Avid Technology Inc (AVID) 2009 Q4 法說會逐字稿

Good day, everyone. Thank you for standing by and welcome to the Avid Technology fourth quarter earnings results conference call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to the Director of Investor Relations, Tom Fitzsimmons.

Good afternoon. I'm Tom Fitzsimmons, Director of Investor Relations for Avid. And, 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 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 US Securities and Exchange Commission.

In addition, our forward-looking statements represent our estimates only as of today January 28, 2010 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 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 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 measures are not accessible on a forward-looking statements and 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. Welcome everyone to our conference call for the fourth quarter of 2009.

For the fourth quarter Avid returned a pre-tax profitability on a non-GAAP basis. Revenue was $175 million with a GAAP operating loss of $15 million and non-GAAP operating profit of $2 million which Ken will discuss in more detail in a few moments. Fourth quarter revenues were strong sequentially, up about 15% with seasonal improvement in our consumer business along with the recognition of some large broadcast deals in the quarter. We continue to see the positive impact of Avid's transformation efforts on our business. The digital content creation industry continues to experience rapid change and Avid remains well positioned to help our customers succeed in these challenging times.

Before I discuss business highlights for the fourth quarter I will turn the call over to Ken who will provide more details on our fourth quarter financial results. Ken?

Thank you, Gary. Good afternoon, everyone.

Revenues for the fourth quarter were $174.7 million, up 15% from the third quarter and down 15% on a year on year basis. About one percentage point of the year on year decline was attributable to divested products and the impact of changing currency exchange rates. Our revenue for 2009 was $629 million which was down 26% year on year. About seven percentage points of this year on year decline was related to divested product lines and the impact of changing currency rates. We believe this decline is in line with the overall decline in our markets for 2009. Our GAAP net loss for the fourth quarter was $17.9 million or $0.48 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 fourth quarter total $16.5 million and include amortization of intangibles of $3.3 million, stock based compensation of $3.5 million, restructuring costs of $9.7 million, acquisition related or M&A costs of $4.2 million, gain on asset sale of $3.6 million and a related favorable tax adjustment of $585,000. This was the first quarter we incurred significant M&A related costs since GAAP was updated to require M&A costs such as diligence and transaction expenses to be expensed when occurred rather than capitalized as part of the transaction. A portion of the fourth quarter M&A costs were related to the January 2010 acquisition of Blue Order which Gary will talk about later.

Excluding these items our non-GAAP net loss was $1.4 million for the fourth quarter or $0.04 per share. Our fourth quarter GAAP operating loss was $15.1 million. Excluding amortization, stock based compensation, gain on sale of assets, costs associated with M&A activity and restructuring charges, our non-GAAP operating profit was $2 million for the quarter. Our first non-GAAP operating profit since the second quarter of 2008.

Our GAAP gross margins for the fourth quarter was 52.3% including $1 million per amortization of intangibles and stock based compensation. Excluding these charges, our non-GAAP gross margin was 52.9% up over eight percentage points year on year and down one percentage point compared to the prior quarter. The GAAP 2009 gross margin was 51.4% including $4.8 for amortization of intangibles, restructuring and stock based compensation. Excluding these charges, the 2009 non-GAAP gross margin of 52.1% was up 4.4 percentage points from the prior year. The year on year improvement in non-GAAP gross margins is largely attributable to consolidation and streamlining our operations resulting in reduced overhead, better leveraging our scale and Company wide buying power, divestment of lower margin products at the end of 2008 and improved utilization of our services personnel resulting in service margin improvements by over seven percentage points year on year. The gross margin decline of one percentage point sequentially was primarily due to the mix of revenue in the quarter.

Our GAAP operating expenses for the fourth quarter was $106.4 million including amortization of stock-based compensation -- including amortization, stock based compensation, gain on asset sale, costs associated with M&A activity and restructuring costs. Excluding these charged, our non-GAAP operating expense was $90.3million. This was up about $7 million on a sequential basis and down $7 million year on year. Our non-GAAP operating expenses for the full year was down about $83 million compared to 2008. This decrease is the result of cost reduction plan started in the fourth quarter of 2008. Of the $7 million sequential increase in the fourth quarter, $2.7 million was related to the revenue investigation, about $1 million was related to less employee furlough taken in the fourth quarter compared to the third quarter, and about $2 million was related to other normal year end activity. Also, the fourth quarter operating expense did not include the full benefit of the restructuring which occurred earlier in the fourth quarter.

