Avid Technology Inc (AVID) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Avid Technology Second Quarter 2009 earnings Conference Call. One note that today's call is being recorded. For opening remarks and introductions, I would like to turn the conference 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 includes 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 US Securities and Exchange Commission.

In addition, forward-looking statements represent our estimates only as of today, July 23, 2009, and should not be relied upon as representing our views on any subsequent date. We undertake no obligation to review or update these forward-looking statements. During this call, we'll be referring to non-GAAP financial measures. Niece 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 quarters results, and are available in the Investor Relation section of our website at www.avid.com. For the purposes of understanding our future business model, we will also provide some forward-looking analysis on this call on a non-GAAP basis. Some of our GAAP financial measures are not accessible on a forward-looking basis, and the differences between our future GAAP and non-GAAP financial measures could be substantial.

Now I'd like to turn the call over to Gary.

Thank you, Tom. And welcome everyone to our conference call for the second quarter of 2009. Our second quarter results show the continuing improvements we're making in our cost structure with improved gross margins and lower operating expenses, allowing us to cut our non-GAAP operating lose nearly in half compared to last quarter. Revenues for the second quarter were essentially flat sequentially and down year on year. As Ken will discuss in more detail, we believe the year on year decline is largely due to general economic conditions and protect divestments that occurred in 2008. We continue to deliver on our three-phase transformational plan unveiled a year ago. Based on the operational changes we've made, we believe we are well positioned to take advantage of growth opportunities once the economy recovers. Before I discuss business highlights for the second quarter, I will turn the call over to Ken who will provide more details on our second quarter financial results. Ken?

Thank you, Gary and good afternoon, everyone. Our revenues for the second quarter were $150.5 million, essentially flat with our first quarter and down 32% on a year on year basis. If you exclude divested product lines and the impact of currency exchange rate, changing currency exchange rates, our revenues were down about 24% on a year on year basis. In a moment I will discuss revenues in more detail.

Our GAAP net loss for the Second Quarter was $15.9 million or $0.43 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 second quarter totaled $10.4 million and include, amortization of intangibles of $3 million, stock-based compensation of $2.9 million, restructuring costs of $5 million, and a favorable tax adjustment of $540,000. Excluding these items, non-GAAP net loss was $5.5 million for the second quarter or $0.15 per share. Our GAAP gross margins for the second quarter was 51.5% including $810,000 for amortization of intangibles and stock-based compensation included in our cost of sales. Excluding these charges, our non-GAAP gross margin was 52.1% up over 2% year on year and compared to the prior quarter. Comparing the first half of 2009 to the first half of 2008, non-GAAP gross margins was up 1.7 points.

Our operating expenses for the quarter excluding amortization, stock-based compensation, and restructuring charges, was $82.7 million. This was down sequentially and down almost $27 million on a year on year basis. For the first half of 2009, our non-GAAP operating expense was down over $50 million compared to the first half of 2008. The year on year decrease resulted from the restructuring actions we took in the second half of last year. Our GAAP operating loss was $15.3 million. Excluding amortization, stock-based compensation, and restructuring charges, our non-GAAP operating loss was $4.3 million for the quarter versus an $8.3 million operating loss last quarter and a $1.5 million operating income last year. As previously noted, after taxes and interest, our non-GAAP net loss was $5.5 million.

I would now like to review the results for our two business segments, Audio and Video. The following items are excluded from the business segment results. The previously stated GAAP to non-GAAP adjustments of $10.4 million, $11.5 million of General and Administrative expense, $38.1 million of Sales and Marketing expense, $1.8 million of corporate R&D. Net interest income and other expenses of $58,000 and income taxes, a reconciliation of the segment contribution margin is included in our press release announcing this quarter's results. Now, starting with Video segment. Revenues for the Second Quarter were $88.7 million, up slightly sequentially, but down almost $59 million year on year or over 40%, or 40%. Excluding divested products, the year on year decline was close to 33%. The remaining decline we believe is related to the slow economy. Although economic conditions are causing some pricing pressure, we believe purchases are being delayed as if we have not seen a significant change in our win/loss ratio. The Video segment contribution margin was $25.2 million or 28.5% of Video revenue. This compares to $21.3 million of contribution last quarter, and $43.6 million in the second quarter of last year.

