Avid Technology Inc (AVID) 2010 Q2 法說會逐字稿

Good day welcome everyone to the Avid Technology Second Quarter 2010 Earnings Results Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tom Fitzsimmons. Please go ahead, Sir. Good afternoon.

I am Tom Fitzsimmons, Director of Investor Relations for Avid. I would like to welcome you to today's call. With me today are Gary Greenfield, Avid's Chairman, and Chief Executive Officer, 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 Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about our performance. There are a number of factors that can cause actual events or results to differ materially from those indicated by these statements, such as competitive changes, our ability to execute the strategic plan or adverse changes in general economic conditions. Other important events and factors appear in the filings with the US Securities and Exchange Commission. In addition, our forward-looking statements represent only our estimates as of today, July 22, 2010 , 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. They may not be comparable to similar non-GAAP measures used to report by other companies. The non-GAAP do not reflect all the costs associated with the Company's operations determined in accordance with GAAP. The most directly comparable financial measures calculated in accordance with GAAP and a reconciliation of GAAP to non-GAAP measures are contained in the press release announced with this quarter's results and are available in the investors section of the website at www.avid.com. For the purpose of understanding our future business model, we will also provide forward-looking analysis on this call on a non-GAAP and 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. And now I would like to turn the call over to

Thank you, Tom. Welcome to the conference call for the second quarter of 2010. Avid delivered a solid top line for Q2 with revenue growth for the quarter on a year-to-date basis. Revenues for both audio and video grew for the quarter for the first time since 2007. We reduced our loss compared to the same periods last year and moved closer to profitability. However, the strengthening dollar, particularly against European currencies created a significant headwind for both revenue and earnings in the second quarter as over 50% of our businesses transacted outside the United States. I will discuss more about the business in a moment but will turn the call over to Ken to discuss the financial results in more detail.

Thank you, Gary. Revenue for the second quarter were $162.2 million as compared to $150.5 million for the same period in 2009. The GAAP net loss for the second quarter was $12.9 million or $0.34 per share. This compares to a GAAP net loss in the second quarter of last year of $15.9 million, or $0.43 per share. Our non-GAAP net loss which excludes amortization of intangible assets, stock based compensation, restructuring and other charges, acquisition costs, and related tax adjustments was $2 million for the second quarter, or $0.05 per share. This compares to a non-GAAP net loss of $0.15 per share for the second quarter of 2009.

And now, I would like to provide a bit of color on the results for the second quarter. Overall, revenue for the second quarter was up 8% year-on-year, which is the highest growth rate we've reported since 2007. Revenues from acquisitions contributed about 3 percentage points of growth while changing currency exchange rates adversely impacted revenue by about 1.5 percentage points compared to last year's second quarter. Our video revenues were $93.5 million, up about 5% compared to the second quarter of 2009.

This is the first quarter of year on year growth per video since the fourth quarter of 2007. We continue to see strengthening in the broadcast market, demand for our shared storage products and most of our broadcast news related product increased in the second quarter compared to a year ago. In addition, the recent release of Media Composer version 5.0 provided a nice boost to our professional editor product line during the quarter.

In audio, we had another solid quarter. The second quarter revenue was $68.6 million, which represents 11% year-on-year increase. We continue to see strong demand for our Live Systems line of products, with the year-to-date revenue up 50% compared to the first six months of 2009. Our professional audio products also continue to have good growth compared to a year ago. Sales of the recently acquired Uphonics products contributed nicely to the quarter and accounted for approximately 6 percentage points of the year-on-year revenue growth in audio.

Now, I will discuss the operating results on both aGAAP and non-GAAP basis. The items exclude from the non-GAAP results for the second quarter totaled $10.9 million, and include amortization of intangibles of $3.4 million, stock based compensation of $3.7 million, restructuring and other costs of $4 million. The majority of this charge was related to the restoration cost of the Tipsbury campus which we recently vacated. Acquisition related costs of $83,000 and a favorable tax adjustment of $171,000. The GAAP operating loss for the quarter was $12.8 million, an improvement of $2.5 million year-on-year. Our non-GAAP operating lose for the quarter was $1.7 million which represents a $2.6 million improvement compared to the second quarter of 2009.