I would now like to review the results for the two business segments -- audio and video. The following items are excluded from the business segment results -- the previously slated GAAP to non-GAAP adjustments of $16.5 million, $15.9 million of general and administrative expenses, $42.2 million of sales and marketing expenses, $1.7 million of corporate R&D expense, net interest, income and other expenses of negative $94,000 and income taxes. A reconciliation of the segment contribution margins is included in our press release announcing this quarter's results.

Now starting with the video segment. Revenues for the fourth quarter were $106.2 million up 15% sequentially and down $28.1 million year on year or 21%. Three percentage points of the year on year decline was related to divested products and the impact of currency. Our professional video editing product sales were strong in the fourth quarter and professional services revenue was almost double last year, due to large broadcast transactions taken to revenue in the quarter. The video segment contribution margin was $35.8 million or about 34% of video revenue. This compared to $31.8 million of contribution for the fourth quarter of 2008 or 24% of video revenues.

In audio, revenues were $68.5 million in the fourth quarter up 15% sequentially and down 5% year on year. Seasonal consumer sales drove a good portion of the sequential increase as well as an upgrade promotion for Pro Tools HD and new Oxygen keyboard products introductions in the quarter. Audio contribution margin for the fourth quarter was $26.1 million or 38% of audio revenue. This compares to $20.8 million of contribution last quarter, $25.2 million in the fourth quarter of 2008 or 35% of audio revenue.

Our balance sheet remains strong. We have no debt at the end of the quarter with $109 million in cash or about $2.91 per share. During the quarter we made approximately $4.2 million in cash payments related to our restructuring efforts, bringing our total 2009 cash payments for restructuring to $25.8 million. In addition in the quarter, we deposited $10 million of cash into a long-term asset account for a facility escrow. This escrow is related to our plan to move our headquarters from Tewksbury to Burlington, Massachusetts, in June 2010 -- in the June 2010 time frame when the current Tewksbury lease expires. We had a significant improvement in our working capital, resulting in a positive cash flow from operations for the fourth quarter of over $22 million including restructuring payments.

Inventory was down over $14 million compared to last quarter and down over $18 million compared to December 31st of last year. This quarter was the fifth quarter in a row of sequential decline in our inventory levels. Inventory turns for 2009 were 3.9 turns. Our receivable balance was down almost $7 million on a substantially higher revenue, resulting in day sales outstanding of 41 days or ten days better than our last quarter end. Some of the improvement is due to the large broadcast transactions recognized in the quarter which had mostly been paid. However, most of the improvement is because of strong cash collection in the last quarter of 2009.

In the fourth quarter of 2008 at our investor day in Boston, we laid out our transformation plan. Major parts of this plan were to improve gross margins and to better optimize our cost structure. We stated our goal was to improve gross margin two to three percentage points in 2009 and reduced our non-GAAP operating expenses by $60 million year on year. In 2009 we improved our gross margin over four percentage points and reduced our operating expenses by over $80 million. The Company's cost structure now allows for significant operating leverage as revenue improves.

Before I turn the call back over to Gary I'd like to provide a quick update on the previously announced investigation initiated at the beginning of the fourth quarter. The investigation was primarily focused on the manner in which revenue was recognized on certain shipments of products from warehouses outside of the United States. We discovered that there was an incorrect interpretation of shipping terms in certain shipping locations which affected the timing of our revenue recognition, not the overall amount. This shipping practice had been consistently applied for a number of years and was discovered as we consolidated and merged operations. The investigation is now completed and there will be no adjustments required to our historical results. In order to conclude this investigation in the most expeditious and thorough manner, we retained independent counsel and auditors. As I mentioned earlier the cost of the investigation was approximately $2.7 million.

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

Thanks, Ken. As we mentioned earlier we are pleased to report that our revenues were up in the fourth quarter. This is a positive step in the ongoing transformation of our business and we continue to align the Company to improve profitability. The encouraging results of the quarter can be attributed to strengthen the broadcast sector, a seasonal increase in sales in our creative enthusiasts segment and the benefit of our reduced costs structure. As our markets stabilize we feel we are well positioned for profitable revenue growth.

