Avid Technology Inc (AVID) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Avid Technology third quarter earnings release 2009 conference . Today's program is recorded. At this time for opening remarks, I would like to turn things to the Director of Investor Relations Mr. Tom Fitzsimmons. Please go ahead,

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 and Administrative Officer. Before we begin, please note that this call include forward-looking statements as defined in the Private Securities 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 statement such as competitive factors and pricing pressures, our ability to anticipate customer needs, our ability to execute strategic plan or 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 only our estimates as of today, October 22, 2009, and should not be relied upon as representing our views on any subsequent date. We undertake no obligation to review or update the 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 principals. The most directly comparable financial measures calculated according 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 relation section of our website at www.Avid.com. For the purpose 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 measure are not accessible on a forward-looking basis and the differences between our future GAAP and non-GAAP financial measures could be substantial.

Finally, in our press release announcing this quarter's results, Avid also announced that it's audit committee is overseeing an investigation concerning the manner in which revenue was recognized on certain shipments of audio products from certain warehouses outside the United States. Based on the current progress of the investigation, Avid believes that there have been errors that affected the timing but not the amount of the revenue recognized. And it is likely that the correction of these errors will not have a material impact on the financial statements for the current or any prior period. This investigation was only recently commenced. Avid's expectations concerning the nature and materiality of these and other errors are subject to change based on the final outcome of the investigation. We will not be taking any questions on this matter during the call. And now I would like to turn the call over to Gary.

Thank you, Tom, and welcome everyone to our conference call for the third quarter of 2009. For the third quarter we approached break even on operating basis reporting almost $154 million in revenue against a $700,000 non-GAAP operating loss. We continue to see the benefit of our restructuring actions with year to date non-GAAP operating expenses down over $75 million and year to date gross margin as a percentage of revenue up significantly compared to the first three quarters of 2008. We were able to increase revenues sequentially during the summer quarter and feel that our end markets have stabilized. Before I discuss business highlights for the third quarter I will turn the call over to Ken who will provide more details on our third quarter financial results.

Thank you, Gary and good afternoon, everyone. Our revenues for the third quarter were $153.7 million, up 2% from our second quarter and down 29% on a year on year basis. If you exclude divested product lines and the impact of changing currency rates our revenues were down about 22% on a year on year basis. Our GAAP net loss for the third quarter was $16.2 million or $0.43 per share. Consistent with prior quarters, our earning release provides a table of certain items that are excluded from our non-GAAP results. These items for the third quarter total $17 million and include amortization of intangibles of $3.3 million, stock base compensation of $2.9 million, restructuring cost of $7.9 million, loss on asset sale of $3.4 million, and a related favorable tax adjustment of $463,000. Excluding these items, our non-GAAP net income was $787,000 for the third quarter or $0.02 per share. This non-GAAP net income includes a net tax benefit of $1.7 million. This benefit is primarily because of a favorable tax settlement of certain tax matters. Our GAAP gross margins for the third quarter was 53.3% including $929,000 for amortization of intangibles and stock base compensation. Excluding these charges our non-GAAP gross margin was 53.9%, up approximately 6% year on year in almost two points compared to the prior quarter. Comparing our year to date performance if 2009 to the comparable period in 2008, our non-GAAP gross margins was up over three points.

We are very pleased with the expansion in the gross margins. The third quarter gross margin as a percentage of revenue is the highest level we achieved since the third quarter of 2005. The expansion of gross margin was achieved through cost reductions, resulting from the consolidation of our manufacturing and distribution operations, along with the focus on higher margin products. In addition, the margins for our service offerings have increased because of improvements in operational efficiency. In fact our non-GAAP service gross margins for the third quarter of 53.4% is up over 9 points compared to the third quarter of 2008.

Our operating expenses for the quarter excluding amortization, stock base compensation, loss on sale and assets and restructuring charges was $83.6 million. This was up modestly on a sequential basis and down about $24 million year on year. As Gary mentioned, year to date our non-GAAP operating expense was down over $75 million compared to the same period in 2008. The year on year decrease resulted from the restructuring actions we initiated in the fourth quarter of last year along with our continued focus on cost controls and improved operational efficiency.

