Avid Technology Inc (AVID) 2010 Q4 法說會逐字稿

Good day and welcome, everyone, to Avid's fourth 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 Director of Investor Relations, Mr. Tom Fitzsimmons. Please go ahead, sir.

Good morning. 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 will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements that relate to future results or events and are based on Avid's current estimates and assumptions. There are a number of factors that could cause actual events or results to differ materially from those indicated by these statements, such as our ability to actually hit our strategic plan and meet customer needs, competitive factors or adverse changes in economic conditions. Other important risk factors and uncertainties will be in our periodic reports and other filings with the US Securities and Exchange Commission.

In addition, our forward-looking statements represent our estimates only as of today, February 4, 2011, 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 even if estimates change.

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 and may not be comparable to similar non-GAAP measures used or reported by other companies.

The non-GAAP measures 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 our press release announcing this quarter's results and 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 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'd like to turn the call over to Gary.

Thank you, Tom, and welcome to our conference call for the fourth quarter of 2010. We're pleased to end the year on a positive note, with fourth quarter 2010 revenue up 12% compared to last year. The highest level of quarterly growth in over four years. In addition we were close to breakeven net income on a GAAP basis for the quarter, excluding certain items which Ken will review later. We had non-GAAP net income for the quarter and for the full year.

These results show that we're seeing the benefits of focusing on our strategic principles and continuing to improve our operational efficiency. Back in July of 2008, we laid out a three stage transformational plan for the Company -- To get healthy; build momentum in the core business; and unlock new sources of growth. While we will continue to be diligent in managing our cost structure, we feel that we are moving beyond the get healthy phase of our transformation and can be even more focused on continuing to build momentum in our core business, while looking at other potential alternatives to improve our revenue growth. I will discuss the business more in a moment, but will first turn the call over to Ken so he can discuss our financial results. Ken.

Thank you, Gary, and welcome to everyone on today's call. I will first review the fourth quarter's results, then summarize the full year and finally comment on our year-end financial position. Revenues for the fourth quarter were $195.3 million, an increase of 12% as compared to $174.7 million reported for the same period in 2009. The GAAP net loss for the fourth quarter was $600,000 or $0.01 per share. This compares to a GAAP net loss in the fourth quarter of last year of $17.9 million or $0.48 per share. The GAAP net loss for the fourth quarter of 2010 includes -- amortization of intangible assets; stock-based compensation; restructuring charges; gain on asset sale; and related tax adjustments. Excluding these items, our fourth quarter non-GAAP net income was $14.2 million or $0.37 per share. This compares to a non-GAAP net loss of $0.04 per share for the fourth quarter of 2009.

The fourth quarter non-GAAP EPS is the highest for the Company since the fourth quarter of 2007. The items excluded from our non-GAAP results for the fourth quarter totals $14.8 million and include; amortization of intangibles of $2.8 million; stock-based compensation of $3.3 million; restructuring cost of $14.9 million; a gain of $3.5 million related to the final installment payment from the 2008 sale of SOFTIMAGE, a non-core product line; and a related favorable tax adjustment of $2.8 million. The majority of the restructuring cost is related to a realignment of our workforce, which enabled us to move additional investment to higher return areas and continue to improve our operational efficiency. The remainder of the charge is related to the darkening of unused facilities.

I'll now discuss the fourth quarter results in greater detail. From an overall standpoint revenue was up 12.12% year-on-year. The fourth quarter growth represents our highest year-on-year revenue growth rate since the third quarter of 2006.

We continue to experience growth across many areas of the business. We had a year-on-year increase for the quarter for both audio and video. We also had very strong growth in both Americas and Asia-Pacific regions, but were down somewhat in EMEA. Revenue from acquisitions contributed about three percentage points of year-on-year growth for the quarter, while changing -- currency exchange rates adversely impacted revenue by about the same amount. Overall product revenue for the fourth quarter was $162.9 million, up 16% year-on-year. Our services revenue, which includes maintenance support, professional services and training, was $32.5 million, down 6% from a strong fourth quarter last year. Professional services and training revenue for the last year's fourth quarter were especially strong, primarily due to revenue recognized on a major broadcast customer engagement completed near the end of 2009.

