Avid Technology Inc (AVID) 2009 Q1 法說會逐字稿

Good day, and welcome, everyone, to the Avid Technology first quarter 2009 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. 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 or adverse changes in general economic or market conditions. Other important events and factors appear in our filings with the U.S. Securities and Exchange Commission.

In addition, our forward-looking statements represent our estimates only as of today, April 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 also provide some forward-looking analysis on this call on a non-GAAP basis. Some of our GAAP financial measures are not, however, assessable 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 first quarter of 2009.

Like others, Avid experienced a challenging first quarter due to the current economic conditions around the globe. While we are not satisfied with a net loss for the quarter, I am pleased with the process we continue to make in transforming Avid.

Back in July of 2008, we discussed our three-phase transformation plan -- get healthy, build core momentum and span margins, and then lock new sources of growth. While all these efforts began at the same time, they are overlapping and will be completed at different times. We had announced the transformation plan, and we stated that the get healthy phase would take about 12 to 18 months. The end of the first quarter marks roughly the halfway point for this phase.

Examples of our progress measured against the goals we originally established for this phase include, one, become more efficient and streamlined. We've dramatically reduced our cost base over the past year and can now be profitable on a much lower revenue base. In fact, our operating expense for Q1 is down over $25 million compared to last year's first quarter on a non-GAAP basis.

Two, develop a clear brand strategy. We had a very successful NAB, which I will discuss shortly. But clearly we are on track in revamping our brand, the new version of which was unveiled at the show.

Three, become more open. We announced the support of NAB for both Final Cut Pro and [Omnium] products in our workflow.

We also continue to make progress in Phase 2 of our transformation. As Ken will speak to in a moment, in the first quarter we saw an improvement in our non-GAAP gross margins as a percent of revenue on both a sequential and year-on-year basis.

I'd now like to turn the call over to Ken, who will provide more details on our first quarter financial results. Ken?

Thank you, Gary, and good afternoon, everyone.

Our revenue for the first quarter were $151.6 million, down 27% sequentially and 24% on a year-on-year basis. If you exclude non-core product lines and the impact of currency exchange rates, our revenues were down 22% sequentially and 12% on a year-on-year basis. I will discuss revenues a bit more in a moment, but a good portion on the year-on-year decline was in our European market.

Our GAAP net loss for the first quarter of 2009 was $17.3 million, or $0.47 per share. As in prior quarters, our earnings release provides a table of certain items that are excluded from our non-GAAP results. These items for the first quarter totaled $11.7 million and included amortization of intangibles of $2.9 million, stock-based compensation of $4.1 million, restructuring costs of $5 million and a related favorable tax adjustment of $354,000. Excluding these items, non-GAAP net loss was $5.6 million for the quarter or $0.15 per share.

Our GAAP gross margins for the quarter -- for the first quarter was 48.3%, including $2.1 million for amortization of intangibles, stock-based compensation and restructuring costs related to our cost of sales. Without these charges, gross margins would have been 49.6%.

Our non-GAAP gross margin was up over 1 percent point year-on-year and up over 5 points sequentially. As Gary mentioned, part of our transformation plan was to expand our margins, and our first quarter results show improvements in our gross margins.

We improved our operational efficiency through the creation of a single company-wide production and delivery organization and the divestment of lower-margin product lines such as PCTV. These improvements were partially offset by the strengthening of the U.S. dollar as compared to the prior quarter and the first quarter of 2008.

Our operating expenses for the quarter, excluding amortization, stock-based compensation and restructuring, was $83.5 million. This was down almost $14 million sequentially and more than $25 million on a year-on-year basis.

Our GAAP operating loss was $20.3 million. Excluding amortization of stock-based comp and restructuring, our non-GAAP operating loss was $8.3 million for the quarter. As previously noted, after tax and interest, our non-GAAP net loss was $5.6 million.

Foreign currency exchange rates had an overall unfavorable impact on our results. This impact was somewhat modest on a sequential basis but fairly significant when compared to the first quarter of last year.