Our third quarter GAAP operating loss was $18.1 million, excluding amortization, stock base compensation, loss on asset sale and restructuring charges, our non-GAAP operating loss was $663,000 for the quarter versus a $4.3 million operating loss last quarter and a $2.8 million operating loss last year. As previously noted, after tax and interest, our non-GAAP net income was $787,000.

I would now like to review the results of 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 $17 million, $11.2 million of general and administrative expenses, $41 million of sales and marketing expenses, and $1.6 million of corporate R&D expense. Net interest income and other expenses of negative $240,000 and income taxes. A reconciliation of segment contribution margins is included in our press release announcing this quarter's results.

Now starting with the video segment. Revenues for the third quarter were $93.2 million, up 5% sequentially but down almost $52 million year on year or 36%. Excluding divested products and currency exchange rates, the year on year decline was about 26%. We did see a sequential increase in our consumer editor revenue with the release of Studio 14 and sequential improvement in revenues for our broadcast and storage offerings. The video segment contribution margin was $31.6 million or about 34% of video revenues. This compared to $40.8 million of contribution for the third quarter of 2008 or 28% of video revenues.

In audio, revenues were $60.5 million in the third quarter, down 2% sequentially and down about 16% year on year. Audio's contribution margin for the third quarter was $21.5 million, or 36% of audio revenue. This compares the $21.8 million of contribution last quarter and a $23.5 million in the third quarter of last year or 33% of audio revenue.

Our balance sheet remains strong. We have no debt and ended the quarter with a $103 million in cash or about $2.76 per share. During the quarter, we made approximately $4.9 million in cash payments related to our restructuring efforts, bringing our year to date 2009 cash payments for restructuring to $21.6 million. Cash flow from operations for the third quarter excluding restructuring payments was negative $3.9 million. Inventory was down over $2 million compared to last quarter and down about $32 million compared to September 30 of last year. In fact, third quarter was the fourth quarter in a row of sequential decline in our inventory levels. Inventory turns were at 3.1 days and days sales outstanding was 52 days for the third quarter. I now like to hand things back to Gary who will provide an update on the business.

Before I review some of our business highlights for the quarter, I would like to share details regarding an important organizational change that we made earlier this month and provide a quick update on our markets. As Avid continues to transform its business, the global marketplace demands that we find new ways to innovate and deliver solution was greater speed. One of the ways we are accomplishing this is through the expansion of our global development program, an initiative designed to distribute our engineering work globally in order to achieve maximum benefit from all our product resources. We began this work in 2008 with partners in the Ukraine and China allowing us to increase our development capacity with the same investment. Based on its success, we will expand this program in the coming year. Our global development facilities will focus on maintenance and QA of existing products which will allow our more experienced internal engineers to focus on innovating and developing the next generation of digital content creation technology.

Overall, we believe market conditions are stabilizing. According to industry sources, spending on media and entertainment by consumers and businesses is projecting to grow over a four year period which we believe will drive demand for audio and video content that our customers create. Each of our markets is experiencing different dynamics. Major post production rental houses who would put system upgrades on hold are now beginning to look at these investments to offer their customers tools for today's tapeless HD work flows. However, many smaller and independent post facilities remain challenged by tight credit markets.

While broadcaster continue to deal with the challenges of decreasing ad revenue coupled with increasing need to distribute through the web and Mobile devices some industry analysts are predicting the core US advertising environment will ease in 2010. KYF spending remains a bright spot modestly growing in 2009. And in addition, political advertising in the US is expected to expand next year. And professional audio businesses in both recorded music and post production has bifurcated into very large facilities and independents working from their homes. Challenging the mid-size studio and creating a new market for collaborative tools. The recorded music business continues to search for its future revenue model in response to new methods of distribution with artists relying more on touring, licensing and merchandising which will benefit our live sound consoles. Overall retail is expected to rebound about six months behind the general consumer recovery. The latest information from NPD for July indicates consumer video editing sales are down about 24% year on year which is in line with what we are experiencing. We are pleased that our consumer video editing products Studio Ultimate has been the number one SKU for thirteen months in row with positive response to our recent Studio 14 release. In education, enrollment in colleges and universities is on the upswing, driving the creation of new academic programs focused on digital content creation to serve demand. And government funding the American recovery and reinvestment act or ARRA is expected to drive spending in the U.S.

