Avid Technology Inc (AVID) 2011 Q4 法說會逐字稿

Good day, and welcome, everyone, to the Avid fourth quarter 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'm Tom Fitzsimmons, Director, Investor Relations for Avid. I would 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.

Forward-looking statements may be identified by the use of forward-looking words, such as anticipate, should, believe, could, estimate, and expect, or similar expressions. There are a number of factors that could actual events and results in future periods to differ materially from those indicated by these forward-looking statements.

Such as our ability to execute our strategic plan and meet customer needs, our ability to produce innovative products in response to changing market demand, particularly in the media industry, competitive factors, fluctuations in our revenue based on, among other things, Avid's performance in particular geographies, fluctuations in foreign currency exchange rates, and seasonal factors, such as higher consumer demand at year end, adverse changes in economic conditions, and our liquidity.

Other important risk factors and uncertainties appear in our periodic reports and other filings with the SEC. In addition, our forward-looking statements represent our estimates only as of today, Tuesday, February 7, 2012, and should not be relied upon as representing our estimates or views or any subsequent date.

We undertake no obligation to review or update these forward-looking statements, even if the estimates change. During this call, we'll 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 that 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, 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 and GAAP 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 Gary.

Thank you, Tom. And, welcome to our conference call for the fourth quarter of 2011. The results for the fourth quarter were encouraging. We reported positive GAAP net income for the first time since 2007 and had positive cash generation for the quarter.

Our financial results for the quarter reflect our efforts through the year to improve on our execution across the business, whether in sales, support, supply, development, or our back office. While Q4 did not get the full financial benefit of our restructuring action announced in October, we expect to see additional benefit this year.

During the fourth quarter, we also saw positive results from our executive briefing series on the Integrated Media Enterprise. We continue to see growth in our Media Enterprise market as customers in this segment make investments to take advantage of the opportunities presented by the transition to a digital environment. We believe Avid is well positioned to help our customers migrate to digital workflows as part of becoming successful Integrated Media Enterprises.

I will talk more about the business and market dynamics in our industry in a moment. First, I would like to turn our call over to Ken to discuss our financial results in more detail. Ken?

Thank you, Gary, and welcome to everyone on today's call. Revenues for the fourth quarter were $185.3 million, down from $195.3 million for the same period in 2010, and up sequentially from $165 million for the third quarter of 2011. The GAAP net income for the fourth quarter was $1.2 million, or $0.03 per share, which compares to a GAAP net loss in the fourth quarter of last year of $571,000, or $0.01 per share.

The GAAP net income for the fourth quarter of 2011 included amortization of intangible assets of $2.7 million, stock-based compensation of $2.9 million, restructuring charges of $8.5 million, mostly related to a reduction in head count announced in October of 2011, and a related favorable tax adjustment of $750,000. Excluding these items, which totaled $13.4 million, the fourth quarter non-GAAP net income was $14.6 million, or $0.38 per share.

This compares to a non-GAAP net income of $14.2 million, or $0.37 per share for the fourth quarter of 2010, which excluded $14.8 million of similar charges. A reconciliation of GAAP to non-GAAP results is included in the press release announcing our fourth quarter results. I'll now discuss the fourth quarter results in greater detail. Our revenues for the quarter were down 5% year on year, with growth in Europe offset by year-on-year declines in Asia and America.

Changes in currency exchange rates impacted year-on-year comparisons by less than 1 percentage point. Our product revenues for the fourth quarter were $148 million, down 9% year-on-year. Service revenue, which include maintenance support, professional services, and training, were $37.3 million, a record quarter for service revenue, and up 15% compared to last year's fourth quarter.

Now, turning to a discussion of audio and video revenue for the quarter. Video revenues for the fourth quarter were $116.2 million, down slightly compared to the fourth quarter of 2010. Our Professional Editing business had strong unit sales and a year-on-year increase in Media Composer software revenue. But, revenue was down overall with lower revenue from hardware bundle sales.

Media Composer version 6 was released in the latter part of the fourth quarter, so we didn't have the benefit of a full quarter of sales. Our workflow and share storage revenue were especially strong. Combined, they had double-digit year-on-year growth for the quarter and for the full year.