In Audio, revenue was $61.8 million in the second quarter, down 4% sequentially and down about 18% year on year. Our Professional Audio Workstation business was off while we saw good uptick in our Live Sound product line following the introduction of the venue SC 48. Audio's contribution margin for the second quarter was $21.8 million or 35.3% of Audio revenues. This compares to $22.7 million of contribution margin last quarter and $26.5 million in the second quarter of last year.

Our balance sheet remains strong. We have no debt, and ended the quarter with $118 million in cash or $3.18 per share. During the quarter, we made approximately $6.8 million in cash payments related to our restructuring effort announced last year, bringing our first half 2009 cash payments for restructuring to $16.7 million. Cash flow from operations for the second quarter, excluding restructuring payments, was a negative $5.6 million. Inventory was down about $2 million compared to the last quarter and over $27 million compared to June 30th of last year. We have approximately $5 million of PCTV inventory, classified as other current assets, in our June 30, 2009 balance sheet. This is down over $2 million from our 2008 year-end balance. Inventory turns were 3.1 turns and day sales outstanding was 51 days for the second quarter. Our deferred revenue of $61.6 million was down sequentially and year on year.

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

Thanks, Ken. In a minute I'll cover a few business highlights for the quarter, but first I'd like to share some important organizational changes that we made earlier this week. An important part of transforming Avid is to regularly evaluate our operating structure. As you know, we made significant changes last Fall, which have served us well and as we move forward we see another important alignment opportunity. This past Tuesday, we've brought together our Audio and Video business units into a single product organization to be lead by [Chris Cahagen] who joined Avid as Senior Vice President for the New Products organization. Chris will lead the engineering and Product Management functions for both Audio and Video and Chris comes to us from EMC. Chris is a 23 year veteran of technology industry, and like many other Avid employees, he is fanatical about making music and video outside of work. He's a Pro Tools user and also has an edit suite in his home where he's already starting to learn Media Composer. We're pleased to have Chris join the Avid team and take on this important role.

In addition, Kirk Arnold is stepping into the newly created role of Chief Operating Officer for Avid. She will continue to supervise the functions within her former customer operations group, Sales, Professional Services, and Marketing; However, she will also assume responsibility for our New Products Organization and Customer Success. These organizational changes are designed to facilitate tighter road map planning and execution between our Products and solutions teams and to foster more convergence in the areas of Audio and Video Interoperability, Program Management and Solutions Development. In addition, as we continue to reshape customer beliefs about Avid, we believe the time is right to further integrate and innovate our customer engagement model among our Sales, Professional Services, Marketing and Customer Success teams. These changes will allow me to focus more time on the strategic initiatives that are critical to executing Avid's transformation, particularly in the areas of expanding our margins and unlocking new sources of growth. With Kirk as Chief Operating Officer, I know our Customer and Market Facing operations are in great hands, and they will get the leadership attention they need.

Turning now to some of our accomplishments in Q2, there were some positive momentum within various segments of our business despite the slow economy. Our customers, and the industry at large, have been responding favorably to the changes at Avid and the new solutions we've introduced to the market. Let me touch on some highlights. The America Cinema Editors organization, or ACE, honored Avid earlier this month with its first ever ACE Technical Excellence Award, naming Media Composer the preferred tool of top editors, and presenting the award ACE cited Avid's committment in working hand in hand with editors. The news was featured in a story appearing in Variety magazine on July 1. One or more Avid Audio and Video solutions were used in the creation of each of this summer's top five grossing films to date.

Following NAB this year, Avid received honors from five industry leading trade publications, the innovations recognized including are end-to-end, HD work flow, stereoscopic 3D editing, and Avid Media Access Architecture, or AMA, an enhancement to our Video editing work flows which were all announced at NAB. We received positive reviews of the new version of our music notation software, Sibelius 6, which has new work flow improvements that speed up the process of composing and arranging, facilitate greater collaboration and improve classroom management for teachers. We launched Digidesign venue SE 48 designed for small to mid size [live sound] settings. Venue consoles are being used by live sound teams behind many of the summers top touring acts, including Britney Spears, Bruce Springsteen, Dave Matthews, and the Eagles. And finally, educators and trainers will have easier access to Avid solutions as the American Recovery and Reinvestment Act of 2009. Among educational offerings that meet the act's guidelines are three new Audio, film and Video protection production solutions designed to help educators provide students with the types of media creation tools needed in advanced education programs and professional careers. Overall we made good progress in the quarter delivering innovative solutions that appeal to our customer base, from the enthusiast to the enterprise, we are earning accolades for our customer committment.