Now turning to some of our accomplishments in third quarter. We continue to execute against our strategic principles with the delivery of innovative open collaborative solutions to enable our customers to be successful. Here are some highlights. Avid returned to the IBC show in Amsterdam in September where we were able to have some great meetings and interactions with customers and prospects from all of Europe and the Middle East. The introduction of our brand was enthusiastically received by our customers and partners. September was a busy month for us with several new product introductions across our market segments. At IBC we introduced new versions of our Media Composer, Symphony, and News Cutter professional editing solutions to enable more open and collaborative work flows and a new version of our Interplay Production asset management system which now extends work group capabilities to the wide area network and supports users working in Final Cut Pro. We introduced 11 rack, a combined guitar amp and effects processor with a computer recording audio interface designed to transform the way recording and performing guitarist achieve vintage and modern amplifier tone without the need for physical amplifiers in the studio or on stage.

We launched a new version of our Pinnacle studio consumer video editing software and a trio of pro tools empower consumer software hardware bundles that begin at $99. These bundles are streamlined version of pro tools, the industry standard software package for professional recording and audio production, giving consumers the ability to work but with the same professional musicians and sound mixtures used to create chart topping hits. We are also pleased to say that once again the vast majority of Emmy award winners and 33 outstanding picture editing outstanding sound, editing/mixing and outstanding program categories at the 61st annual Emmy awards in September chose to use one or more Avid audio or video solutions to create the year's top television programming. Additionally, we are seeing previous customers that tried competitive offerings return to Avid. For example the Ellen Degeneres show switched back to an Avid work flow. After just one season using Final Cut Pro, they discovered that Avid solutions would allow them to work within a collaborative work flow that enabled them to meet critical deadlines. Let me turn this back to Ken to talk about our financial outlook for 2009.

Thank you, Gary. Before I provide a perspective on the financial outlook, I wanted to remind you 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 with the case last quarter, we are not providing specific revenue or earnings guidance. However, we expect the fourth quarter will reflect sequential improvement on both the top and bottom line. We expect the sequential improvement in revenue in our consumer business which is about 25% of our revenues. We are not anticipating significant increase in our operating expense, so we expect to have a non-GAAP operating profit in the fourth quarter of 2009.

During our last earnings call, we discussed the revenue required to break even in 2009. Based on our current expense run rate we believe our break even revenue for the year is closer to $640 million. It should be noted that this is non-GAAP break even point,includes the benefit of certain suppressed cost of approximately $20 million during 2009. These suppressed costs include one week furloughs, suspension of 401K match, and no company wide bonus since our financial performance is below our planned threshold for bonus funding. We do not expect to reach break even in the full year of 2009. This non-GAAP operating profit excludes the following GAAP adjustments - restructuring charges, stock base compensation, amortization of intangibles, and losses on sale of assets. We would expect these costs to be about $50 million in 2009. These adjustments with the $640 million revenue assumption would result in a GAAP operating loss of about $50 million. Additionally, items affecting net income include other income of approximately $100,000 and income taxes. Due to the certain discreet tax benefits realized in 2009, our full year GAAP tax benefit will be close to $3 million. The non-GAAP tax benefit would be about $2 million less than the GAAP tax benefit. This concludes our remarks, now we would be happy to take your questions.

(Operator Instructions) We will go first to Paul Coster with JPMorgan.

Thanks. Good afternoon. And nice to see you getting close to profitability and looks like to will happen next quarter. Gary, I wonder if you could talk about 2010 a little bit and of the pipeline as it relates to TV broadcast in particular. Can you give us color around what you are seeing that tells you it's stabilizing and what you think might be the drivers and impediments in 2010?

Well, let's talk about the market and then we can come back to the driver side of the coin. You know, on the market side I think I commented in the July call that we were starting to see our RFPs and in fact that continues. Of course, it's nice to see RFPs and nice to win them and we have been winning a few recently. The real point being that companies are making decisions not whether we are winning or losing. We are seeing activity in the states. We are seeing activity overseas. The good thing about this year is we are talking to our customers about next fiscal year is that they feel they have a level of certainty about what projects they will be funding.