Now, moving to segments, we have combined our Professional and Consumer Video businesses. We will now consequently report on two business segments -- Audio and Video. The following items are excluded from the business segment results -- the GAAP to non-GAAP adjustments of $11.7 million I reviewed earlier, net interest income and other expenses of $153,000, $13 million of general and administrative expenses, $37.5 million of sales and marketing expenses, and $1.8 million of corporate R&D expenses, and the benefit from income taxes. Please note that the segment contribution margin calculation was changed from last year. Segment contribution margin is now calculated as segment gross margin less R&D and product management expenses directly attributable to those segments.

The reconciliation of segment contribution and the reclassified contribution margin for the prior year using the new basis is contained on our press release announcing this quarter's results.

Now, starting with the Video segment. Reported revenues for the first quarter were $87.5 million. Our European Video business was slow in the first quarter. We believe a good percent of this slowdown was attributable to the decrease in spending by broadcasters as opposed to competitive losses. Changes in currency exchange rates year-on-year also contributed to this decrease.

Included in this revenue is approximately $900,000 of non-core business primarily related to the sell-through of PCTV inventory in our U.S. channels. This compares to core revenue for Video of $123 million last quarter and $107 million in the first quarter of last year, resulting in a 30% sequential and a 19% year-on-year decline in our core Video revenue.

The Video segment contribution margin was $21.3 million, or 24.3% of Video revenue. This compares to $31.8 million of contribution last quarter and $28.5 million in the first quarter of last year.

In Audio, revenues were $64.1 million in the first quarter, down about 12% sequentially and year-on-year.

Our Pro Tools Version 8 upgrade sales were strong, but sales of our Icon and Live Sound product lines were off, primarily, we believe, as a result of financing issues for our customers of these high-end products.

The Audio contribution margin for the first quarter was $22.7 million, or 35.4% of Audio revenue. This compares to $25.2 million of contribution margin last quarter and $26.3 million in the first quarter of last year.

Our balance sheet remains strong. We have no debt and ended the quarter with $131.7 million in cash. During the first quarter, we made approximately $10 million in cash payments related to our restructuring efforts announced last year.

Inventory was relatively flat compared to last quarter and down almost $28 million compared to the first quarter of last year. We have approximately $6.6 million of PCTV inventory classified as other current assets in our March 31, 2009 balance sheet. This is down almost $1 million from our 2008 year-end balance.

Inventory churns were 3.2 and day sales outstanding in receivables were 48 days for the first quarter.

Our deferred revenue of $68.2 million was down sequentially and year-on-year.

I'd now like tier one hand things back over to Gary to provide an update on the business. Gary?

Thanks, Ken. Our results for the first quarter are indicative of the overall tough economic environment facing our customers across many of our markets and geographies. Broadcasters have seen a significant drop in advertising spend, and according to broadcast industry analysts, are expecting to reduce capital spending and initiate cost-cutting programs in the coming year.

A tightening in the credit market has also dampened effect on sales of our higher end audio products, which are also financed to third parties. The film industry has shown relative strength with strong box office sales in the beginning of 2009.

The consumer market is also challenging. In fact, NPD reported that U.S. consumer video editing sales have declined about 25% year-on-year, which is consistent with what we have seen.

We continue to work with our customers through these difficult times to provide solutions that allow customers to achieve their goal of creating high-quality digital media by reducing operational costs. And our professional services team continues to form strong partnerships with customers, which will benefit us when the economy recovers.

We're just finishing up a great week at the National Association of Broadcasters trade show in Las Vegas, where we unveiled our new brand identity, which reflects our organization and products coming together under one Avid. At the center of this brand identity is a new logo composed of simple geometric shapes derived from the buttons, icons and markers that consumers and professionals recognize as fundamental to the digital audio and video solutions they use every day to enable their creativity.

The new logo forms a visual connection to iconic shapes that represent volume up, volume down, play, pause, record and forward, signaling a unification of the Company's core audio and video offerings. The distinctive mark also spells out the Company's name in abstract letterforms. I'd urge you to take a look at our newly launched website to see some of these early brand milestones in action.