Video revenue for the fourth quarter was $117.8 million, up 11% compared to the fourth quarter of 2009. We continue to see good growth in most of our video product categories. Fourth quarter revenue growth was led by strength in our shared storage and asset management product areas. Professional editor sales were also up nicely, driven somewhat by customers upgrading to current versions of the Media Composer software and hardware. Demand for our broadcast related products also remained strong, especially for our multi-stream servers, which allow customers to ingest and play out multiple channels on one server. Sales of our consumer video editing product were down year-on-year for the quarter.

Now looking at audio. Audio fourth quarter revenues were $77.5 million, which represents a 13% increase year-on-year. Audio revenues for the fourth quarter benefited from strong sales of ProTools version 9 software and upgrades related to the new version released in the fourth quarter.

Gary will provide more color later, but the customer excitement around the ProTools version 9 release has been extraordinary. We also saw strong sales in our venue live systems products, which partially benefited from the resolution of some of our supply chain issues. And we are pleased with the revenue contribution and customer excitement around our expanding control surface business, which includes our Euphonix line of products.

As indicated in earlier quarters this year, we had experienced some supply chain issues which constrained revenue in the past, mostly for our audio products. However, we feel we have caught up on these issues in the fourth quarter. The improved balance between supply and demand had a favorable impact on our fourth quarter revenue.

Now I will discuss our fourth quarter results beyond revenue on both GAAP and a non-GAAP basis. On a GAAP basis we reported gross margins as a percentage of revenue of 53.8%, up 1.6 percentage points year-on-year and up almost two points sequentially.

Our non-GAAP gross margin was 54.3%, up 1.5% year-on-year and a bit more on a sequential basis. The fourth quarter represents our third sequential quarter with improved gross margin. The fourth quarter benefited partially from the strong sales of ProTools software, higher revenue on a relatively fixed cost base, and favorable product mix overall. These positive drivers were somewhat offset by the adverse impact of changes in currency exchange rates on a year-on-year basis. It's also worth noting that our fourth quarter gross margins as a percentage of revenue is the highest since 2005.

Our GAAP operating expense was $108.4 million for the fourth quarter, up $2 million year-on-year and up $15.6 million sequentially. The sequential increase is largely attributable to the restructuring charges I discussed earlier of almost $15 million for the fourth quarter. Our non-GAAP operating expenses for the fourth quarter was $91.9 million, which represents a $1.6 million increase year-on-year and almost a $10 million increase on a sequential basis.

The year-on-year increase is modest considering our fourth quarter expenses include costs related to acquisitions and higher compensation costs related to reinstated compensation practices which were not included in last year's number. The sequential increase is largely related to higher commissions and bonus incentive pay accrued in the fourth quarter, based on our final full year results. The GAAP operating loss for the quarter was $3.3 million, an improvement of $11.8 million year-on-year. Excluding these items I mentioned previously, our non-GAAP operating profit for the fourth quarter was $14.3 million or 7.3% of revenue, which represents a $12.12 million improvement compared to the fourth quarter of 2009.

Now I'd like to take a look back at 2010, which was a year of significant progress. Revenue for 2010 was $678.5 million, up 7.9% from 2009. Revenue for video grew 5%-- 5.6%, and audio grew 11.3%. The GAAP operating loss for 2010 was $36.2 million or $33.7 million better than last year. Our GAAP net loss for 2010 was $37 million, a $31.4 million improvement from 2009.

GAAP results for 2010 include -- $46.2 million of amortization of intangible assets; stock-based compensation; loss on a legal settlement; restructuring charges; gain on asset sales; acquisition related costs and related tax adjustments. Excluding these items, our non-GAAP operating income for 2010 was $13.6 million or 2% of revenue. In addition, we returned to profitability for the full year on a non-GAAP basis, reporting a non-GAAP net income of $9.2 million or $0.24 per share.

Now turning to the balance sheet. We ended the fourth quarter with $42.8 million of cash, which is up $8.4 million from the beginning of the quarter. The sequential change in cash was driven by cash generated from operations of $7.8 million, mostly due to improved operating results.

In addition, we received $3.5 million payment related to the sale of SOFTIMAGE in 2008. Our inventory at quarter end was $108.4 million, which is up $12.1 million from the end of last quarter. As I indicated during prior calls, inventory levels were expected to increase as we rebuilt stocking levels to better meet demand. The annualized inventory turns for the fourth quarter were 3.0 turns. Our accounts receivable balance of $101.2 million represents 47 days sales outstanding, which is in line with our historical experience.