As you know, what happened last year is everyone had built their budgets a little bit before the economy cracked. As people hit December, as people hit January, everyone pulled the break cord on the train and just stopped and when you do that it's almost impossible to get going again. But people, even at the lower advertising numbers, know that they have some projects to do and are funding those projects if you're advertising supported. Overseas, as I've mentioned in the past, there is a lot of government subscription based business and other subscription based businesses so we continue to see some activity in those markets as well where you have the user fees or wherever it might be so just the level of engagement we have with our customers is helping us believe that with a little bit more confidence, that our ability to think about future business. And in addition one of the reasons that we shared the stats with you, advertising and broadcast is predicted to be up slightly next year, very slightly, but at least it's not down.

At least national broadcasting, the (inaudible), the subscription based cable advertising, so the leading metrics are also showing positive results so they are supporting the activity we are seeing from our customers. The drivers are the similar things that we talk to in the past - people who want to generate HD content even more so. I was with one of my European broadcasters last week and we were having a conversation and they built a new center about a year ago and they'd expected to be producing one-quarter HD, three quarters SD and in fact they're producing three-quarters HD and one-quarter SD. That drives demand. It drives demands for upgrade in environment. It drives demands for storage for our production asset management system. And of course all of that had been suppressed with the economy this year so people are still agitating to get over to HD.

And in addition, there is just at this point there are people with delayed system upgrades they need and wanting to do some very, very necessary upgrades. And third thing is, with the economy of course there always comes a drive for efficiency so people are interested in those areas where we can help them achieve an increase in efficiency.

In terms of the competitive landscape has it changed much in the last few months?

I don't think it's changed much in the last few months. If there is anything I would say is I think people are little more sensitive to the smaller companies but the smaller companies are still out there. I can't remember if we did the call before or after our competitive release of one of our competitors in the editor space but the editor releases that we'd seen were sort of ho-hum. Particularly when Avid put out three or four major releases in 15 months. So I don't think there's been any a dramatic shift in the last 90 days.

And finally the last question, do you have any metrics around the first time use in higher education? I know it's concern that you capture that community to fend off the threat from final cut pro in particular. Anything that can reassure us you are having success there?

Now that we were having success it's really hard because of getting the kids through schools and everything else. I did do a customer advisory board and I was in an educational customer advisory board in California two weeks ago, in fact it was two weeks ago today, and clearly you're sensing that folks are using, of course speaking mostly to video but people are using our products in an innovative way and seeing more use of it and not just what you may think of schools but the professional schools one we are talking about how 60,000 different PCs out there. We introduced new programs into education. For instance, we introduced media composer for here in the United States. For $295 where for the time here in college for four years, or in school it doesn't have to be college, for four years you will get all upgrades for that $295 as opposed to having to buy annual amounts. We believe we are getting traction but there's not good stamps on it.

Good. Thanks very much.

We will go next to Steven Frankel with Brigantine Advisors.

Good afternoon. With the mix shift toward to more consumers in fourth quarter, is the sequential improvement that we've seen in gross margin at risk?

Steve, for the most part most, since we've disposed of a lot of the lower gross margin products there really is not a big difference between the gross margins realized on our professional products versus the consumer products. And in fact I know that since the focus used to be on Pinnacle branded products, Pinnacle Studio has very high gross margins.

Okay. Would you expect your Pro Video business to be up in fourth quarter like it is traditionally?

We didn't really comment by segment, but I think overall we kind of see that the business sequentially kind of picking up. And you are correct that historically the fourth quarter is the strongest quarter for professional video even though you can't necessarily point to a market factor that would drive that as much as consumer spending might be because of the holidays.

What else do you need to do in 2010 to get you on the road to this goal of double-digit operating margins? Or is it simply you to find way to drive more volume?