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

Thank you, Gary. Before I provide a perspective on our financial outlook, I wanted to let you know that the 2009 Avid Investor Day has been scheduled for Monday, November 2 in Boston. More information can be found on the Investor Relation page of our website. I hope you will be able to join us. As was the case last quarter, the current economic climate remains uncertain. Although we are not providing specific revenue or earnings guidance, we expect that the second half of the year will be stronger than the first half of the year on both the top and bottom line. We continue to closely monitor our spending with the goal of returning Avid to a non-GAAP operating profit for the year. On our last call, we estimated we could show a non-GAAP operating profit assuming revenues reach at least $665 million in 2009.

Based on additional actions we've taken, we believe our breakeven point is now achievable with revenues in the range of $645 million-$650 million. This non-GAAP operating profit excludes the following GAAP adjustments, restructuring charges, stock-based compensation, amortization of intangibles, and gains on sale of assets. We would expect these costs to be about $35 million-$40 million in 2009. These adjustments with the $645 million-$650 million revenue assumption would result in a GAAP operating loss of $35 million-$40 million. Additional items affecting net income include other income of approximately $400,000 and income taxes. Due to certain discrete tax benefits forecasted to be realized in 2009, our full year GAAP tax provision will be close to zero. The non-GAAP tax expense would be about $2 million higher than the GAAP tax expense.

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

Thank you. (Operator Instructions). We'll go first to Mike Olson with Piper Jaffray.

All right, thanks, good afternoon. So gross margin was definitely better than what we were looking for, but do you expect it will be sustainable at these levels? What are the factors that could play into straying from this higher level over the next few quarters?

Well, this is Ken speaking, and with regards to the gross margins, we expected to see improvement each quarter. We had a nice strong quarter this quarter, and I think that our objective is to continue seeing improvement sequentially each quarter. We've done -- some of the headwind we had to fight on actually trying to achieve these gross margins when you look at it is with a lower revenue base we've been able to achieve this by structural differences in our manufacturing overhead along with other good cost control, especially as it relates to delivery of services. So I think that from that standpoint, I'm especially expecting that we get improvement in the service area as we continue to move on. Along with that ,I think the possibility that on the product side as you know when you spread manufacturing overhead over a larger revenue amount, the gross margins would improve.

Okay, and then can you talk about just the change in personnel with your CTO a month or so ago? Is there a plan to replace that position, or does the other management changes that you talked about serve to kind of make that position less critical?

Yes, I think the CTO position was about sort of looking to the future. I think both with Chris Cahegen joining the firm, I think he will bring a very nice vision to this area and also myself spending more time on the strategic alternatives. In the short-term we'll wait and see if we specifically need the role of CTO. It should be clear we still have a lot of architects in our organization that are focusing in on the next generation architecture of our product. CTO is more about the evolving marketplace and we have many teams that also look at that similarly, our Market Solutions team, Product Management teams and Chris now, and of course as I mentioned, I'll hope to be spending more time on the strategic elements of the business as well.

Okay, and then Ken one other quick housekeeping one. So did you say overall taxes for the year on a non-GAAP basis will be $2 million?

Correct. It would differ about $2 million from whatever the GAAP, is and the GAAP should be close to neutral for the year, break even.

Okay, thanks.

Next we'll move on to Jim Ricchiuti with Needham & Company.

Hi, good afternoon. I wonder if you could talk a little bit about what you're hearing, seeing from your customers. Gary, I think in the past, recent past you talked about the customers seem more inclined to engage in some dialogue. Do you get the sense they're ready to move forward, or are they still very cautious with respect to the economic outlook, and maybe you could talk about it both in the Video and Audio side of the business? Thanks.