On the personnel side, we ended the quarter with 1,960 employees and 497 contractors. And now I'd like to hand things back over to Gary, who will provide an update on the business. Gary?

Thanks, Ken. The first item I'd like to cover is a new addition to the Avid leadership team. Today Jim Vedda has joined Avid as our new Senior Vice President of Worldwide Sales, reporting to Kirk Arnold, our Chief Operating Officer.

Jim comes to Avid most recently from Crossbeam Systems and brings more than 20 years of both direct sales and channel experience to the team. He has a track record of driving growth and leading complex global sales organizations, having held leadership positions at Ascential Software and IBM, as well as Parametric Technology Corporation. Jim's knowledge of global markets, integrated solution selling and distribution models will position Avid to expand its reach in our current geographies, as well as the new emerging territories we are targeting for growth. Jim replaces Martin Vann, who is stepping down and transitioning out of Avid.

And now I'd like to provide an update on the business. As discussed earlier, we're pleased and encouraged by the progress we made in the fourth quarter and for the year as a whole. We saw improvements across several areas of our business, including the broadcast market, live systems, and professional editing product families. As Tim discussed, revenue is up 12% year-on-year for the quarter and 8% for the year. We feel positive as we head into 2011. These results indicate that we are moving beyond the get healthy phase of our transformation, allowing us to continue to build momentum and explore more opportunities to unlock new sources of growth.

We continue to see many promising signs of continued growth in the broadcast market. According to the New York Times article in December 2010, TV advertising grew to 41% of total US advertising spend in 2010, up from 37% in 2005 [despite] theories that online advertising would cut into TV advertising spend.

There were major events that fueled the resurgence of the broadcast market in 2010, like the World Cup, Winter Olympics and midterm elections, which also drove growth for many of our broadcast customers. For instance, some station groups have reported double-digit growth in advertising for the third quarter of 2010. Our own broadcast business fared well both in Q-- in Q4 and 2010. Our customers' investments in our shared storage, ISIS 5000/7000 solutions, Interplay and AirSpeed Multi Stream helped to drive this growth. Using these solutions, broadcasters can save time and money by implementing fast, [end just] edit playout workflows in SD or HD, accelerating production processing, some time consuming media tasks, extending media access to a greater number of contributors, and linking media directly to business operations.

A good example is UK broadcaster Sky, which recently built new, more efficient production facilities with a range of these new production solutions. The transition to HD continues to be a key driver of our business. A story in the MediaDailyNews in October 2010, indicated that only 24% of TV advertisements are currently produced in HD, indicating potential growth for [post] facilities in the 2011.

We had a number of sizable wins related to HD and file-base workflows. As an example, the Tonight Show with Jay Leno recently converted to an HD digital workflow, investing in AirSpeed Multi Stream, Interplay, ISIS 7000 and Symphony Nitris DX. Meanwhile, HBO is transitioning its New York based post production facilities to an end-to-end file based workflow using Avid's Interplay Production, ISIS and Media Composer Solutions.

According to a story in Variety Magazine from December 2010, theatrical 3D production continues to grow in 2010, from November 2009, to the end of 2010, [Audre] would release 25 3D titles, almost doubling the number released in the same period in 2008 to '09. And over the past year the number of 3D capable theater screens has grown worldwide from 6,700 to 19,700. While it is too soon to know exactly how much demand there will be for 3D viewing in the home market, these stats show that theatrical 3D is a growing trend and Avid is continuing to invest in development to reinforce early leadership in 3D stereoscopic editing and finishing tools.

In November we launched ProTools version 9 at the AES convention in San Francisco, which is one of the most successful launches of a new version of the product in the history of the Company.

As a result, we netted a range of prestigious industry awards out of the gate, like Pro Audio Review Magazine Par Excellence Award. We sold more copies of ProTools in the first quarter -- of ProTools 9 in the first quarter of its availability than we had any other ProTool software upgrades. In an announcement at [Nidierway] the social media conversations, I had a spot on the top tweet feed on Twitter, becoming the eighth most searched term on Google the evening of November 4. Customers were thrilled with the new features and openness of this solution, which is a testament to the long-term work we have been doing to take feedback and work it into our products. We did see a dip in sales of ProTools LE systems entry level version of the software in the quarter, which were expected following the release of version 9 of ProTools software and our previously announced HD Native and audio interfaces.