I think it's a combination of things and I think it's a combination of both of them. I don't think that, so therefore I think we will continue to look to drive operational improvement. I know last quarter people asked me would we expect sequential gross margin improvement again, and I think that if you look over a longer period of time I don't think you look necessarily quarter to quarter. But over a longer period of time even with all of the nice improvements that we made in gross margins, I think we can still continue down that journey and still expand gross margins over time along with becoming more operationally efficient on the operating expense side. So that combined with revenue growth is what we would need to really achieve those mid-teen margins over the long term.

Okay. And you mentioned that the rental houses were more just interested in buying again. Where are we seasonally given that they are heavy into production. Does that mean they are looking now but won't get those orders for another six months until production quiets down?

When you say production houses you mean the post production houses?

The production of all of the network shows. Right now they are busy and don't change equipment in the middle of the season.

Yes. So first you are correct although first of all a lot of them use rental equipment so we get rental equipment and rental orders all year long. The second thing is there is no season. There is not the typical fall, spring season any more. As you go through, it's show by show. The thing is how many shows are in the summer or how many shows show up in January. You're actually getting smoothing of that that goes on but theres no doubt that a show will not change. For example, the Ellen we spoke about, they actually reached out to us early in the season but could not switch work in the middle of the season because they would have to shut down, et cetera, et cetera. You are right about that but we are now working with many of the production studios who are doing the post on those and we get those in all kinds of cycles right now.

Okay. Thank you.

We will hear next from Jeff Rath with Canaccord Adams.

A couple of questions if I can. First one is just expand on the disclosure that you included just in your release with regards to the audit committee looking into I guess a small amount of revenue recognition. Can you just kind of give us -- it appears it's not very material but just looking for a little bit more context, what happened, is it suggestive of financial controls and what kind of comfort can you give us that the scope of this is isn't going to expand. Thanks.

This is Ken. First off to say that just to kind of restate what we said before. This is an investigation that recently started. We believe there have been errors that affected the timing but not the amount of revenue recognized. And it's likely that the correction of these errors will not be material. Will not have a material impact on the financial statement for the current and/or any prior period. But beyond that, theres no additional comment at this point in time.

I understand and it's an investigation, do you have any sense how long this might take and does it reflect on potential financial control issues broader? Any color like that?

Well, again, I think we have to complete the investigation before we make any additional comment.

And then just going to provide some great color with regards to the different restructuring processes you appear to be sort of completing here. I had a more of a sensitivity related question. You have given us sort of the benchmark $640 million in revenue that is kind of your non-GAAP break even kind of number. But then you kind of also shared with us this $20 million in suppressed cost. As we kind of think about your business into 2010, how should we think about that break even if we and I'm just trying to get a sense of the operating leverage here. If I were to throw out a number to you keeping mix relatively the same and say your revenues are $700 million, what would your operating margins approximately be given that there is some give-back around these suppressed costs? Can you give me any color there? That would be helpful. Thanks.

First off to say that if you kind of look at all of 2009 and you take the $640 million is where we said the break even and we brought that break even projection down every call this past year, but we have as we mentioned about $20 million of suppressed meaning if we restore all of those suppressed costs next year we would be starting off the year with a break even point of about $660, of $640 plus the $20 so it's $660. By the way, we'll have pay increases or some other things that could happen next year but we we're also going to do things to improve our operational efficiencies as we go. We will do things to help improve gross margins. We will do things to improve our operating expenses. If you look at kind of where the model on where we are at for this past quarter, you can see that with the gross margins running in the non-GAAP basis close to 54% and there is really only about a couple percents of other variable costs that are sitting in operating expenses, we are running above 50% in leverage for every incremental revenue where we get above break even. So with that, that's showing you the leverage. Like I said, our anticipation would be that we would be looking going on into next year to continue to get some operational efficiencies.

Great, thank you very much.

We will go next to Mike Olson with Piper Jaffray.

Thanks. Good afternoon. One more question on the gross margin. It's clearly been going in the right direction and I think you just basically mentioned that you can continue to grow gross margin. My question is, what would that be through? Is it a continued product line change or what would cause gross margin to continue to move higher than this level as you look to 2010?

First off to reflect first off on the progress and what caused that uptick in this past year, the consolidation of our operations where we previously had really six different support operations supporting manufacturing and logistics. Consolidating it down into one we are able to streamline our operations and have a lot of freight savings and cut out a lot of fixed overhead.