Shared storage and workflow products accounted for over 20% of our 2011 revenue. The majority of our service revenue is related to video, and as I mentioned, we had nice growth in both Professional Services and our customer support business for the quarter and for the year.

Audio fourth quarter revenues were $69.1 million, down 11% compared to last year. We had a decline in Pro Tools software revenue, which is partially due to a very strong fourth quarter last year. If you recall, during the fourth quarter of 2010, we released the first open version of Pro Tool software as part of our openness strategy and had an extraordinarily strong sales of this product in that quarter.

We continue to see good growth of control services, especially our System 5 product category. In addition, our Pro Tools HD line of products grew year-on-year for the quarter and with the benefit of the Pro Tools version 10 and HDX hardware releases late in the fourth quarter, which Gary will speak to in a moment.

We experienced lower sales in audio products sold into our creative enthusiast market, mostly due to weak demand in consumer markets. In addition, in the past year, we trimmed the number of products offered in this market that were not meeting our profit goals or didn't have the appropriate volumes. We continually evaluate our product portfolio to determine if we are achieving our goals.

With the release of Media Composer version 6, we are pleased to have both of our flagship professional video and professional audio editing software open to third party hardware. This validates our openness strategy. While we have seen strong sales for the -- for this year, this strategy appears to have contributed to lower sales of our hardware/software bundles for both of the product lines.

I also want to note that at the end of 2010, we initiated a new offering of our -- for our educational customers, allowing them four years of free upgrades for certain Media Composer, Pro Tools, and Sibelius educational software product offerings. While this program has been successful, it results in this revenue being recognized rateably over the four-year period instead of upfront upon shipment.

This program adversely impacted 2011 revenue by about 1 percentage point of revenue. Now, I will discuss our fourth quarter results beyond revenue on both GAAP and non-GAAP basis. On a GAAP basis, we reported gross margin as a percentage of revenue of 54.1%, up 0.3% year-on-year, and almost 1 point sequentially.

Our non-GAAP gross margin was 54.6%, up 0.2% year-on-year and up 0.8% sequentially. The year-on-year improvement was primarily attributable to the improved product mix, product gross margin related to favorable product mix, and operational efficiencies, in addition to higher maintenance support revenues on modest spending growth.

It is worth noting that our fourth quarter GAAP and non-GAAP gross margins, as a percentage of revenue, were the highest for the company since 2005. Our GAAP operating expense was $101.3 million for the fourth quarter, which is down $7.1 million year-on-year. Our non-GAAP operating expense for the fourth quarter was $88 million, which represents a $3.9 million decrease year-on-year and a $3.8 million increase on a sequential basis.

The year on year decline is primarily related to the reduction in work force announced in October and lower variable compensation due to a lower funding of bonus programs. The sequential increase was partially driven by higher commissions in the fourth quarter.

$88 million of non-GAAP operating expenses represents the lowest fourth quarter operating expense level for the company since the fourth quarter of 2004. We will continue to ensure that spending growth lags our revenue growth. Over the last three years, we have lowered our employee-based head count by approximately 600 and improved our flexibility with higher levels of offshore contractors.

GAAP operating loss for the quarter was $1 million, an improvement of $2.3 million year-on-year. Excluding the items I mentioned earlier, the non-GAAP operating profit for the fourth quarter was $13.1 million compared to a $14.3 million non-GAAP operating profit in the fourth quarter of 2010.

Now, turning to the balance sheet, we began the quarter with cash of $33.7 million and a $13 million draw on our line of credit. We ended the quarter with $32.9 million of cash, with no draw on the line of credit. For the quarter, we generated $14.4 million of cash from operations and reported a $12 million increase in our net cash balance.

The fourth quarter cash from operations included $6.5 million of cash payments related to our restructuring activities. In the fourth quarter, we also took significant steps forward in better managing our inventory. Our inventory at the end of the fourth quarter was $111.8 million, which is down over $14 million from the beginning of the year -- quarter.

This reduction was achieved by better balancing our inventory supply and demand. We expect our inventory levels to come down further by the end of 2012 as we continue to improve our supply chain management. Our annualized inventory turns for the fourth quarter were 2.8 turns. Our accounts receivable balance of $104.3 million is in line with our sequential growth in revenue.