So I think I was just at NAB, Jim, when we met on the phone last time and when we did our call and what I said is people are beginning to engage in those conversations, and I would say indeed that trend overall is encouraging. Kirk and I had a review of some of our fees yesterday, and I've got to tell you it's been a long time since RFPs have been coming in the door. As people start to look at those you have to realize those are long term projects, so that's not 90 day projects as we go through it. So our customers that are national networks, are post houses, whether it be studios or smaller post houses, I would say are absolutely beginning to engage in conversation and be talking about projects. In fact one of the smaller post house shared with me that he had -- his revenue was actually -- his highest year had been 2007 and right now he was on a run rate higher than 2007, and that was a few person post house. So that -- we're starting to see some conversations taking place, and I don't want to use the word momentum but certainly stabilization, and people are starting to make some purchase decisions there.

Where we clearly are seeing people not do anything is in the local broadcast market which is a US phenomenon generally you have that local broadcast market overseas. As you probably are aware, whether it was [Gray] or [Young], but one of them, whether Gray is going to be running Young or Young is going to be running Gray, but one of them, filed for bankruptcy and [St. Clair] said they might have to, so still very cautious in the local broadcast market. On the Audio side, I think there's also some caution as well. Now when you have a new product like SE48, we saw a lot of pick up on the market so when they see something new they can make them more productive or more efficient, I think they are going on doing that. Getting one more seed of the high end product, -- obviously we're selling the bench of it $61 million or $62 million for Audio for the quarter -- but we're selling a bunch of it but we're still seeing people being a little bit more cautious in terms of adding additional seats in that Audio market, so I would say stable conversations. I wouldn't say that there's a huge ramp up right now.

Okay. Ken a question for you. Wonder if you can give us the revenue break out geographically in North America, Europe, and what kind of decline you saw in the businesses and geographically.

Sure. For the quarter, 51% of the revenues from the Americas and 49% internationally, and so we were stronger in America than we were internationally so we were down about 17% year on year in Americas. We were down if you take out the currency, and by the way that 17% was taking out divested products too.

Okay.

And if you went over to Europe in the other areas internationally, we were down in the 28%-34% range, depending on whether it's Asia or Europe for the quarter.

Do you guys see any signs there of that business stabilizing?

Where is there?

I'm sorry, in both Asia and Europe.

We actually felt pretty good even with declines we felt pretty good about what we saw in Europe this last quarter. I think that I commented the last time around I'd say consumer remains soft over in Europe, and I think we watched that consciously as a nature of just sort of the cultural nature, some of the reality that's there. In Asia, I actually just returned from Asia-Pac, and really when we say Asia it's really Asia Pacific, I just returned and from Australia and New Zealand and they were saying -- as you know, they are sort of the outer ring when the pebble falls in the water but they were saying they actually are starting to feel pretty good there. I would describe it the same way I would overall which is sort of starting to see some opportunity, they're talking about spending, and in the case of those countries they were talking to me about very specific projects. I think some of them, particularly private enterprises versus government enterprises were feeling capital constrained because their access -- whether they are going to create profitability to improve but we still need access to the Capital Markets.

Okay. Thanks very much.

And from Brigantine Advisors, Steven Frankel.

Hi. Could you start by telling me where the headcount is and this new configuration, does that mean you're going to use fewer bodies in sales and sales support going forward?

Well the total people count is about 2,200 roughly for FTEs and such, for employees, and there's nothing that changed our sales organization, Steve. Kirk already had a consolidated customer operations organization, she already had marketing reporting to her. What we've done is added the Products Organization and Customer Success Organization so no one should imagine anything that's going to change in any of those three things. As Ken has commented in the past, we continue to take a look at operational improvements, and I think Kirk, in particular, being responsible for all of the operational functions of the Company will create stronger execution, better efficiencies, but there's nothing structurally we've done to the sales organization per se.

And what's the channel inventory level like on the retail side?

Well first off it's probably, I don't have the exact number where it would be sitting today, but it would be lower than it would be actually, I think in our previous experience, because what we've actually found out is that the channels had been very cautious on making sure they don't get overstocked. What we've been finding is that we actually think we probably at the end of the first quarter might have dipped down to an all-time low and I think we're seeing it returning back to a little bit more to normal.

