and Exchange Commission. In addition, our forward-looking statements represent our estimates only as of today, January 29, 2009, and should be not be relied upon as representing our views of any subsequent date. We undertake 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 GAAP to non-GAAP measures, are contained in our press release announcing this quarter's results, and are available in the Investor Relations section of our website at www.avid.com.

For the purposes of understanding our future business model, we will also be providing some forward-looking analysis on this call on an non-GAAP basis. Some of our GAAP financial measures are not, however, accessible on a forward-looking basis; and the differences between our future GAAP and non-GAAP financial measures could be substantial.

And now, I'd like to turn the call over to Gary.

Thank you, Tom, and welcome, everyone, to our conference call for the fourth quarter of 2008. Avid closed out 2008 with a busy and productive Q4. As we discussed in our last call, the economic climate, our product line divestments, and our restructuring all had an impact on the fourth quarter. We believe our results for the quarter were mixed, but we continue to see a number of positive strides being made across the Company, which I will share with you in a bit.

Ken will provide you with our financial results, after which I'll provide a more detailed update on our business and transformation efforts. Ken will then wrap up with our 2009 guidance and we will take your questions. Ken?

Thank you, Gary, and good afternoon, everyone. Our revenue for the fourth quarter was $206.7 million, which was down sequentially and year on year. I will discuss our revenue changes in a moment, but the major factors impacting fourth quarter revenue were the economy, unfavorable currency exchange rates, and the sale of our non-core product lines.

Our preliminary net loss for the fourth quarter of 2008 was $31.9 million, or $0.86 per share. We performed an impairment analysis in our consumer video segment, resulting in a $9.6 million impairment charge. As we finalize our analysis for all of our business segments, we might have additional impairment charges. This analysis will be complete prior to filing our 2008 annual report on Form 10-K. Our non-GAAP results will not be impacted by any additional non-cash impairment charges.

As in prior quarters, our earnings release provides a table of certain items that are excluded from our fourth quarter non-GAAP results. These items total $22.6 million and include impairment charges of $9.6 million, amortization of intangibles of $3.6 million, stock-based compensation of $3.1 million, restructuring costs of $23.9 million, net gain from product line divestments of $13.3 million, and related favorable tax adjustments of $4.3 million. Excluding these items results in a non-GAAP net loss of $9.3 million for the fourth quarter, or $0.25 per share.

Our GAAP gross margins for the fourth quarter was 42.9%, including $2.9 million of restructuring, amortization of intangibles, and stock-based compensation. Without these charges, gross margins would have been 44.3%.

Our non-GAAP gross margin was down year on year and sequentially. Our Q4 2008 gross margin was adversely impacted by about 3 points, or $7 million, related to the performance of our consumer video product segment, which I will review in a moment. The strengthening of the US dollar in the fourth quarter also impacted short-term margins, as most costs of goods are valued in dollars.

Our operating expenses for the quarter, excluding impairment charges, amortization, stock-based compensation, net gains from product line divestments, and restructuring. was $97.4 million. This was down about $10 million sequentially and $12 million year on year, which is early evidence of cost savings from our restructuring efforts.

Our Q4 operating expenses include $1.7 of transformation-related costs. Transformation-related costs include third party consulting, severance, and recruiting costs related to our 2008 restructuring activity that are not included in our restructuring charge. For the full year of 2008, transformation-related costs were approximately $8.8 million, or $0.24 per share. These type of costs should not be material in 2009.

Our preliminary GAAP operating loss was $32.7 million. Excluding impairment, net gain on product line divestments, amortization, stock-based compensation, and restructuring, but including transformation-related costs, our non-GAAP operating loss was $5.7 million for the quarter. As previously noted, after tax and interest our non-GAAP net loss was $9.3 million.

During the fourth quarter, we finalized the sale of our Softimage 3D and our PCTV product lines. The Softimage transaction closed on November 17. We received $26.5 million of the $33.5 million purchase price, with the remaining balance to be held in escrow, with scheduled distribution dates in 2009 and 2010.

We also completed the sale of PCTV for $4.8 million on December 24, 2008. We received $2.3 million at closing and the remainder is scheduled to be collected over the next 12 months. We will also be reimbursed for the cost of existing PCT inventory sold by the buyer over the next 18 months. The PCT inventory on the balance sheet as of December 31, 2008, was $7.5 million.

The sale of these two non-core product lines will allow us to better focus on the core business moving forward.

I would now like to focus on the operating performance of our three business segments. While we now have a single, integrated customer-facing organization, this will be the final time we will report our businesses in our three traditional segments -- Professional Video, Consumer Video, and Audio.