The day sales outstanding for the quarter were 51 days, which is consistent with our third quarter of 2011, and our aging improved compared to prior periods. On the personnel side, we ended the quarter with 1,787 employees and 490 contractors, which is down, in aggregate, 172 from the end of our third quarter. That ends my summary of our fourth quarter results. Before I hand the call back over to Gary, I would like to provide a full year overview of 2011 along with certain highlights.

We ended 2011 with $677.9 million of revenue, which is essentially flat with 2010. However, due to higher gross margins, we reported improved operating results on both GAAP and a non-GAAP basis. Our GAAP net loss was $23.8 million compared to a GAAP net loss of $37 million in 2010.

The 2011 and 2010 GAAP net loss figures included $34 million and $46.2 million respectively of stock-based compensation, amortization of intangibles, restructuring, gain and loss on sale of -- on sales, M&A related costs and legal settlement costs, and related tax adjustments. Excluding these items, our non-GAAP operating profit for the year was $15.1 million, or 2.2% of revenue, and our non-GAAP net income was $10.2 million, or $0.26 per share.

I would also like to highlight some of our significant accomplishments. Service revenues reached record levels, which improves our visibility of future revenue. Gross margins, as a percentage of revenue, improved for the third consecutive year. And, were at the highest levels since 2005.

We've improved our operating flexibility with higher level of contractors in our work force. Operating expenses have been managed closely and the majority of our October restructuring is complete, which positions us well from a cost structure standpoint moving forward. And now, I would like to hand things back over to Gary who will provide an update on the business.

Thanks, Ken. As discussed earlier, we're encouraged by results for the fourth quarter. In the fourth quarter, we had revenue growth in Europe and also reported strong growth in our service businesses. As we head into 2012, we believe we can build upon this momentum to fuel future growth by taking advantage of the changing industry dynamics, and, responding with solutions that not only address, but also anticipate our market and customer needs.

I would like to take a few minutes to explore some of those trends and their impact to customers, as well as to our business. First, I would like to discuss the Media Enterprise market, which grew for the quarter and for the full year. Our customers in the Media Enterprise segment continue to focus their efforts on finding ways to expand revenue, by capitalizing on the changes brought about by transition to digital and the shift in consumer viewing preferences. In the fourth quarter, we saw plenty of activity to support this effort. Hulu entered into a multi-year content agreement with Univision, giving Univision a chance to generate additional subscription revenues from reruns in Hulu, our way to sell advertising to our growing Hispanic population.

We saw Disney and Comcast sign a 10-year multi-platform distribution deal that will give Comcast customers live or on-demand access to Disney content, including ESPN, ABC, and Disney shows using a variety of options including television, tablets, or other handheld devices. Also, at the CS show this year, Tom Hanks announced that he will debut his first scripted series called Electric City, an animated web series on Yahoo.

Our customers in this segment know that in order to successfully capitalize on and monetize these opportunities, they will need to invest in technology that allows them to store, retrieve, and repurpose content so that it can be distributed across multiple platforms. In fact, nearly 50% of customers participating in a recent Avid sponsored survey indicated that they were planning to, or have already started to, invest in technology that will add capabilities for multi-platform distribution.

And, one third are planning to invest in storage and easy retrieval of content. In Q4, we saw evidence of this willingness to invest in technology. With strong revenue for our Enterprise Production and Media Asset Management and Storage Solutions, which include Interplay Media Asset Management, or MAM, Interplay Production and Interplay Central, as well as ISIS 5000 and ISIS 7000, our open shared storage platform.

Several deals further emphasize this demand, including an expansion deal with Fox Sports Network, FSN, to provide a mix of products, including Interplay, Media Composer, ISIS 5000 storage in addition to professional services and training. Our launch of Interplay Media Asset Manager, or MAM 4.0, in December demonstrates our commitment and deep understanding of our customers' needs across the segment, by providing our Media Enterprise customers with the technology they need to access and use their media more effectively and profitably.

With MAM 4.0, our customers can interlink media operations and workflows, control movement of media between Interplay MAM and storage systems, configure metadata and leverage a service-oriented architecture to integrate in-house and third party applications. In fact, Mukul Krishna, Global Director of Digital Media for Frost & Sullivan, had this to say about MAM 4.0.