On a GAAP basis, we reported gross margins as a percentage of revenue of 50.7%. Down 0.8 percentage points year-on-year, but up almost 1 percentage point sequentially. Our non-GAAP gross margin was 51.6%, down about 0.5 percentage point year-on-year and up almost 1 percentage point sequentially. The year-on-year decline was largely attributable to the unfavorable impact of the strengthening of the US dollar and a royalty credit which we had in the second quarter of 2009.

The sequential increase was driven by higher revenue on the relatively fixed overhead and improved mix of product sales offset to a large degree by the adverse affect of changes in currency exchange rates. Our GAAP operating expense was $95 million for the second quarter, up $2.2 million year-on-year, and up $4.3 million sequentially. Our non-GAAP operating expense for the second quarter was $85.4 million. This was up about $2.5 million on a year-on-year and sequential basis. The year-on-year increase in operating expense was driven by incremental expenses from acquisitions. Absent this, our spending would have been down year on year.

In addition, in 2010 , we reinstated certain compensation practices that were suspended in 2009, including annual pay rate increases, pension contributions, and no forced furlough. The cost of reinstating these programs was more than offset by operational improvements implemented near the end of last year. On a sequential basis, operating costs related to acquisitions was a major reason for the increase. In addition, marketing programs including NAB increased on a sequential basis. At the end of the quarter, we had approximately 2,042 employees and 482 contractors.

Now, turning to the balance sheet. We ended the quarter with $46.8 million of cash, which is down $27.4 million from the beginning of the quarter. The primary reasons for the decrease in cash were $10.9 million of net cash used to purchaser Uphonics, $3.1 million of payments related to restructuring, and $12.5 million of capital expenditures driven by our headquarters moved to Burlington, MA. This move resulted in higher than normal capital expenditures for the first half of 2010 , but we expect capital spending to return to more normal level in the second half of this year. Our net inventory at quarter end was $79 million, which is up $7 million from March 31. About $3 million of increase is relate today Uphonics inventory. The inventory levels will probably increase in the second half of 2010 as we rebuild stocking level to better meet current demands. The analyzed inventory turns for the second quarter were 3.9 turns.

Our accounts receivable balance of $100 million represents 56 days sales outstanding, which is up somewhat from the beginning of the quarter, however, our aging of receivables is consistent with prior periods. And now, I would like to turn things back over to Gary who will provide an update on the

Thanks, Ken. As mentioned earlier, we continue to see positive momentum in our year-on-year revenue with an 8% increase in Q2 '10 revenue over last year. Our markets continue to stabilize and there have been some positive signs particularly in our broadcast, live scion and musical instruments or MI sectors. There are a number of external market factors that we see attributing to growth to specific segments in the customer base. In the broadcast sector, the growth of HD continues, according to a May 2010 study from RTNDA/Hofstra , which reported that 66% of news stations in the top 50 US markets are now producing their news in HD, and fewer than 25% of the stations in smaller markets have converted to HD. Additionally a recent Goldman Sachs report predicted that the UK TV ad market would be up more than 20% year-on-year for the second quarter as a result of the UK election, World Cup and upswing in the automotive and financial sectors. Avid continues to see a growing interest from our broadcast customers worldwide as they invest in shared storage, media asset management and newsroom productivity solutions.

For instance, Media City UK, the largest purpose built media community in Europe deployed a full end to end Avid custom work flow and KTBS, a local Louisiana broadcaster in the States implemented the Avid Interplay productions solutions as part of their move to HD news production. We have also seen a very positive response to Integrated Media Enterprise framework at broadcasters increasingly look for ways to involve the business models, become more collaborative, maintain and increase profitability and gain more visibility into their assets.