Please note that the following items are excluded from the business unit results -- the GAAP to non-GAAP adjustments of $22.6 million, I reviewed earlier; net interest income and other expenses of $331,000; plus $21.6 million of corporate operating expenses.

I wanted to highlight that all of our segments were impacted by foreign currency exchange rates in the fourth quarter. While the impact of exchange rates was favorable for the full year, in the fourth quarter we had an unfavorable sequential impact on revenue of about $13 million.

Now, starting with the Professional Video revenue-- for the fourth quarter were $111.2 million, down 5% sequentially and down 17% year on year.

Our Softimage 3D animation product line contributed approximately $1.4 million of revenue to this segment in the fourth quarter of 2008 and $2.8 million in the fourth quarter of 2007. We believe the sequential decline in Professional Video is attributable to slowdown in spending by our customers during this uncertain economic period in addition to the unfavorable impact of currency exchange rates. The year-on-year decline reflects the fact that the fourth quarter of last year, we had an especially large transaction taken to revenue from our backlog.

Professional Video contribution margin was $16.8 million, or 15% of revenue, which was about $2 million higher than the last quarter.

For our Consumer Video segment, revenue for the quarter were $23.1 million, down 17% sequentially and down over 40% year on year. The PCTV product line contributed about $9 million of revenue in the fourth quarter, down about $7 million from last year. The fourth quarter was especially difficult for our Consumer Video business given the current economic climate combined with the disruption, particularly in Europe, to our reseller network caused by our divestment of PCTV.

Consumer Video lost approximately $12 million in the quarter. The Consumer Video business for the fourth quarter was also adversely impacted by the unfavorable ruling related to a duty tax; issues related to royalty costs; and low gross margins on our PCTV and also our video transfer product line. As I mentioned earlier, these factors reduced this business segment's gross margins by approximately $7 million.

In Audio, revenue was $72.4 million in the four quarter, which was flat with the prior quarter and down 16% year on year. The release of Pro Tools 8 had a favorable impact on our business sequentially. On a year-on-year basis, both the professional and home markets for our audio businesses were down, largely related, we believe, to the current economic climate.

Audio's contribution margin for the fourth quarter was $11 million, or 15% of revenues, which was almost a $3 million sequential improvement.

Our balance sheet remains strong. We have no debt and ended the quarter with $148 million of cash, up $25 million since September 30, 2008, primarily due to $28.8 million of proceeds from the sale of our non-core product lines.

The fourth quarter included a $23.9 million charge for restructuring, the majority related to a reduction in force. Approximately $9 million of cash was used for restructuring activity in the fourth quarter.

Inventory was down $27 million compared to last quarter. Although the sale of PCTV contributed significantly to change, lower inventory levels in our Professional Video business also helped. Please note that $7.5 million of our PCT inventory was reclassified to other current assets in our December 31, 2008, balance sheet.

Inventory turns were 4.8 million and days sales outstanding were 45 days for the fourth quarter, which are improvements over the prior quarter and the prior year.

Our deferred revenue of $73 million was down sequentially and year on year. This reduction is related to our non-core product line divestiture, changes in deferred deal backlog, and sell-through, as well as the timing of maintenance contract bookings.

I'd now like to hand things back over to Gary, who will provide an update on the business.

Thanks, Ken. 2008 was a year of very significant change for Avid and can be characterized as a year of planning and getting our house in order. We completed a number of organizational changes that will enable us to move towards execution of our goals and strategy in 2009 and 2010.

While the current economic climate requires us to move forward with a degree of caution, we are now better positioned to execute on our strategy. Back in July, we presented our strategy in a three-phase transformational plan -- (1) get healthy; (2) build core momentum while expanding margins; and (3) unlock new sources of growth. We also mentioned that we would work these phases in tandem. During 2008, we made significant progress around these goals. Our senior leadership team was established and these leaders have now rolled out their organizational structures.

We made significant progress around the transformation of our business with the complete reorganization of the Company. As Ken mentioned, our cost structure has improved significantly in the fourth quarter as a result of this restructuring. We've now organized Avid to function as one integrated company rather than three separate businesses like we have in the past. This enables us to leverage the combined strengths of our core audio and video domain expertise and to better serve our customers.

We've already made some great progress on infrastructure products to demonstrate this integration. For example, we have started to consolidate our Web and ecommerce sites to create a more unified and robust presence on line. Our customers can expect to begin to experience the benefits of these projects as early as Q2 of this year.