We continue to see a number of positive external factors that will influence the future of Avid's business. For instance, there have been a number of signs that have rebound in the broadcast sector. After experiencing a 10% decrease in 2009, the WPP group predicts that advertising spend in the broadcasting sector will show a modest increase in 2010. Additionally, Nielsen media projects that the cable and satellite market will continue to grow about 8% in 2010. We have seen progress within our own broadcast business with broadcasters across the world investing in end-to-end Avid work flows and making the transition to HD. The US musical instruments or MI channel was down about 15% from 2008. It appeared to be trending back to previous levels as we crossed out Q4. Despite pure market health we experienced some growth in categories such as our digital audio work stations and MIDI controllers. And Best Buy continues to show interest in expanding its MI presence.

For the most part economic fears compounded an off cycle buying year to slow discretionary spending across the post-facilities market. The box office saw record revenues in 2009 but the credit crunch slowed the initiation of new film projects. The good news is that we did see sales start to pick up in Q4 and expect to see modest growth in 2010 as facilities gear up for events like the Olympics and presidential elections. The market for 3D content in film and video also continues to evolve and our customers are very interested in producing and broadcasting 3D content. "Avatar" has been a huge success at the box office. In recent weeks several entities including ESPN and Discovery have announced they will launch 3D specific channels. We continue to see this as an area of growth for Avid as these projects can require more edit stations and an increase in storage needs.

In education we expect a delay in the segment lagging by one or more buying cycles until tax revenues that support education recover. However, we are seeing more community colleges and career schools allocating funds to support new technology programs and creative digital media. Education continues to be an important focus for Avid and we have had some great wins recently and we participated in the ABC news on campus program at six of the country's leading journalism schools.

Despite the overall slow economy we continue on our path of innovation and successfully introduced a number of new products and technologies to our portfolio in 2009. In addition to releasing several dozen product upgrades, some highlights include -- in early fall we entered the guitar amp effects processor market for the very first time with the introduction of our 11 rack product to positive industry and customer feedback. Last summer we introduced VENUE SC48, a fully integrated audio and processing life sound solution developed for small to mid-sized houses of worship, clubs, corporate A/V companies and touring customers. I mentioned 3D earlier and its rising popularity. You may recall in March of 2009 we introduced the ability to view, edited, and playback, 3D stereoscopic material in our Media Composer solution -- completely changing the way 3D films are created in the edit suite.

In 2009 we also fueled our innovation by making a couple of key acquisitions. In the fall we acquired Maximum Throughput or Max-T. We're excited about the possibilities that network-based collaborative systems can offer to extend and streamline our customers workflows. The technology opens up new business models including the possibility of delivering editing as a managed service beyond the firewall even as a cloudbased software to service. Earlier this month we acquired German based company Blue Order -- a market leader in media asset management. This technology will offer our broadcast and post production customers a more efficient and cost effective way to manage and monetize their digital assets. Both of these acquisitions will present growth opportunities for Avid among new and existing customers.

As we move into 2010 there are a number of exciting events happening. The Olympic Winter Games kick off in a few weeks and a number of our customers including NBC and Eurosport will use a variety of Avid solutions to broadcast the games in HD worldwide. Award season is underway for the film, television and music industries. Once again, an overwhelming majority of the nominees for the Golden Globes, Grammys and ACE Eddies are AVID customers. We are honored that these customers continue to rely on Avid solutions to bring their creative visions to life. Avid will be honored at the ACE Award ceremony next week receiving the first ever ACE Technical Excellence Award for media composer. An accomplishment we are very proud of.

Now I will turn it back over to Ken to provide the 2010 outlook.

Thank you, Gary. As we look forward into 2010 our visibility into our DIO pipeline and our revenue forecast predictability continues to improve. While we are not prepared to provide guidance for 2010, we did want to provide some context for 2010.

We expect revenue growth and to be profitable on a non-GAAP basis for the full year of 2010. During our earnings call last year we discussed the revenue levels required to breakeven in 2009. Based on the actions already implemented and our expense run rate we believe we should breakeven on a non-GAAP operating income once annual revenue reaches $640 million to $650 million. Revenue in excess of this threshold should generate 50% or higher contribution to our non-GAAP operating profit.

This breakeven threshold excludes the following GAAP adjustments -- restructuring charges related to the previously announced actions, stock-based compensation, amortization of intangibles and loss or gain on asset sales. Based on what we know today we would expect these costs to be about $28 million to $32 million in 2010. These adjustments with the $640 million to $650 million revenue assumption would result in a GAAP operating loss of about $28 million to $32 million. Items affecting income -- net income -- include other income of approximately $200,000 and about $10 million of GAAP income taxes. We estimate non-GAAP taxes would be about $2 million higher than GAAP taxes for 2010.