NAB offers a great opportunity to get customer feedback on our solutions and what we can do to help our customers succeed. In addition to our new branding, we made several other announcements at NAB.

We announced new Avid-wide support packages that provide comprehensive support to customers working in environments that include both Video and Audio solutions.

We also made announcements that underscored the openness of Avid solutions. These included the support of Final Cut Pro running on Avid's Unity MediaNet and ISIS shared-store offerings -- shared-storage offerings as well as the qualification of new workflows with Omnium servers in a number of camera formats.

We understand our customers work with a broad array of tools and believe it is important to offer a platform that supports their diverse needs. As you know, Avid's strategic plan is exclusively focused on customer success, and we're proud of the work our customers are doing with Avid products. We were thrilled to have some of the most talented and recognized customers on the main stage with us at NAB this year talking about how they've been able to use our audio and video solutions to unleash their creativity and create award-winning work.

For instance, Oscar-winning duo Chris Dickens and A.R. Rahman of Slum Dog Millionaire spoke on our main stage at our customer event about their tight collaboration on the film from a video and audio perspective.

Additionally, we had presentations from Ocean's Pictures Sound Mixer Larry Blake, (inaudible) and USC professor Norm Holland.

The 2009 award seasons marked success for Avid customers across the music, film and television industries with more than 55 honorees and 140 nominations representing several categories at the 2009 Grammy, ACE and Oscar Awards. Avid customers took home top honors at the awards in categories that include Grammy wins for the Record of the Year and Album of the Year; ACE Eddie wins for the Best Edited Feature Film, Best Edited Half-Hour Television Show and Best Edited Reality Series; and Oscar wins for Best Motion Picture, Achievement n Sound Mixing and Achievement in Film Editing.

Key product announcements last quarter reinforced our commitment to providing our customers with open solutions and fluid reliable workflows. In early March, we announced upgrades to our Newsroom suite of offerings with a end-to-end long-op HD Newsroom solution that includes new versions of iNEWS Command, AirSpeed, Multi Stream HD and Interplay. This solution was built on an open infrastructure that will allow our customers to easily integrate it within their existing environments.

In the same period, we announced upgrades to our video editing solutions -- Media Composer, Symphony and NewsCutter. There were several key enhancements to these products, including the introduction of the Avid Media Access, or AMA, which now offer our customers more flexibility when it comes to working with [their camera] formats. Steve Cohen, a motion picture editor with ACE, recently cited the benefits of AMA to editors on his Splice Here blog.

We announced native support for the [red camera] as well as the Sony [HD Cam] format in the first quarter, and we introduced its operability between our leading professional video editor, Media Composer and our leading digital audio workstation, ProTools, to provide customers with an integrated experience.

A key component of our strategy has been the organizing of our business to meet the needs of a wide spectrum of market segments from education to creative professionals to large broadcasters. Avid demonstrated its ongoing commitment to the education segment by participating in the grand opening of the new state of the art school Cinematic Arts Complex at University of Southern California, which features that 260 Avid audio and video systems. In the first year alone, more than 1,000 students will work on those systems.

During the opening event, Scott Webber from the TV drama Lost demonstrated to students how to use our ICON Mixing System, and several Avid demo artists were on hand showcasing the new features of Media Composer and ProTools.

Overall, we have made some good progress in transforming Avid, and we continue to deliver on our commitments to our customers. While the current economic climate has introduced new challenges, we continue to work closely with our customers and are building a solid foundation for Avid as we move forward.

Now, let me turn this back to Ken to talk about our financial outlook for 2009.

Thank you, Gary.

I'd now like to provide some perspective on our financial outlook. As was the case last quarter, the current economic climate remains uncertain. Although we are not providing guidance, we are comfortable in saying that we expect sequential improvement as the year progresses. While the global economy is not in our control, we continue to monitor our spending with the goal of returning Avid to a non-GAAP operating profit in 2009.