In addition to it, of course, disposing of lower gross margin products like PCTV last year benefits us at least this year compared to last year. The place where we are also making significant improvement is that we had improvements in our service margins across the board. Weather thats our maintenance services where we had a nice uptick and also in our professional services and training area. And we still think with continued focus on metrics and operational efficiency that we believe as time goes on that those margins should continue to improve and increase. So I think that we made very nice progress so far in the nine months of this year. And I think that we are still on the journey. But I'm hoping that we can get our gross margin rates back in to where they had historically been if you went back four or five years ago with the company starting to get back into the mid-50s and maybe at some point in time I'd would say higher than that.

Primarily from this point on it's primarily on the service margin side that you think that leverage could come?

I still think that there is margin on the other side, too. Some of it could be from product mix as we move along. If you look at it, the hardware content although you can't really say the hardware content of the revenue dollar probably becomes a little less and less every year because we are getting and capturing more value for the software.

That's it for me. Thanks.

Thanks. Good to talk to you.

We will hear next from Barbara Coffey with Kaufman Brothers.

Good afternoon. I have a couple quick questions. Can you speak to sort of the state of the shift to more HD full broadcast studios both domestically and internationally. Then secondly more accounting question. I had not expected to see continued restructuring this quarter and kind of like to know what it should be for the full year as I model things forward.

Ken, why don't you get the restructuring and then I will come back on the HD.

Okay. First off we did, as we shifted towards more of a global work force of which we rolled out a plan in October indicating what we're going to do over the next couple quarters which is really taking a greater impact of a global work force which I believe will begin to start benefiting our operating expenses in the second half of next year really but more into 2011 because we basically had all of the framework for that particular plan in place now. Even though some of those expenses may be paid out in future quarters we did take a hit for some of those items. And another item, too, is that we did take a write down which I call the sale of assets but it related back to with the sale of PCTV we did have some inventory sitting on the books yet which as it was sold off we then would realize the benefit of those and some of the selloff of that has gone slower than expected so we took a writeoff charge for this particular amount during the quarter. And looking forward on a go-forward basis, I can't imagine that you're going to be seeing anything significant in the fourth quarter but I think when we start getting into next year and beyond I probably need to wait until we firmed up our plans and report the fourth quarter.

That's fine. Thank you. And on HD?

Yes, Yes. So HD, the question was asked of me pretty regularly and I actually just read some recent statistics on the recent statistics on the subject. When you get below the top designated market areas or DMA, below the top 25 DMAs, you see very few of them that have more than one station broadcasting HD as opposed to broadcasting digital. Broadcasting in HD and below the top 100 are few and far between. So there is still a lot of opportunity out there in the HD market.

One of our clients, without mentioning who, just in the Boston area is an example is still very much on a tape based work flow and has not switched to HD and it's a major affiliate as an example, and Boston you know is a major market. Everyone has just suppressed this over the course of the last year and everyone is waiting to do it. So when you are seeing 16 by 9, it's ST being uplifted into the HD format. So there is still a lot going on there. As people replace they will go let's replace my SD one with another SD as people get into the replacement cycles, they're switching over to HD. And again I won't mention it but a major television show that went live this year went live with a linear work flow because they just didn't have the money to do non-linear work flow, as an example, and that's a national show, but that stuff's going to change.

Is Europe any different than the U.S.? Is there something --

Europe is behind the US but they are investing. It's a different situation. Because of the national broadcasters there is a lot of projects going on. And plus companies like Sky that are very competitive in pushing the edge of HD so people have to respond to Sky and some the others. So it's not the same -- it's behind the US in HD, but on the other hand there is more momentum as we speak.

Thank you.

And our next question will come from Andrew Abrams with Avian Securities.

I wonder if you could give us little bit of color or at least as much as you can tell us about the response you are getting from your customer base as pricing came down over the last quarter or so. Have you seen this translate into anything at any level? Or are the results of this are being held back by the general economy.

You talking about as we've aligned our pricing for media composure and such?

Yes.