We saw modest growth in the MIDI controllers in the second quarter and the latest sales track numbers indicated that MI market continues to grow at a steady rate. Earlier this month, we introduced a refresher of our axiom keyboard controllers making it more flexible for editors, producers, and musicians to work with a variety of digital audio work stations to create music either in the studio or on stage. This line of products is also attractive in our education channel. Full Sail University in Florida recently invested in a number of our MIDI key board controllers and Sibelius software to use as part of the curriculum for students taking online courses. Our government and commercial segment showed a great deal of strength this past quarter in both audio and video. The Department of Defense spending on video operations were strong in the quarter and we're happy to report that Avid Solutions are being deployed as part of work flows and military broadcast and training applications. This is a growing sector of our business and we continue to work closely with a variety of government system integrators to broaden the relationships and work flows for customers.

Light Systems also continues to do well. According to ticket sale numbers from pollster.com, Avid venue systems are being used on 9 of the top 10 US tours this summer and 5 of the top European tours. This includes acts such at Paul McCartney, Taylor Swift, Jay-Z, Tom Petty and JamesTaylor and Carol King. Venue was also used extensively throughout the live performances at the World Cup in South Africa and has been recently installed at a variety of concerts and sporting sites such as the Tribidor Club in Los Angeles and the New Jets/Giants stadium in New York. Most of our post production facilities and studio customer have told us they have seen a slight uptick in businesses this year. HD and 3D continue to be significant drivers for these organizations to invest in storage and asset management systems and upgrade to file based work loads. A story in the Wall Street Journal earlier this month stated Hollywood has already committed to a total of 32 3D films for 2011, compared to 15 last year and that there are now more than four times as many 3D projectors and screens in the US as there were last year. We continue to see a number of our customers upgrading to HD. Direct Robert Rodriguez, who directed Predator and Sin City recently upgraded his entire facility, Troublemaker's Studios to HD, outfitting it with a variety of new audio and video systems including Media Composer, Nitris DX, a dual operated D control with video satellite and Pro Tools software and unit shared storage system.

When we spoke to you last we were fresh off the hill from an annual A&V show in Las Vegas where we introduced Media Composer 5 and announced the acquisition of Uphonics. We have made quite a bit of progress on both fronts since then. Media Composer 5 started shipping in mid June and we have had more than 5,000 trial downloads in the first six months. The market has expressed great excitement about it's new capabilities like native mile based work flows with formats like red, new utilibility features and support for third party hardware. We are excited about how we are delivering our commitment to be more open and have had a number of customers indicate to me that they are upgrading and switching to Media Composer from File Cut Pro or other competing solutions. A number of industry leaders have told us that they believe that this is as open as Avid has ever been. In a 2009 survey of Ace Editors, found that the majority of editors, producers and directors are still choosing Media Composer as their creative solution for film and TV projects. Our customers ranging from independent professionals to enterprise level broadcasters continue to be excited about the possibilities the Uphonics acquisition brings. We are committed to keeping these control services open and involving the Ucon control protocol to include the ecosystem of audio and video work flows to include Media Composer and Pro Tools. Since closing the acquisition, we've engaged and signed a number of partners like Apple, Apigee and Steinburg and look forward to further expanding the current roster of partners in the months to come. Looking forward we will return to IBC in Amsterdam in September to meet with our European customers to demonstrate and discuss our latest audio and video work flows and solutions. This show always provides us with opportunities to get closer to the European customers and learn more about the market dynamics and help them solve their specific business and technology problems. Overall the progress we've made in this past quarter is promising and we are hopefully about what the remainer of the year may bring. Now I will turn it back over to Ken to provide context for the remainder of