With our combination of expanding gross margins and reduced operating expenses, we believe the Company can show a modest non-GAAP operating profit even if revenue drops to approximately $665 million in 2009. This non-GAAP operating profit excludes the following GAAP adjustments -- restructuring charges, stock-based compensation and amortization of intangibles. We would expect that these costs to be about $35 million to $40 million in 2009. These adjustments with a $665 million revenue assumption would result on a GAAP operating loss of $35 to $40 million. Additionally, affecting net income included -- include other income of approximately $1 million and income taxes.

GAAP income taxes in anticipated to be in the range of $3 to $5 million. The non-GAAP tax expense would be about $2 million higher than the GAAP tax expense.

This concludes our remarks. We would now be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS). And our first question will come from Jim Ricchiuti with Needham & Company.

Yes, thank you. I was just wondering -- Gary, you talked a little bit about weakness in Europe. Can you discuss maybe in a little bit more detail what you're seeing there, and also, if you could, characterize the U.S. market as well in terms of what you're seeing from customers, hearing from customers coming out of NAB?

Yes, so -- I -- so, let's hit the European question first about just where we're seeing Europe. Europe is always not -- never been as resilient to a downturn as the United States. I can't really speak to why. I would speak it to Americans tend to be -- as cynical as we might be, we tend to be more optimistic that Europeans, particularly the consumer community.

As we sold PCTV, we loss some critical mass for some of our distribution channels for Consumer, and I think as we are changing that organization around to be able to deal with that and to focus only on those profitable countries, then you have some loss in momentum, particularly for our Consumer businesses there. And I think that's more of what we saw in the first quarter than anything else. And when we say Consumer channels, we're including -- don't think it was just Consumer Video, but all of our Consumer products and what's occurring there.

To speak to the NAB point, which is really tied into the European point, I actually found this year more European participants than we typically have seen in NAB, and there's still transition -- I think I've spoken to this on prior calls. The transition to HD is still very early in Europe. As an example, in France, we're working with one broadcaster who's going to have the first HD news channel in all of France, and that's just indicative of how early it is, how early it is in Europe.

What we were hearing at NAB -- what we were hearing at NAB across what I would say would be primarily the Post segments and the Broadcast segments is that people are starting to engage. They're certainly starting to engage to Avid. The tenor in terms of the conversations [where] Avid, I can assure you, were very different this year than last year and want to work with us on a -- want to work with us on some larger proposals.

The broadcasters have had their CapEx reduced -- the large, what I call traditional broadcasters. The subscription base, whether they be content delivery or whether be -- whether they be content delivery or whether they be a -- cable, I'd say, are still doing reasonably well and are engaging in conversations.

Overseas what we're finding is that overseas with Europeans, certainly the largest majority of that, people again are starting to engage us in a different level of conversation. And one of the reasons people are looking for more end-to-end solutions is they want one throat to choke. They realize that trying to put all this stuff together and integrate it is very costly; they can improve their ROI by turning to as few vendors as possible. Certainly we're not going to be the only vendor in the mix.

So -- but I will tell you the conversations at NAB as a whole were just very, very positive. I literally -- I was supposed to come back yesterday morning, and there was such demand for so many meetings I took the red eye in last night to make it back for the earnings call, and I was -- literally raced for the airport at 8:30 at night to be able to do that. So there's a lot of customer engagement. A lot of them are hopeful that CapEx will start to free up in the second half of the year.

In the past you've seen some doubts coming out of NAB in the June quarter. It sounds like what you're seeing is people were interested in talking. They're engaged. But maybe not much in the way of carry through until perhaps second half?

I would say I would not anticipate anything big in this quarter. If there were to be anything, I think the positive things which came out of NAB is our stereoscopic capabilities and our wet capabilities. When we had the main stage presentations for that at our main stage, were literally standing room only over the course of the last three days. And our media composer with the stereoscopic capability did win a video award for Best of the Show in the category.

So there might be some stereoscopic or Media Composer DX, because as you're probably aware, that SAG is close to reaching a conclusion on its lack of contract. It never struck, but it might as well have because no one would bond with -- no one would bond new shoots.