This integration also included looking across our business to ensure that we are focused on our core areas of strength. For example, we've redefined the markets we'll serve as one company, casting an eye towards how our audio and video technology can empower all of our customers, from education, home enthusiasts, to artists and creative professionals, to small, medium, and larger enterprise businesses. No matter where our customers are on this continuum, Avid has the ability to be an integrated video and audio solution provider to all of these users, and that is a significant differentiator from any other company in our industry.

Moving into 2009, customers will start to see a more unified Avid in the marketplace as we evolve the way we represent our brand at various industry trade shows such as NAB. We've decided to exhibit on NAB's show floor in 2009 after a brief absence in 2008, although we'll be much more judicious by using a smaller footprint than we've had in past years. We feel we were able to have some great conversations with existing customers in Las Vegas last year, but having a presence on the floor enables us to attract a greater number of prospects in folks who may not be as familiar with Avid.

I would now like to switch gears and discuss some highlights from our fourth quarter. In Q4, we had a number of new product introductions. Our customers and products received multiple awards, and we achieved a few milestones regarding the holiday season sales of some of our consumer products. With those things as a backdrop, I'd like to share some of the details with you now.

In the fourth quarter, we began shipping Pro Tools Version 8, the next evolution of our music creation and audio production software. Pro Tools 8 provides everything users need to create, compose, record, edit, mix, and output, all in one application. We're happy to report that since its release, we've sold approximately 34,000 Pro Tools 8 licenses worldwide, which includes upgrades and new system purchases.

During the same period, we were able to help customers such as broadcasters, large post facilities, and educational institutions, set new standards for HD collaboration with the launch of ISIS 2.0, our storage solution. The innovative media network solution sets new benchmarks in system capacity, performance, and scalability, filing for up to 384 terabytes of storage, and an ability to scale up to 330 real-time clients with full-system monitoring. One of our beta testers, Films@59 out of the UK, said the system support for high-resolution files is a huge benefit and has the potential to greatly increase their productivity.

And while our numbers in our consumer space were down over all, the fourth quarter provided a boost to our consumer audio and video business in terms of milestones. M-Audio reported that Black Friday sales at Apple stores of products such as Key Studio 49 Keyboards and AV40 speakers were up over 80% from last year.

And our global Pinnacle ecommerce sales increased over 30% in 2008. This was achieved as a result of a complete overhaul of our Pinnacle website and ecommerce experience, along with expansion into Latin America and Asia Pacific.

During the fourth quarter of the year, we received multiple award and accolades. These include Video Maker magazine naming Pinnacle Studio 12 its prestigious Product of the Year award, which will appear in the February 2009 issue of the magazine. And in October, Below the Line magazine reviewed Media Composer 3.0 and called it the preferred choice of editors in feature film and television productions. These are great examples of our continued technological innovation and commitment to our customers and business partners.

Lastly, in October we hosted a broadcast business summit, which we invited several of our top broadcast customers to Tewkesbury for a few days. During this time, we had a number of productive two-way conversations with these customers, discussing topics such as business and technology challenges, our solution roadmap, and industry trends. We look forward to hosting many of these personalized events for our customers.

All in all, we're making good progress against our strategy and our delivering on our commitments to our customers and business partners. We still have a fair amount of work to do, but the progress is promising and we look forward to continuing to drive this positive change in 2009. Let me turn this back to Ken to talk about our outlook for 2009.

Thank you, Gary. I'd now like to provide some perspective on our financial outlook. While the current economic climate makes it difficult to provide revenue guidance, we'd like to share our profitability targets for 2009. Our intention is to provide clarity regarding our core revenue and our goals for non-GAAP operating profit margins in 2009.

First, I will address core revenues so investors will understand our continuing revenue base entering 2009. For 2008, our revenues totaled $845 million, including $53 million associated with divested product lines. In addition, we discontinued certain other product lines which are no longer considered core to our go-forward strategy. Revenues relating to these product lines totaled $8 million in 2008.

Revenue for our core product areas, after adjusting for divested and discontinued products, totaled $783 million in 2008. In addition, during the first half of 2009, we plan to continue to fine-tune our product offerings, which could negatively impact our revenues from core products by an additional $5 million to $10 million.

In 2008, we took several cost-reduction actions intended to return Avid to profitability. These actions were designed to improve our gross margins and reduce our ongoing operating expenses. For 2009, if you assume our revenue as relatively flat with our 2008 core revenue, we have a non-GAAP operating margin target of 6% of revenue. This is an annual operating margin target, and we would anticipate sequential quarterly improvement throughout the year.