And given all the pressures on the local broadcasters, does this make you want to stretch out product cycles or accelerate innovation to try to drive purchases? How do you deal with that?

First I want to move the local broadcaster aside for a second but I will answer your question. I think for the local broadcaster, they're just caught in the advertising quandry are but outside the United States it's all national networks and inside the United States it's still a lot of national networks that are doing it. So I actually believe this is an opportunity for Avid -- the market to turn to Avid as a vendor that can provide a broader range to them and the strategy we've taken towards integrated work flows, which means investing in innovation, is a far more powerful message than stretching out product cycles at this stage of the game. I mean, there's still -- I'm doing rough numbers but IABM is expecting a doubling of the number of HD channels in the next couple of years, for example. We can't stretch out cycles and not be there for our customers and the new camera formats, whether it be the field cameras, such as P2 or XD Cam, or whether it be the higher end movie cameras such as Red, an example we've got to be there for our customers because they're looking towards us for innovation, and we're not trying to press our product cycles, but we're certainly not extending them either.

Okay, and you've stated a couple times you felt like these businesses could earn a double digit operating margin. Do you still feel like that's the case?

I think at some point we will have a return to normalcy in which we will have that opportunity to do that. I mean, even in this quarter where we had NAB which actually raises expenses, we controlled our expenses very nicely during the course of the quarter. I think if this is a sustainable environment, we'll have to take a look and see what that means for the whole industry and sustainable over a couple years. But certainly, I think we've demonstrated the operating leverage that we would have should there be a return to any level of normalcy in revenue or even below normalcy.

Could you update us on the health of the dealer channel today?

Well you said the health of the dealer channel. I think as Ken said, the dealers have been watching things very carefully. I mean, overall we haven't had, every year or even before this happened every year we would have one or two dealers that have financial problems, but both our dealers in our rental companies, they've been cash managing just like everyone else, and I think that's one of the reasons to Ken's point that the inventories are down out there, but we've been working closely with the dealers, and again I'll tell you a couple of them are constrained. But as you know that part of the goal, we have 3000 dealer partners, and part of it is around sales and services is really to reduce the number of dealers, so it's like anything else, to start winning is the ones that can be more successful that are better capital structures, better financial structures and what we're doing is not losing reach in those Markets, we're just working more closely with some of the better partners.

Okay, great. Thank you.

(Operator Instructions) Next we'll go to Barbara Coffey with Kaufman Bros.

In the blending of the Audio and Video units, these traditionally have not been purchased by the same people. Will you sort of be maintaining both different sales forces or could you walk through that a bit?

So Bobby, I think it's a good question so let me help. First of all, the Audio business unit and the Video business unit -- Audio business unit is still very much there first of all, and as they were really about Product Management and Development as we were doing that so we aren't changing anything with the combination of Audio and Video business units into a single products organization. It has nothing at all to do with changing the sales structure. It's about Product Management, Market Solutions, and Program Management and Development reporting to a single head.

We want to insure that we do not lose our excellence we have in Audio development or in Video development so it's not like we're converging that under converging that and today your approachables developer and tomorrow you're a Media Composer developer vice versa. So we'll still have that excellence, but this is going to give us an opportunity to have more interoperability and we've improved that considerably but we have a lot of other stuff to do as well as some other efficiency such as common practices and within the sales organization, we do have a common sales force in you're in Enterprise as example. First of all it's a misnomer when people say it's different people buying it, why you may have a sound engineer using it or you may have a editor using the composer, in fact they report up to the same people, they report up to the same Head of CTO, one of the major networks or Head of Operations whatever it might be, so that was sort of a legacy view of the world, but in the enterprise we reach out with the common sales forces.

We still have specialty dealers, Pro Tools is still largely delivered through dealers and we still work with them and we still have an overlay in our organization even for the Enterprise or for Media Composer that can work whether we do have a single go to market sales organization. We do have an overlay organization that can bring in the level of expertise or have relationships or whatever it might be. I would describe it as a hybrid model rather than one or the other.

Thank you.

There are no further questions at this point, I'll turn the conference back over to you for any additional or closing comments.

Thanks a lot, everyone, 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 again thanks.

Ladies and Gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.