So I think we will start to see emerging over the course of this quarter, next quarter, as that's ratified -- I think we will start to see new projects green lighted, and that might create a little -- one of the things we are seeing is editors now demanding our DX series, which remember is what we released a year ago, and particularly with the 3.5 release and with its AMA capability, we now see editors demanding that, which has been forcing the studios to say to the rental houses they've got to acquire that or their in-house studio organization.

So we may see something, but we're not -- I'm not -- I count that as upside rather than expectation.

Okay, thank you.

Our next question comes from Paul Coster with JP Morgan.

Hi, thank you. Can you talk a little bit about the guidance for -- well, first of all, can you make -- can I make sure that I understood it properly that the sequential improvement is at the bottom-line. Are you also anticipating sequential improvement in the top line from this point forward?

Yeah, I think that what we were saying is really revenue and earnings from a sequential standpoint, we would expect to continue to improve as the year goes on. And then when I talked about the operating break even, because we changed our cost structure around so much -- I wanted to -- we did not provide any revenue guidance on this call, but I wanted to give everybody an idea if that if the year remained tough for the whole year and that our objective is that we would -- we want to make -- ensure that we can deliver a non-GAAP operating profit, that I'm really just indicating to people where would that breakeven amount be based on our cost structure and our plans that we're implementing today.

Okay, that makes sense. The -- what exactly are you seeing, though, that gives you the confidence around the sequential revenue improvement?

Well, first off, I'd say that we do have visibility in the larger projects. I think that some of the improvements may be modest in future quarters, so we're not -- I don't think that we're looking at anything to expect some extreme improvement, but at the same time, at least as it relates to some of the larger transactions and some other activity that we have going on, we do think that it would like it would improve compared to where it was in the first quarter, especially in the second half of the year.

Those projects that you do have in the pipeline, you would say that they're generally of the larger nature or -- how is the pipeline evolving?

Well, the pipeline -- I've actually had the same conversation with another CEO yesterday, and if you take a look at the pipeline -- the pipelines are growing, but things are getting stuck in the middle of the pipeline, things that we expect in advance to the closing stage, they're sort of getting stuck as people are waiting for their CapEx.

I think what Ken was referring to is projects that we've actually -- many of which we've already signed that are acceptance deals, we call them, where we do have some real -- where we do have some real visibility, as well as where some are forced into having make some decisions. I think I've commented on this just about every call. There is some real end-of-life to equipment, whether it's our equipment or other equipment and these broadcasters do have to be sure they put things on the air. I think that will force some second half decisions.

Good. And my last question is a welcome expansion in gross margin -- was it pricing, product mix, combination of the both?

It was a combination of product mix and reduced cost. As you may remember, on average for most of our product sales, we are running about -- on an average, we're running probably 65% gross margins on just that, and a lot of those are valued in dollars. So we had some pressure there, but the good news is that as it relates to our fixed overhead and our expenses and our different services groups, that we've been able to achieve improvements year-on-year.

Good, great. Thanks very much.

We'll now hear from Mike Olson of Piper Jaffray.

All right, thanks. You mentioned OpEx down $25 million year-over-year, so you've made progress in cost cutting. I guess my question is -- I'm not trying to beat a dead horse here, but kind of a follow-on from the previous one, but would you need to do additional cost cutting in order to get to that earnings break even, or is it basically just dependent on parallel revenue recovery?

Well, the earnings breakeven point is just a number, right, so it has nothing to do with revenue recovery. That's the number at which we breakeven. We continue to watch our costs, and -- we continue to watch our costs, and we have -- I think we've always indicated to you all that we have programs underway that are built as part of our plan to further reduce our costs, that we wouldn't have seen all those cost savings in the first quarter. And so you will see additional -- I think you will see additional cost savings coming out of this as part of our broad-based -- broad-based planning.

Okay. You don't want to quantify what the range of that cost savings could be, do you?

I'll let Ken. You can actually do the math where we breakeven at $665 -- you can do the breakeven on that. You can do the math on it. But Ken might know it off the top of his head.