Thank you, Gary. While we are not prepared to provide specific guidance for 2010, we did want to reiterate our comments from the last two earnings calls. We expect full year 2010 revenue to be higher than 2009. The second half of 2010 should be stronger than the first half due to normal seasonality, the timing of certain revenue transactions and getting the benefit of product releases and acquisition. We've also initiated selective pricing increases effective July 1 which should mitigate some of the adverse impact to revenue and gross margins caused by currency exchange movements. We continue to expect to have a positive non-GAAP operating income for the full year of 2010. Our break-even point for non-GAAP operating income in 2010 remains at the annual revenue level of $645 million to $655 million. Revenue in excess of this threshold should generate 50% or higher contribution to the non-GAAP operating profit. We expect our non-GAAP net interest and income taxes to be about $10 million, which would result in a non-GAAP net loss of $10 million, or approximately $0.26 per share loss if you assume the same revenue range. The non-GAAP break even excludes following GAAP adjustments. Restructuring and other charges, stock base compensation, amortization of intangibles, acquisition related cost and loss or gain on sale of assets. Based on what we know today, we would expect these costs to be about $31 million for 2010. The non-GAAP net loss excludes the items I just outlined and a favorable tax adjustment of about $2 million. This would result in a GAAP net loss of approximately $39 million assuming the same revenue levels. Before we move to Q&A, I'd like to announce that our 2010 Investor Day will be held on Friday, November 12th, here at our new Burlington location. More information and registration is available on our IR page of our website. I hope that you will be able to join us. This concludes our remarks and we would now be happy to take your questions.

Thank you, Sir. We will take the first question from Paul Coster, of JPMorgan.

Paul, we can't hear you. I don't know if you are on mute.

One moment, please. Mr. Coster, please go ahead.

Can you hear me now?

Yes. Okay. Thanks. We want to know if there has been any change in the competitive landscape especially with the Harmannic acquisition of Omneon?

There really hasn't been. Obviously we are keeping a close eye on the evolution of Harmannic and Omneon. Omneon has always been one of the big players in the play out serve area and competes with our product. We have not seen them be more aggressive or less aggressive since the announcement of that acquisition. Since NAB, we really haven't seen anything of consequence. Sony with media (inaudible), they talked about it. They obviously talked about it at NAB, the Harmannic acquisition of Omneon. I think that we've continued to move forward with Media Composer, with our integrated media enterprise strategy, which we rolled out. There's been a lot of conversation in the press about. The Uphonics acquisition. If anything, I think there has been more movement from Avid competitively than from others.

Okay. You touched on this briefly. I apologize if I am repeating here. Can you talk about how Avid could benefit from the 3D editing and post production?

The 3D really can help Avid. Most people associated primarily with the editors. For all the major 3D movie that is appeared this spring and last year, Media Composer is the editor of choice for doing the offline editing for 3D. Indeed, when you do a 3D production the number of editors increases. For example, on "Avatar" there were 13 Avid editors. Typically, on a 2D you would see five. The reason for that is that they are more complex. Everyone who does a 3D movie also does a 2-D version of it. That's not a simple conversion process. Even people in 3-D and convert to 3D, the story still need to be edited. I think more importantly and where the broader opportunities are is the areas of asset management, when you do 3D, it generates additional story lines. You don't just do a traditional 3D. If I do an IMAX version which is slightly different. You do a 2-D version and you distribute it in many more different forms. So the enterprise media, our strategy for the Integrated Media Enterprise, as well increased storage requirements. Those are all benefiting factors to Avid. That is just on the film side, similarly on the TV side. On the TV side, on the broadcast side, there are different standards out there for broadcasting it. What take one channel to broadcast a traditional 2-D film -- excuse me, 2-D show, sports show, would take 2 channels. And we sell stuff, us and our competitors sell stuff by the channel. So, it increases demands as people add new channels in there.

Okay. Then, Ken, I caught the FX impact on revenue. But did you give an impact on operating income?

The impact on operating income would have been far less. So, for the quarter, it would have been closer to $1 million in the operating expense. But where it impacts us a lot -- so, it would be a savings in other words, year on year. But where it impacts us a lot is on the gross margin. As you may remember, most of the costs of goods are US dollar-driven, because they are either tied to the US dollar. Or if they are tied to the currency in China, which, of course, attracts the US dollar. So, when the European currency is changed a lot, we need to react according. Otherwise a lot of it drops straight down in the gross margin line.

Got it. That is it for us. Thank you very much.

And we will take the next question from Michael Olson with Piper Jaffray & Co.

Good evening. A couple of quick ones here. Do you think the improvement in broadcasting, especially newsroom specifically is being driven rising tide of improving industry wide broadcast ad spender? Is there something going on more specific to Avid?