The operating margin target excludes the following GAAP adjustments -- approximately $5 million of restructuring charges related to activities initiated in 2008; stock-based compensation of $14 million to $16 million; and amortization of intangibles of about $12 million to $14 million. These adjustments, with the same revenue adjustments, would result in a GAAP operating margin of about 2%.

Additional items affecting net income include other income of approximately $1 million and income taxes. GAAP income tax expense is anticipated to be in the range of $7 million to $9 million. The non-GAAP tax expense would be about $2 million higher than the GAAP expense.

This concludes our remarks. Now we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) And we'll take our first question from Paul Coster with JP Morgan. Please go ahead.

Yes, thank you. Ken, can you just tell us what percentage of revenues came from international versus domestic and what the customer concentration numbers might be, if relevant?

Sure. Bear with me for a second. So we've got-- from an over-all standpoint, the breakdown would be 58% international and 42% domestic, which is pretty much the same for the full year -- 56% versus 44% domestic for the full year.

Okay. Were there any 10% customers?

There were no 10% customers during the year at all.

Okay. So you're not going to be reporting in the three segments moving forward. Just technically, how are we to expect the reporting to be going forward? It is just products and services?

The anticipation will be that we will be providing audio and video separate, but we're looking at combining consumer video and the professional video segments. And we may have some changes on how we measure profitability in those segments, of which we'll have further detail, of course, for our first quarter call.

Paul, that's a reflection, of course, of the way we're organized and actually the way we're actually building the products, with shared technology, etc. And as you know, it was one of the transformational activities that we embarked upon towards the end of the year.

That makes sense. So clearly it's difficult to issue any kind of guidance at the moment, but can you talk about the pipeline, the close rate, the sales cycle, particularly as it relates to the professional side of the business? And are things getting tougher? We can only assume they are.

What I would say, Paul, the pipeline's actually-- is (inaudible) doing pretty well. Markham Van [ph], who now heads up our worldwide sales organization across all of our product lines, is really bringing a great form of discipline to the way we take a look at sales and the way we take our pipeline. I think the question isn't about the size of the pipeline; it's more about do we see the sales cycles getting longer? And I think that uncertainty has-- on the problematic side, uncertainty has led to, "Well, when is that commitment going to be made?"

On the other hand, HD -- and I think we've spoken to this before -- is further along in the US than overseas, and we're seeing a lot of opportunity overseas of HD opportunities, particularly in the video space.

We're seeing in the United States that only about 25% of the letter stations have actually changed their internal work flow to HD. When you hear of the HD transition, February, June, whatever side of that you happen to be on, what you're really hearing about is the transmit signal. If you take a look at some of the HD stations that have transitioned, you still see the small picture. And so we're seeing the letter stations coming to us and saying, "Okay, look; we've got to upgrade our infrastructure to get there." Again, sales cycle.

And of course, the other thing is that Pro Tools was released in the last two weeks of the year; Pro Tools 8 was released in the last two weeks of the year. So there is some opportunity there.

So we're cautious. And there's no doubt the economy is sitting there in front of us. We've tried to build internal plans that reflect that, but there's no doubt that both the consumer side as well as our professional enterprise sides, there's a little wait-and-see out there as well.

Okay. And my last question, then, is the pipeline is just as big; obviously, the close rate is slower owing to the sales cycles. But what about the win rate? Do you see any change at all there or do you think your competition's actually weakening?

I'm actually-- I would say on the competition side, I'd say we're actually in pretty good shape. I think that many of the activities that our customer operations organization under Kirk Arnold's leadership has initiated-- has said that, "We're coming out tough against our competition in the traditional media composer area."

We talked about Pro Tools. One of the big things in Pro Tools 8 was this composer capability I talked about, which allows you, right in a Pro Tools environment, to use the capabilities of Sibelius, which we had acquired a couple of years of go.

So what we finally have done in the last year, I think, is started saying, "Hey, we are going to not just have the great stand-alone products, but bring some of the interoperability together that we've spoken about." And that's made us, I think, a little bit stronger against our competition. Competition is still quite strong; I don't want to walk away from that. But we're turning that momentum. Quite honestly, I feel like we had rolled over dead a little bit, competitively, and we're coming out pretty strong and charging pretty hard.

Thank you.

Next we'll go to Mike Olson with Piper Jaffray.

Hey, good afternoon. It seems like the pro video business is holding in there while audio, and even more so consumer, are seeing a bit more difficulties. And understand the consumer issues. But maybe you could just talk more specifically about the primary audio segment headwinds.

And then also, I know you've been asked this dozens of times, but would there be any reason to take a look at just simplifying the business and honing in on pro video and maybe shedding the consumer and audio segments?