Well, no, I think that you're just going to see sequential improvement, but you also should see gross margin expansion through all that.

Okay. And then just in talking with your customers, we often hear that high-end customers are extremely loyal. They never leave Avid, but the mid- and low-level users have entertained the idea of moving to Final Cut or maybe have actually even moved to Final Cut. What's your strategy to slow that down, and I guess are you not as concerned with potential market share loss in the mid and low market and more focused on just maintaining that high end?

So, first of all, I think we have a multi-faceted strategy. As I do every time, I would like to remind everyone that Final Cut is only our editor business and really has nothing to do with any other part of our business that's there.

I think that what we're doing in the category of Final Cut, specifically, since you asked about it, is making sure that we have -- that we're bringing to bear better products and products that the professionals can use as well as working with the educational institutions. If you were to read Steve Cohen's -- what we pointed to, Steve Cohen's Splice Here blog, as an example, he would specifically comment on Media Composer versus Final Cut, something that had -- a year ago, people would be saying, "Look, this is our Achilles' heel," this is now a reason to be buying Avid. And we can be pointing at many, many things along the way where Avid has reemerged as the tool to use.

The second thing we're doing, of course, is marketing. When we were out at NAB and we has Chris Dickens as an example standing up there who was, by the way, a triple winner -- [BASDA], ACE and the Academy -- when you have someone like that up there literally speaking at the Avid booth, you see all the young faces staring at him going, "We want to be like Chris." And Chris is up there saying, "The way I got here is by using Avid, and that was a key part of my success."

So marketing is a part of it. You've heard me say on prior calls that we have rolled over and played dead. We're no longer rolling over and playing dead. We're going after that market.

The third thing is education. We did participate -- USC is considered one of the premier schools -- if not the premier school, in the case of cinematic arts. We participated in their opening. I should note that Hampton did the -- an Apple -- a Mac shop, but they're using Avid Media Composer to train their students.

Similarly, there's many other universities, and we really have stepped up our educational efforts throughout the country.

The fourth thing and -- which we just have got to realize is that it's a mixed world out there. It's a mixed edit world out there. There are -- there is more than just Avid out there, and that it's a world we committed to opening up our platforms. And I don't think anyone -- any one of our customers and I doubt any one of the folks on this phone, a year ago if I had said, "Avid embraces Final Cut onto our infrastructure," they would have said, "There's no way Avid would ever do that. And indeed, we did do that. Which says, "Look, we recognize Avid's going to be out there in the next edit environment. We want Avid to own the infrastructure platform, and we've made sure that Avid Media Composer and Final Cut Pro can coexist in this particular case on the same -- in the same storage world.

So we're clearly trying to say, "Look, Avid's the leader. There's some specialty areas you could very well use final cut, but we're going after this market hard."

Good, thanks. That's really helpful. Just one last housekeeping. I might have missed it, but do you give full revenue, and if not, is that something you guys are going to share?

No, it's all -- that's all part of the Video segment.

Okay, thank you.

We'll take our next question from [Wayne Chang with Cannacord Adams].

Hi, guys. Thanks for taking my call. I think most of my questions were already asked. Just really quickly, just talking again about the sequential improvements in revenue, do you see that actually happening in the video segment in particular, considering the precipitous drop-off?

And wanted to see if you could just talk a little bit more about what additional cost opportunities you -- cost-cutting opportunities you might have, particularly whether that rationalization might be more heavily back-half weighted or not.

And lastly, I'm not sure if I have the number right, but I think it was in '10, 10% up income target at some point. Is that number going to be revised? Are you dropping that number off? Can you talk a little bit about that as well?

Okay. Three-part question, so I'll take the revenue one first, and we said -- you have to look at it off of this year's base, so as we get into the second half of the year, if you kind of -- let's take the Video segment as an example. So we were down 30%, but $17.6 million of the decrease was the impact of non-core and $5 million was the effect of currency. So taking out currency, we were down about 14% year-on-year. And the Audio side was kind of down about 12% year-on-year, and if you took out currency, it'd even be less than that. But we see sequential improvement in that, and again, probably more towards the second half than the first half.