Our life systems business also finished strong in the quarter and for the year and we had a particularly strong showing in the Asia region this quarter. This can be attributed to the inroads we have made with our partners in this region over the past couple years. We are also pleased to report, according to Pollstar, VENUE was used in eight of the top ten grossing US concert tours in 2010.

The introduction of our consumer audio solutions, Avid Vocal Studio, Avid KeyStudio and Avid Recording Studio, all of which features ProTools SE software, was well received in the industry. We saw an increase in volume over previous versions, which signals that demand for content creation in the consumer market continues to expand. CNET.com reviewed this family of audio solutions and said, bottom-line there's never been a better time to jump into the making of a little home recording studio and Avid's latest entry level offering is its best yet.

During our 2010 Investor Day, I discussed the importance of emerging markets for Avid, particularly Brazil, Russia, India, China and the Gulf states. We could really make good progress in these markets in the areas of increasing investment for us.

We introduced new performing and recording products at the NAMM show in Anaheim last month to help serve our creative enthusiasts [and] professional markets and empowers musicians to take their music and sound production to new levels. The Venom synthesizer extends our leadership in keyboards with our first foray into the digital synthesizer market. Torq 2.0 is a solution specifically designed for DJs and provides flexible new workflow options for creative performance and real-time remixing and production. While Eleven Rack Expansion Pack is a software add-on for our Eleven Rack products, it includes new guitar amp and bass effects, dynamic stereo delay and speaker breakup emulations.

A new family of Mbox solutions, which gives musicians and engineers the ability to turn their Mac or PC into a portable recording mixing and production studio using the industry leading visual on air workstations with either ProTools or a software from a third party.

Our presence at NAMM was recognized with a number of industry awards, including the Sound On Sound Award with our Artist Series winning best hardware controller. The ProSoundWeb Live Sound International 2010 Readers Choice Products Awards with ProTools 9 winning for the best live recording software and the VENUE MADI option card winning for best live recording hardware. The Technical Excellency Creativity Awards, or TEC awards, with VENUE SC48 winning for best sound reinforcement console technology.

And the NAMM University Best in Show award with John Grabowski of Sweetwater Sound selected Avid as A Company to Watch.

Our consumer video editing business continued to be down. However, some reports indicate that consumer video editing market is beginning to trend towards a recovery, which we believe will serve us well as we work to deliver exciting new consumer product introductions in 2011. Of course it's premature to share specific details about these introductions today, but as the economy continues to bounce back we believe that this area of our business will improve.

Finally, Avid was honored in January with another Emmy award from the National Academy of Television Arts and Sciences for the joint development and production of portable tapeless acquisition, which we co-developed with Ikegami back in the mid-1990s.

The Academy recognized Avid's role as an innovator in advancing the state of television production. This marked our third Emmy win in the past six months and Avid's 14 Emmy award overall.

We're pleased with the progress we made in 2010 from a financial and product standpoint. Much of our growth is a result of organic development with a range of advancements to our industry leading solutions like Media Composer, Pro Tools, ISIS, NewsVision, our new audio interfaces and Integrated Media Enterprise or IME. We also expanded our business through acquisitions, closing and integrating Blue Order and Euphonix into the Avid family. I'm looking forward to a successful 2011 with continued improvements on both the top and bottom-line. Now I will turn it back over to Ken to provide an update on 2011 outlook.

Thank you, Gary. At our 2010 Investor Day meeting in November, we provided financial guidance for 2011. This guidance was updated in December 2010, due to the acceleration of certain restructuring charges into 2010 from 2011. The fourth quarter and full year 2010 results I just discussed have increased our confidence in our outlook and as a result we are updating our guidance. For 2011, we expect revenue to be approximately $700 million to $720 million and we expect our non-GAAP operating profit to be about 5% of revenue. We also expect a year-on-year improvement in our non-GAAP gross margins as a percentage of revenue and a modest increase in our non-GAAP operating expenses.

We expect our non-GAAP taxes and net interest expense to be around $6 million to $8 million for the full year 2011. Our tax expenses for 2010 and 2011 are lower than the estimates we provided at our Investor Day in November of 2010. This reduction in taxes is largely driven by implementing new cost sharing agreements with our international subsidiaries. The non-GAAP net income I just outlined would exclude the following charges; Stock-based compensation, amortization of intangibles, restructuring and other charges and related tax adjustments. Based on what we know today, we still expect these items to result in about $25 million to $30 million of charges for 2011. At the midpoint of our range, including these costs, would result in a close to breakeven GAAP net income for 2011. This concludes our remarks and we would now be happy to take your questions.