Well, we've been asked all the questions. We've been asked if we should focus on audio and get rid of the pro video. So I think we've been through all that mixture. As we go through it, just to talk a little bit about some of the headwinds that we have there -- in the audio space, the audio space is a pretty broad space so you can't talk about it in any one segment.

Pro Tools was late in the year. While that's a benefit for 2009, it didn't give people a chance to do much in the last couple of weeks of the year, and I think that was-- that's just a timing of the delivery that was out there.

In think in the audio space, you do find fewer enterprises than you do in the pro video space. And as a result of finding fewer enterprises, the small businesses and individual professionals, as well as the MI audience, musical enthusiasts, are confronted by the economy a little bit more. Obviously there was still a pretty robust business for audio during the course of the quarter, but that's how things get reflected, is at the margin of some of those businesses. So there's a little bit of consumer at the lower end of the audio; there's the professionals.

And again, I think people are obviously feeling the effects of the stock market, and also the credit crisis -- not having loans available for the small businesses. You've got a lot of stuff we're starting to see sort out already in this year.

As far as the focus, I don't really want to address, shall we spin something off or not spin something off -- we've addressed that -- and I think, instead, focus on our strategy, which is to take advantage of our unique positioning of an aspirational ladder from the enthusiast to the enterprise. It's something we've done very successfully with audio and we're doing the same thing with our consumer products in the video space, is starting to create the relationship, through marketing and through actually sharing of special effects between our high-end product and our low-end product.

We're particularly also trying-- if there was not really an opportunity to do that but the marketing, but also just to have shared R&D, I might feel differently. But we've sort of spelled out that strategy during the course of the summer and we're making our bets. We constantly look at our business; we look at the whole thing.

Audio has performed very well for us over the years and we're not going to take a look at one quarter and say, "Hey, it's time to spin off the business there."

That's helpful; I understand. And then second, I realize you aren't giving real specific guidance, but when you talk about the 6% pro forma operating margin and flat revenue on the core revenue side would get you there, are you implying that you expect flat revenue for the core revenue -- so basically '09 revenue of around 780? Is that what you're implying in saying that?

No. What we were trying to say is that we're not giving any revenue guidance, but we wanted to give enough direction to people on other types of things, and they could make their own assumptions. We just felt in this environment, it's just not prudent to give revenue guidance.

Okay. So you're just saying, if it was flat it would be 6% pro forma up margin.

Yes. Even if it was down a little bit from flat, we could probably still hold that number. But it's-- so from a sensitivity standpoint, we can manage so even if it was down a little bit from that.

Okay. Thanks very much.

We'll take our next question from Ben Hunt with Iridian Asset Management.

Hey, thanks. How do you intend to get your costs under control and return this company to profitability?

Well, I don't think it's a matter of getting them under control; I think we took those substantive efforts, and Ken has provided a little bit of that bridge; I let him talk about it.

The reduction in force alone, the restructuring we did back in October, is an example -- it's about a $50 million a year savings. There are several other initiatives with our cost of goods that we've talked about during the year. We're continuing-- we've centralized our manufacturing operations, which is a significant savings to our manufacturing overhead, as an example, where we didn't have shared manufacturing between the divisions. There are many efforts along the Company.

So we're going into this year, and as we've chatted about before, the restructuring that we announced in October does trail a little bit -- and Ken quantified that in his comments -- a little bit into the first part of this year.

But we aren't waiting to get our costs under control. We found ourselves, when the economic headwinds hit, that we're actually better prepared than most because we'd already entered into, of course, during the first half of the year, a planning process so that we could execute in a very thoughtful manner and also execute very quickly, rather than waiting, as many companies have been doing, till the first quarter of this year. Ken, do you want to provide any additional--?

Sure. So to give you an example of some of the things that we've done to date, if you actually went back to the first quarter of this fiscal year, the run rate on non-GAAP expenses was sitting at $109 million for that quarter, and we've brought it down to $97 million by the end of the fourth quarter, this most recent quarter that we reported.

And we previously stated that with the adjustments that we've made it the fourth quarter, some of which aren't fully implemented until at the end of the first quarter of this year, of 2009, and into the second quarter, that we expect to get the operating expense run rate down below the levels, even, that we're reported here for the fourth quarter. So we'd expect that we'd be dropping down into the low $90 million range by the second quarter of this coming year.

(OPERATOR INSTRUCTIONS)

Operator, why don't we end? I'd like to thank all of you 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. Thank you all.

Once again, that does conclude today's conference. Thank you for joining us and have a wonderful day.