It is always hard to separate out. Because we don't see the statistics. We do think the integrated work flows we introduced, along with Media Composer 5.0, we introduced an integrated media work flow for ABC-I, which is in Panasonic format. We introduced XD-cam, which is a Sony format last year.

So, we do think that there are things that are improving. Our market share for Media Composer for Interplay and also storage. We do think that is unique to Avid. And if fact, we saw a very strong growth in those areas in the quarter, as well, as you know, we track our broadcast segment. We saw a strong growth in the quarter and we see strong growth year-to-date.

Now, I think I shared with you all that even last year I felt Avid was taking share, even in a down market. In an up market I would like to think we are taking more than our, we are growing more rapidly in broadcast than other companies are. And knowing what our internal rates are compared to what the markets rates are being forecasted for growth rates in broadcast, I believe that to be the case, but unfortunately you never know until you see the information retroactively. I think it is a combination right now. There is no doubt the broadcast segment is growing this year right now for the marketplace.

Got you. Then year-over-year growth in audio has been outpacing video growth for a few quarter in a row here. Do you expect that to be a continued trend? Basically will audio continue to creep higher in a percentage of overall revenue?

First of all, we had the Uphonics acquisition, which accounted for some of the growth. Ken, what was the percentage growth for audio, just audio?

It was pretty close to half of the contribution for the past quarter.

I think you saw a bunch of video growth driven by Uphonics in the quarter. I was asked that question last quarter as well about why the difference in video growth. Remember, the way we book our broadcast business we actually see that trailing, the growth in video trailing, Because we book large transactions, we don't recognize that revenue until we're installed. We have seen solid bookings in our video business. I can't tell you if next quarter audio might not also outpace the growth a hair, but I think you will see that differential retreat as we move into future quarters.

One last one, you mentioned at the end there, some price rate increases. Can you talk about -- not to go through every product, but generally which products are you raising prices on. And what kind of general percentage increases are we talking about?

I think the average increase if you are doing it in US dollars, the average increase was a couple percentage points. And it really was a bit here and a bit there. I mean, you say what kinds? Some of the video products. It was some of the upgrades. Some of the audio products, etc. Overseas it was all the products. It was an FX exchange upgrade, excuse me, driven by FX -- when I say overseas in the European markets. It was driven primarily by FX, and that was across all of our product line.

Okay. Thank you very much.

We will take the next question from Steven Frankel, of Green Street Advisors.

Good afternoon. I wonder if you might give us insight do visibility for the back half. You do have large deals, although I don't see them showing up in deferred revenues so much this first quarter, but maybe you are burning off as much as is putting on. What is giving you confidence in the stronger back half, especially on the broadcast side?

As we take a look -- first of all, we saw growth last quarter, we've seen growth this quarter. Just a fact at where we are headed, the proof points as we move forward to it. We do have Media Composer which we leased at the end of 2Q which created momentum in the video business. We have other offerings, you will be hearing about, around the time of IBC we have a tendency to announce things.

So, we see some uptake on those products refreshes and some of the offerings as we talk about some of those things. We do have visibility to some of these larger deals, as well. And, some of them, the good news about the way we do our bookings, we don't have to force that into the quarter and get some discounting. We can sign them as we would like. But we have been awarded some deals that we know we will be implementing prior to the end of the year. Go ahead, Steve. I am sorry.

What is the health of the rental suite like in Hollywood? And is that a potential source of Media Composer upgrade between now and the end of the year?

Yes. The rental fleet -- so, let's separate it. An upgrade on the rental fleet. There was a lot of issue from upgrading from adrenaline from the DA series to the DX series. We actually have seen quite a few of those upgrades where people would buy new systems, upgrade them over the course of the last 18 months or so. Those rental organizations typically are on maintenance. So, an upgrade for them, from Media Composer 4.0 to Media Composer 5.0 as an example, would be included as part of the annual subscription they are paying.