First of all I don't think per se, lowering our price had to do when we created new demand for net editor sheets or something out there. What it has allowed us to do is become more competitive again. I think it's what caused Ellen to say, hey, look, we aren't happy. This is not looking and it's now affordable. What it cost them to look elsewhere was what they perceived was a cheaper work flow. Literally on the plane on the way up here, I'm up in New York, on the plane on the way up I was reading a review of the professional editing market and it talked about our price and it said now that the price here in the states is $2500, it now becomes very competitive and everyone knows it's better so now it's within the same price envelope.

So I think what it's allowed us to do is regain our competitiveness in the professional editor and when someone makes a choice they are now turning back to Avid. Aain a little war story. I was sitting on the plane going out to the education customer advisory board I was mentioning and someone caught I was with Avid as I was looking at a PowerPoint and he happened to be a director and said, hey, we made a decision about two or three years ago and revisit it every three years and are looking back at Avid again. We didn't think three years ago that they had moved a final cut and I got an E-mail from them two days later and did my pitch on the plane and said, we are 92% of the way there, get someone to contact me. That's because they are making a decision. We suddenly create a brand-new set of demand in the marketplace, it's a tough economy. Someone buying editor they have to buy a computer to go with it, they're outfitting their news center, they are doing whatever.

Can you also kind of walk us through what your direct versus reseller kind of mix looks like now? How much has it changed? How much would you expect it to change? Is there anything new going on that you are doing to incentivize the reseller side and get those guys fired up a little bit more this year or next year.

Roughly we do 65%/35% channel. Tom, do you have exact numbers for this quarter?

This quarter is around 33%.

So it's the same range. 33% direct I assume you mean.

Right.

So we are roughly call it whatever you want to, one-third, is rough numbers over the course of the year and we are doing some things with our channel. Basically our channel program was a flat channel program. You were channel partner. We were converting them into what every other company in the industry uses which is a three-tier channel program which is the more you sell, the more you work with, the more you are willing to make an investment and more we are willing to work with you. We will have a tier one which is actually we will put those to other distributors so that we can send the other distributor, the larger distributor will have a tier two and tier three distributors where we do joint marketing programs, additional discounting, et cetera as we go through that. One thing we have been working on is restructuring and this is worldwide by the way. Restructuring our channel partners so we spend more of our time with the more successful ones and obviously less of the time with some of the smaller ones. We have all kinds of special programs every quarter going on and we had quite a bit of luck with those. And we change those every quarter.

Right. And just one other thing on the product line. You guys have done pretty much everything that you said you were going to do on the product line. Is there anything else now that you have been through another couple of month and are getting toward the end of the year that you think is less of a focus for you guys or should be more of a focus and not necessarily leading to an elimination of a line but areas you want to focus in or areas you want to focus in less?

Chris Cahagen joined us this summer, you might remember we talked about it on the last call, and one thing he is doing is going through the product line. I think what we said in the past I think remained true today. This is more like, okay, my normal pruning of the garden. Grew up in the season and we are going back and going, okay, let's double down efforts on this one. This product didn't sell as well as we thought it would. There is certainly no big thing we can put our arms around. As I mentioned and in our global development when I was talking about a global development and global engineering efforts, we in fact used that as an opportunity to take some of those products that needed to be more in maintenance mode and move those products completely into our global engineering centers, as an example. So we are continuing to do but there is no major category today of which I would say we aren't doing it. It's more a products within line.

And just one last thing. On the PCTV stuff, you took a full write down on it. Will there be any recapture when the inventory is sold out of your -- not out of yours but out of their inventory or is this it completely? We are done?

Well, we currently have a net amount on the balance sheet of a little bit over $1 million. The gross amount on the balance sheet is $10 million at cost. So for the most part is written off based on what our current estimate is.

Thanks. I appreciate it, guys.

Gentlemen, will turn the conference back to you for closing remarks.

Well, I want to thank everyone for joining us. We are quite pleased with the progress that we have made in the quarter both seeing a little bit of growth in revenue for the quarter but in particular in our continuing focus across the board on both on our Cogs and our operating expense. So thank you for joining us. And please for those of you that have not accepted, please remember that we are having our investor day on November 2, up in Boston. We put together a quite good agenda and would love to see you all join us.