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

(Operator Instructions) First up in our roster we have Paul Coster at JPMorgan.

Thanks. I've got two questions. The first one is can you just talk a little bit about on the editor side what your latest perspective is on the share battle with Final Cut Pro in particular?

Paul, the question comes out and the first thing I want it remind everyone on the call is the editor is a relatively small part of our overall revenue, of course. But on the share it should be clear -- Final Cut has far more units in the marketplace than we do. But what we are seeing is we aren't seeing the erosion that we had seen in the high end of the market of the high end post. Whether it be post in the broadcast area, whether it be post for film and for film or TV.

In fact, we have had some nice wins in that case. We talked about the Ellen win -- the Ellen come back last time where they were at risk of deadlines. One of the large broadcast deals we recognized in the fourth quarter had been a broadcaster that had tried using Final Cut in their news work flow and they are using many other things other than just Final Cut. The fact is they came to Avid for the work flow including our media composer -- NewsCutter products.

We aren't seeing the erosion we had seen. I think it would be, are we taking share or not? There are so many more units of Final Cut out there than Avid it would be hard to say we are taking share but we aren't seeing -- we certainly aren't moving the other direction today.

No reason to suppose that seasonality should be much different this year -- the first quarter should be down and then we will grow through the year?

I will let Ken comment on that.

That would be the normal historical flow by quarter.

Okay. Ken, do you feel that in any sense you have suppressed costs? We are seeing this with a number of companies that really ratcheted it down so much last year -- 401k and health and salary rises and goodness knows what else. And furloughs in your case. Are you going to be able to keep a lid on OpEx?

Yes. When I gave you that break even point there I have assumed we have already taken action. So in this past year, for example, we said we had about $20 million of suppressed operating expenses. Suspension of 401k and foreign pension contributions and furloughs and so on. Right now our intention is not to have that but we have made other operational improvements during the year and therefore our break even base is pretty much constant moving forward so we made up for all that suppressed cost.

My last question is, the large broadcast implementations that you are seeing. By the way, congratulations on getting that first one out of the way. I'm assuming it is CNN. You can tell me if I'm wrong.

But are you seeing these implementation programs lengthening and getting more complex or is there any trend there?

First of all, unless we have a customer's permission we don't speak to who the broadcasters are as you can imagine. But the answer is everyone is a little different, Paul. I would say the average for us is six months. It can be as short as three to four months. Or in the case of one of the ones in the fourth quarter it was over a year. But it was on schedule.

And it was an extremely large broadcaster with an -- completely reengineer their entire work flow. So I would say I think it was an average of around six to seven months from the time we signed the contract. But that's typical. The slowness last year has been in signing contracts. One someone goes into implementing the work flow, it is no different last year, this year, year before.

Okay. Good to see an operating profit. Thank you.

Yes, thanks.

Next up we have Steven Frankel with Brigantine.

Good afternoon. Could you start by giving us some color on what that broadcast pipeline looks like for 2010?

Again, we don't want to give pipeline numbers but I will speak to it. The investor day back in November I said that what we were starting to see was more RPs. What we were starting to see was more opportunity. What I'd say is that trend has continued. There are clearly more opportunities that we are engaged in and more decisions that are going to be made.

I spend time with large broadcast customers. I was with one a couple of weeks ago who said "We have X-million allocated for a project. We are definitely going to do it this year." And last year is conversation is going on in January is "We have no money. Only stuff we absolutely have to replace."

So what I would tell you is that the pipeline has grown significantly. More importantly the number of opportunities has grown significantly. And we continue to believe that that will grow over the course of the year.

There has been some very good interviews out in the public market with some of our customers that are out there. We suspended HD for 2009. We have talked about that. Some of the TV groups -- station groups in particular. In 2009 we are going to start doing it again.

So we are seeing growing momentum. Growing momentum is not the horse charging out of the gate. But we are definitely seeing more momentum out there.

Okay. And now on the post side where are you in terms of getting the installed basis -- the rental pools over to this generation of product?

I think we made progress last year particularly with the rental companies. I follow the bulletin boards and I have been noticing people are talking about the DX series. How can you help me on the DX series? How can you help me with the 4.whatever release of Media Composer which is our -- 4.0 is our latest release of the Media Composer product.