So, again, people that are using rental companies probably will upgrade as they move to the next project. Very few people will upgrade in the middle of a movie for a whole variety of reasons. They are working, they know what they had when they started, etc, etc. But I would not expect incremental software upgrade revenue from the rental companies. We have done a pretty good job in the last year of getting them to upgrade. We continue to refresh the fleets. They are one of the big buyers of storage from us. So, they continue to be a nice source of revenue for us.

Thank you. And, do you think you have helped. I know you gained share on the editing side. What about on the newsroom side? Do you think you have gained share in that segment as well in the last year?

On a strict newsroom side, Steve, I would say it is -- on a strict news, who uses whose news system, I think we have probably held our own in those areas. We compete with companies like ENPS or whatever it might be. I think on the infrastructure around the newsroom, we find gain share. So, by that I mean the editing within the newsroom. The storage within the newsroom. Some of the injust servers within the newsroom. Probably not on the playoff servers in the newsroom but I think we have been gaining shares around the infrastructure that supports it.

On the audio side, on the generic and history Pro Tools business, do you think you can grow that going forward, or is that mature and you are trying to grow things around it and leverage it that way?

I think the Pro Tools world, even though we have a tendency to refer it Pro Tools as software, it is really about the Pro Tools family and Pro Tools system, which is a family of IO product that is work in conjunction with the Pro Tools software and other digital audio works stations. Certainly that is our goal.

One of the things we ran very successfully in the first half of the year, for example, was people that bought Pro Tools LE products, which are mid-level IO products, upgrading to the Pro Tools HD systems, which are hi end IO. And we had quite a bit of success in the first quarter with that. We introduced 11 Rack a year ago, which is officially considered a Pro Tools LE product, which is an example of the Pro Tools ecosystem. I think both from new IO, new category such as guitar which we weren't in, other new types of IO, I think you will continue to see us slowly evolve the footprint of Pro Tools. I think you will see it grow. And I think that is what you are seeing in the audio business, as a matter of fact. While the acquisition accounted for part of the growth, we did have natural growth even with currency as well.

Okay. Thank you.

And that is all the questions we have at this time. We would like to turn the conference back over to Mr. Fitzsimmons.

Yes. I am actually going to finish it up. I want to thank everyone for joining us. As we said, we think we had strong comp line growth for the quarter. We certainly continue to see an improvement in the profitability. We are looking forward to the second half. I want to thank all of you for joining us. Should up any further questions, all of us will be available for follow-up after today's call. Thanks.

And that concludes today's conference. We thank you for your participation. You may now disconnect. Thank you, Sir. We will take the first question from Paul Coster, of JPMorgan.

Paul, we can't hear you. I don't know if you are on mute.

One moment, please. Mr. Coster, please go ahead.

Can you hear me now?

Yes. OKay. Thanks. We want to know if there has been any change in the competitive landscape especially with the Harmannic acquisition of Omneon?

There really hasn't been. Obviously we are keeping a close eye on the evolution of Harmannic and Omneon. Omneon has always been one of the big players in the play out serve area and competes with our product. We have not seen them be more aggressive or less aggressive since the announcement of that acquisition. Since NAB, we really haven't seen anything of consequence. Sony with media (inaudible), they talked about it. They obviously talked about it at NAB, the Harmannic acquisition of Omneon. I think that we've continued to move forward with Media Composer, with our integrated media enterprise strategy, which we rolled out. There's been a lot of conversation in the press about. The Uphonics acquisition. If anything, I think there has been more movement from Avid competitively than from others.

Okay. You touched on this briefly. I apologize if I am repeating here. Can you talk about how Avid could benefit from the 3D editing and post production?