On operationally efficiencies or whatever, a lot of that relates back to programs that we implemented this past year, and we still don't have necessarily all the benefits of those programs. So I don't -- I can't -- I wouldn't say that the changes that you're going to see in the future would be as dramatic as the change that you're seeing from Q1 of last year to the Q -- the first quarter of this year, which was $25 million. So I think that you're going to start to see sequential improvement with regards to that but not as dramatic.

And I'll just add is I don't think you'll see it in any one category, which is really the question you're asking, is like, is there one category we're targeting. I'd say throughout the entire organization, operational efficiencies, and that includes within our manufacturing group, which goes into COGS. You see efficiencies -- a little bit of some efficiencies in every group. Small numbers add up to big numbers.

And the last one, with regards to the target that we had out there before wasn't a guidance target, but we said that if we remained flat on our core revenue, being that we had a base of $775 million in revenue for the year, that we thought we could hit a 6% operating margin target. With today's call, what I said is that the economy -- if the economy remains tough for the remaining part of the year, this is where we believe our breakeven amount is now, based on plans which we've put in place already to date and/or are acting on. So that -- neither one of those is really a target or guidance. It's basically just giving people a handle that if they -- based on whatever revenue assumption you want to put in there in this economy, that's how you get back to the different operating earnings targets.

Yes, Wayne, you asked about 2010, and what I would say is 2010, it's just too hard to predict on the revenue side of the stage, but the overall sense is that this is a company very committed to ensuring that we execute on our three-phase transformation plan, and profitability is a key part of that.

Okay, great. In the event that things do continue to get worse, are there any considerations for further staff reductions?

Nope. There's no specific plans. That's not to say that we don't do some thoughtful contingency planning.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS). And we will now hear from Steven Frankel with [Bridgenteen Advisors].

Good afternoon. Could you tell me what the cash flow from operations was in the quarter?

Well, as you can see, the cash came down about $16 million for the quarter. $10 million of that was restructuring charges. $4.5 million of it was capital expenditures were the two biggest pieces. And then the rest of it would be from operations, including working capital.

And what was the currency impact in the quarter on the top line in total?

The currency impact in total -- bear with me a second. Just want to -- $8.9 million compared to the first quarter of last year.

And what about sequentially?

$1.5 million.

And you've talked a lot on this call about gross margin improvements. Where do you think you are in that process of -- you've made a lot of changes in the supply chain. Have we seen 50% of that benefit, 80% of that benefit?

Well, we've seen a lot of it, but kind of like we're bringing everything under one Avid, we've been doing a lot -- we're still -- in some ways I could say early on in the journey. We're made a lot of progress on reducing freight cost. I believe we have more opportunities there. We're closely evaluating all of the third-party contract manufacturers we work with to try to work with a fewer -- a smaller group. And we're doing things to reduce material costs. And during times like today, we're being very aggressive with our vendors to go off and see if we can't leverage our buying power across the company and act like the large company we are.

So there should be more efficiencies as we get throughout the year.

Yes, and going on into next year.

Do you feel that that consumer -- I know you don't report a consumer business, but obviously you have to be looking at it. Is that still a business that has value to add it given you've had trouble no matter what you do to get it to profitability? And what do you do differently for the rest of the year?

I'm not sure how you can gauge the profitability of our old consumer video line. We got rid of our -- many of the hardware lines, including PCTV last year, which was unprofitable. I think that we think, as we've stated, that we had a strategic reasons on why we combined these two segments together, that there were development synergies going across and then, of course, as we've stated before, we had a consumer business in our Audio segment before, and there are some synergies with regards to how we approach the market from a selling standpoint. So we're focusing on making sure that all of our product lines are profitable, including was formerly known as the Pinnacle product lines.

Okay, great. Thank you.

We have no further questions at this time. Mr. Greenfield, I will turn the conference back over to you.

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 a follow-up after today's call. We look forward to speaking with you next quarter. Thanks.

Ladies and gentlemen, that does conclude today's conference. We thank you for participation.