I can tell you we had some strong performance in our Pro Video area. Pro Video area in the fourth quarter. There remains to be much to do there -- as I observed when we talked about films people watching films are up. I was reading a statistic that said the actual amount of film production going on in the LA area. That is just one area. There are other areas in the country. Was down 19% year on year and large part of those because of the credit crunch that we commented on.

But we are doing a good job of getting the new version of Media Composer out there. We figure it is -- to Paul's initial question -- we feel it is a very important counter to Final Cut because of the continuing professional editing features that we put in.

Then on the gross margin there were some mix issues that held back the gross margin progress we have seen through the rest of the year. Should we anticipate gross margins improving in 2010 from where they ended in '09?

Our expectation is from an overall standpoint we would expect to continue to improve. You can't necessarily draw that line sequentially for each quarter. It will go up and down within a range due to mix which is the primary reason like, for example, the sequential one percentage point decrease from the third quarter. A lot of larger transactions would certainly help the fourth quarter because of a higher service component -- wouldn't have the same gross margin as some of our other business. But we still expect to continue to improve gross margins but I wouldn't expect that we would be able to do it at the rate that we held for the past year but certainly work on improving it.

Great. Thank you.

(Operator Instructions) We are move on to Michael Olson at Piper Jaffray.

Thanks. Couple quick ones. You mentioned we didn't get a full quarter impact from the OpEx reductions. What portion of the quarter do you think benefited from those reductions? Was it half the quarter or more or less?

I would say that a small piece of the quarter that the majority of it would have been things that happen in the December time frame and therefore there is probably 20% benefit.

Then as far as the large broadcast deals in the quarter would you be willing to give us any approximate size of those deals?

When we talk about large broadcast deals we are talking about seven-figure deals. Typically our large broadcast deals range in the range of a couple million -- to a couple million to high single digits and I'd say these would be typical of that range. We don't identify individual deals for obvious reasons. These were typical.

You might remember on prior calls including investor day a lot of people say how do we have the confidence that we would grow in the second half of the year? And we said because we have large broadcast deals coming in towards the end of the year. So these are those deals that we have been commenting on prior. For future reference -- two to high single digits is where we think of large deals.

Thanks very much.

Have a question now from Andrew Abrams at Avian Securities.

I was wondering if you could give some color on any shift you are seeing from hardware to software mix wise? In terms of what you'll wind up selling? You have had a little bit of shift towards software. Has it actually shown up in something recognizable that you guys can see?

What I would -- shift -- certainly our systems are mostly software based but it actually has surprised me that even though everyone wanted software only people continue to buy turnkey systems from us. We certainly saw that in our audio products and video products in the case of the fourth quarter. And then when we do these large broadcast deals even more so because they want us to come in with a complete solution that is there. That being said there is what I would call movement towards that. I think that's one of the reasons you're seeing an improvement. Many reasons you are seeing improvement in gross margins there. But the shift is slow.

If you had less of those large broadcast deals in the quarter would you have noticed it more, I'm assuming?

No, we probably would have noticed it less -- noticed the software more.

Right.

The answer is I would have to go back and do the analysis. But speculating, the answer to that question is yes.

What's your perspective on HD penetration? Top tier broadcasters obviously have converted. Where are we in secondary markets? Tertiary markets?

This number really hasn't changed since we talked about it on investor day. I think we talked about 25%, 30% of the local stations is all that's converted and that number has remained consistent. Now, to that point is when I spoke to some of the station groups saying they are going to convert additional stations this year. Additional stations is part of that. Outside the United States and outside Japan to move to HD is still very early, very nascent, out there. Even if the large broadcasters in the United States while may be HD based they are still making a transition to a more file based work flow. So there is still opportunity there.

If you look at the broadcast business relative to the film business, I'm assuming that file based is a little more obvious in the film business. Is that really the case?

Is that really the case? With the advent of the RED Camera it's a little bit more obvious. RED is certainly starting to take the HD market by storm but still a lot of people that shoot on film but edit, transcode it. I would say it is actually the movement -- in my view, the movement to digital cameras, the high end is file based cameras I should say. File based cameras has moved far more quickly in broadcasting and film. Although the RED is changing that.

Thank you.

With that there are no other questions holding so I'll turn things back over to Gary for any additional or closing remarks today.

I would like to thank all of you for joining us. Should you have any further questions all of us are available for follow-up after today's call. We look forward to speaking with you next quarter. Have a good evening.

Again, thank you for joining us, everybody. That will conclude today's call. Have a good day.