The 3D really can help Avid. Most people associated primarily with the editors. For all the major 3D movie that is appeared this spring and last year, Media Composer is the editor of choice for doing the offline editing for 3D. Indeed, when you do a 3D production the number of editors increases. For example, on "Avatar" there were 13 Avid editors. Typically, on a 2D you would see five. The reason for that is that they are more complex. Everyone who does a 3D movie also does a 2-D version of it. That's not a simple conversion process. Even people in 3-D and convert to 3D, the story still need to be edited. I think more importantly and where the broader opportunities are is the areas of asset management, when you do 3D, it generates additional story lines. You don't just do a traditional 3D. If I do an IMAX version which is slightly different. You do a 2-D version and you distribute it in many more different forms. So the enterprise media, our strategy for the Integrated Media Enterprise, as well increased storage requirements. Those are all benefiting factors to Avid. That is just on the film side, similarly on the TV side. On the TV side, on the broadcast side, there are different standards out there for broadcasting it. What take one channel to broadcast a traditional 2-D film -- excuse me, 2-D show, sports show, would take 2 channels. And we sell stuff, us and our competitors sell stuff by the channel. So, it increases demands as people add new channels in there.

Okay. Then, Ken, I caught the FX impact on revenue. But did you give an impact on operating income?

The impact on operating income would have been far less. So, for the quarter, it would have been closer to $1 million in the operating expense. But where it impacts us a lot -- so, it would be a savings in other words, year on year. But where it impacts us a lot is on the gross margin. As you may remember, most of the costs of goods are US dollar-driven, because they are either tied to the US dollar. Or if they are tied to the currency in China, which, of course, attracts the US dollar. So, when the European currency is changed a lot, we need to react according. Otherwise a lot of it drops straight down in the gross margin line.

Got it. That is it for us. Thank you very much.

And we will take the next question from Michael Olson with Piper Jaffray & Co.

Good evening. A couple of quick ones here. Do you think the improvement in broadcasting, especially newsroom specifically is being driven rising tide of improving industry wide broadcast ad spender? Is there something going on more specific to Avid?

It is always hard to separate out. Because we don't see the statistics. We do think the integrated work flows we introduced, along with Media Composer 5.0, we introduced an integrated media work flow for ABC-I, which is in Panasonic format. We introduced XD-cam, which is a Sony format last year.

So, we do think that there are things that are improving. Our market share for Media Composer for Interplay and also storage. We do think that is unique to Avid. And if fact, we saw a very strong growth in those areas in the quarter, as well, as you know, we track our broadcast segment. We saw a strong growth in the quarter and we see strong growth year-to-date.

Now, I think I shared with you all that even last year I felt Avid was taking share, even in a down market. In an up market I would like to think we are taking more than our, we are growing more rapidly in broadcast than other companies are. And knowing what our internal rates are compared to what the markets rates are being forecasted for growth rates in broadcast, I believe that to be the case, but unfortunately you never know until you see the information retroactively. I think it is a combination right now. There is no doubt the broadcast segment is growing this year right now for the marketplace.

Got you. Then year-over-year growth in audio has been outpacing video growth for a few quarter in a row here. Do you expect that to be a continued trend? Basically will audio continue to creep higher in a percentage of overall revenue?

First of all, we had the Uphonics acquisition, which accounted for some of the growth. Ken, what was the percentage growth for audio, just audio?

It was pretty close to half of the contribution for the past quarter.

I think you saw a bunch of video growth driven by Uphonics in the quarter. I was asked that question last quarter as well about why the difference in video growth. Remember, the way we book our broadcast business we actually see that trailing, the growth in video trailing, Because we book large transactions, we don't recognize that revenue until we're installed. We have seen solid bookings in our video business. I can't tell you if next quarter audio might not also outpace the growth a hair, but I think you will see that differential retreat as we move into future quarters.

One last one, you mentioned at the end there, some price rate increases. Can you talk about -- not to go through every product, but generally which products are you raising prices on. And what kind of general percentage increases are we talking about?

I think the average increase if you are doing it in US dollars, the average increase was a couple percentage points. And it really was a bit here and a bit there. I mean, you say what kinds? Some of the video products. It was some of the upgrades. Some of the audio products, etc. Overseas it was all the products. It was an FX exchange upgrade, excuse me, driven by FX -- when I say overseas in the European markets. It was driven primarily by FX, and that was across all of our product line.

Okay. Thank you very much.

We will take the next question from Steven Frankel, of Green Street Advisors.