(Operator Instructions). Paul Coster with JPMorgan.

Maybe I could start, Ken, by asking what percentage of the revenues were international and then Gary, perhaps you can just elaborate on the issues in EMEA and perhaps on how much momentum, positive momentum you're seeing in China and the Mideast.

Sure. So on the -- about 40% of our revenue for the quarter was in the United States and if you looked at the Americas and how we break it out by segment, it's $97.6 million of the $195.3 million of the revenue for the quarter. I'll turn the rest over to you, Gary.

So, Paul, I wouldn't really think about it as issues in EMEA. The way I think about it is that same large broadcast deal that Ken mentioned, that impacts our professional services, which was just an extraordinary size deal, did occur in the fourth quarter and that was EMEA-based.

And in addition to that, of course, the currency effects in EMEA. We had quite a bit of currency effect between the fourth quarter of last year -- how we ended up last year, on exchange rate versus the strengthening of the dollar in the fourth quarter this year. The fact that it actually was roughly the same was actually -- it was actually quite good. We, of course, continued to look for other opportunities to improve it, but I won't think about there being any consequential issues over in EMEA.

As far as the Gulf states go, we continue -- I wouldn't say it's an all-Avid area because no area is all Avid. But there is a lot of strength for Avid over in the Gulf states. I was there twice myself over the course of the past year. We actually have said, as I think you all are aware, we do customer advisory boards in major markets for major segments and we -- and the Gulf states have become such a significant market for us, we're doing our first customer advisory board there on March 16, where we're pulling together customers from across that region, of course, assuming that everything is safe by then. There's just a lot of momentum building in that area, as you know, that it's -- it is an emerging market with money who want to do things in the very best way and doing Avid-based workflows is doing things the very best way.

Okay. The other question I had was, Ken, can you share with us the pro versus consumer breakdown of revenues in the video segment?

We actually don't break it down, necessarily, the video area into the different segments in our total reporting, but, again, what we ran in the fourth quarter is that our broadcast revenue is running at about 40% of the total revenue. Pro and post and professional is running about 40% and the creative enthusiast or consumer market is running about 20% of our revenue. And you've probably, if you started breaking that down into video versus audio, you will probably find that the consumer segment would be more dominated by the audio segment.

Okay. Got it. That helps very much. Thank you. I think that's it for me. Good quarter. Thanks.

Thanks.

Thanks.

Steve Frankel with Dougherty.

On the gross margin improvement we saw in the quarter, you commented that some of that came from the ProTools 9 upgrade cycle. Would you expect that upgrade cycle to carry through to Q1 or might we see a bit of back-sliding sequentially in gross margin due to lower volumes in Q1?

Well, I'd say that we were very pleased with the reception we had in the fourth quarter and I think that looking at the full year for 2011, as we said, we're looking to increase our overall gross margins and we're still on that track. And part of it relates back to product mix. But going back and predicting each individual product area gets quite difficult, but I would expect that the demand for upgrades will continue sometime into 2011, when it will take a dip down. I'll let everyone else try to make that estimate for me, but I expect that we probably will still have some strong demand into the beginning of this year.

And the budget flush that you commented at the analyst meeting that you were seeing in the broadcast side, has that sustained into Q1 in terms of the local affiliates giving you some good indications of business they want to do this year? What's the visibility like on the broadcast side?

Steve, I think that the driver -- we talked about many things at the investor meetings. We did talk about end of the year money being available, which I think you're referring to as budget flush. We also are seeing the same fundamental drivers being able to have more visibility into next year's spending. The HD drivers, the advertising revenue is up, as we mentioned, several of the station groups have reported double-digit growth.

So we are seeing -- I think we've seen a progression through the course of this year where people can have discussions with us about specific projects and specific plans with a level of confidence that we certainly did not see in the first half of this year. Second half of the year was, okay, great, we have a little bit more confidence and as we're moving into 2011, I'd say it's more like these are the projects we are going to do in 2011. So we see increasing confidence every day.

Okay. Great. Thank you. That's all the questions I have for now.

And we have no further questions. At this time I'd like to turn the conference back to Mr. Fitzsimmons for any additional or closing comments.

Well, I'd like to thank you all for joining the call today. Should you have any further questions, please just give us a call. Thank you all very much.

And that does conclude today's conference. Thank you for your participation.