Good afternoon. I wonder if you might give us insight do visibility for the back half. You do have large deals, although I don't see them showing up in deferred revenues so much this first quarter, but maybe you are burning off as much as is putting on. What is giving you confidence in the stronger back half, especially on the broadcast side?

As we take a look -- first of all, we saw growth last quarter, we've seen growth this quarter. Just a fact at where we are headed, the proof points as we move forward to it. We do have Media Composer which we leased at the end of 2Q which created momentum in the video business. We have other offerings, you will be hearing about, around the time of IBC we have a tendency to announce things.

So, we see some uptake on those products refreshes and some of the offerings as we talk about some of those things. We do have visibility to some of these larger deals, as well. And, some of them, the good news about the way we do our bookings, we don't have to force that into the quarter and get some discounting. We can sign them as we would like. But we have been awarded some deals that we know we will be implementing prior to the end of the year. Go ahead, Steve. I am sorry.

What is the health of the rental suite like in Hollywood? And is that a potential source of Media Composer upgrade between now and the end of the year?

Yes. The rental fleet -- so, let's separate it. An upgrade on the rental fleet. There was a lot of issue from upgrading from adrenaline from the DA series to the DX series. We actually have seen quite a few of those upgrades where people would buy new systems, upgrade them over the course of the last 18 months or so. Those rental organizations typically are on maintenance. So, an upgrade for them, from Media Composer 4.0 to Media Composer 5.0 as an example, would be included as part of the annual subscription they are paying.

So, again, people that are using rental companies probably will upgrade as they move to the next project. Very few people will upgrade in the middle of a movie for a whole variety of reasons. They are working, they know what they had when they started, etc, etc. But I would not expect incremental software upgrade revenue from the rental companies. We have done a pretty good job in the last year of getting them to upgrade. We continue to refresh the fleets. They are one of the big buyers of storage from us. So, they continue to be a nice source of revenue for us.

Thank you. And, do you think you have helped. I know you gained share on the editing side. What about on the newsroom side? Do you think you have gained share in that segment as well in the last year?

On a strict newsroom side, Steve, I would say it is -- on a strict news, who uses whose news system, I think we have probably held our own in those areas. We compete with companies like ENPS or whatever it might be. I think on the infrastructure around the newsroom, we find gain share. So, by that I mean the editing within the newsroom. The storage within the newsroom. Some of the injust servers within the newsroom. Probably not on the playoff servers in the newsroom but I think we have been gaining shares around the infrastructure that supports it.

On the audio side, on the generic and history Pro Tools business, do you think you can grow that going forward, or is that mature and you are trying to grow things around it and leverage it that way?

I think the Pro Tools world, even though we have a tendency to refer it Pro Tools as software, it is really about the Pro Tools family and Pro Tools system, which is a family of IO product that is work in conjunction with the Pro Tools software and other digital audio works stations. Certainly that is our goal.

One of the things we ran very successfully in the first half of the year, for example, was people that bought Pro Tools LE products, which are mid-level IO products, upgrading to the Pro Tools HD systems, which are hi end IO. And we had quite a bit of success in the first quarter with that. We introduced 11 Rack a year ago, which is officially considered a Pro Tools LE product, which is an example of the Pro Tools ecosystem. I think both from new IO, new category such as guitar which we weren't in, other new types of IO, I think you will continue to see us slowly evolve the footprint of Pro Tools. I think you will see it grow. And I think that is what you are seeing in the audio business, as a matter of fact. While the acquisition accounted for part of the growth, we did have natural growth even with currency as well.

Okay. Thank you.

And that is all the questions we have at this time. We would like to turn the conference back over to Mr. Fitzsimmons.

Yes. I am actually going to finish it up. I want to thank everyone for joining us. As we said, we think we had strong comp line growth for the quarter. We certainly continue to see an improvement in the profitability. We are looking forward to the second half. I want to thank all of you for joining us. Should up any further questions, all of us will be available for follow-up after today's call. Thanks.

And that concludes today's conference. We thank you for your participation. You may now disconnect.