The latest version of interplay MAM from Avid raises the bar significantly and reaffirms Avid's deep understanding of today's integrated Media Enterprise. In the fourth quarter, we also saw evidence of our worldwide executive briefing series featuring our view of the Integrated Media Enterprise taking hold with close to $14 million in closed business to date, either initiated by or expedited as a result of our thought leadership initiatives.

We'll plan to leverage that success from 2011. And, we'll be expanding the program further with briefing series meetings planned during the first half of the year in London, Shanghai, Sydney, Toronto, Burbank, Sao Paulo, Mexico City, Paris, Tokyo, and New York. Now, turning to some of the dynamics in the post production and professional market.

The proliferation of file formats and distribution methods together, with changes to consumer's viewing habits and preferences, continue to offer both challenges and opportunities for customers in our post and professional segment, particularly on the video side. Industry reports indicate that as many as 70% of TV viewers in America are also on their smartphones, mobile phones, or tablets while watching television.

In fact, an analysis that appeared in October 2011 Nielsen Wire show that 40% or more of Americans simultaneously watch TV and use their tablets or smartphones daily, while another 20% plus use these devices simultaneously while watching TV several times a week. The consumer demand for more viewing options across multiple screens translates into the need for more high quality content.

Our customers in this segment are looking for professional solutions to help them respond to this demand. In the fourth quarter, we saw customers choosing Avid because of the strength of Media Composer and recognition that it is a tool for professional editors.

This, combined with the continued momentum we are experiencing as a result of more than 6000 customers switching to Media Composer from Final Cut Pro due to our 2011 cross grade offering, helped contribute to a strong year-on-year increase in our unit sales of professional video editing products.

In the fourth quarter of 2011, we showed our commitment to our professional customers when we introduced new versions of our flagship video editing systems, Media Composer version 6, News Cutter version 10, and Symphony version 6. These versions have been rebuilt from the core and feature a new user interface, an entirely new open, 64-bit architecture and support for more third party hardware.

They also reinforce Avid's commitment to its professional users by delivering new levels of openness, performance, collaboration, and productivity. In fact, many of these features were added as a result of working with the pros and asking them to test every aspect of Media Composer 6 and provide feedback. One of our beta testers, Shane Ross, is returning to Avid, after many years of using Final Cut Pro.

He had this to say on Little Frog in High Def blog posts. Even on the UI. There were several instances when Avid conferenced-called us users and got our feedback on what we liked and didn't like. What worked and didn't work. And the feedback was almost instantaneous, as we'd have a new build to look at every week or two. They really listened to our base.

Recent successes at Bunim/Murray Productions with Avid Media Composer 6 and Avid Symphony 6 editing systems, along with ISIS 5000 shared storage systems help provide further evidence of the success of our Media Composer line and our commitment to professional editors. Bunim/Murray Productions is an Emmy Award winning production company that continues to lead the way with popular reality programs, including the Real World, Keeping Up with the Kardashians, Courtney & Kim take New York, Project Runway, and more.

Bunim/Murray Productions is making the switch from Final Cut Pro to Avid beginning this year in order to meet the production workflow requirements for all of their programs. Bunim/Murray selected Avid for its long-term commitment to the professional market, as well as continued technology innovation, group collaboration capabilities, and the ability to integrate Media Composer 6 and Symphony 6 into its existing infrastructure with a new Avid open I/O.

Plus, there's enhanced Pro Tools interoperability between Media Composer and Pro Tools. In Q4 of 2011, we also demonstrated our commitment to audio professionals, with the introduction of new versions of our award winning Pro Tools software and hardware.

Both the software and hardware were well received during the quarter. Initial demand for Pro Tools 10 with HDX hardware has been strong and Pro Tools 10 software addresses many of the requests we receive from both audio post production and music professionals. Pro Tools 10 provides our professional audio customers with a next generation of the best sounding, most powerful audio production software for recording, composing, editing, and mixing music and sound for picture.

Pro Tools 10 features increased interoperability between Pro Tools and Media Composer. Time saving workflows, such as a 24-hour time line capability and realtime fades in clip gain which separates premixed levels from Pro Tools software's mixing automation, greatly speeding up and improving the workflow between sound editors and mixers.

In a January 5th review in Computer Music, Mike Collins observed, Pro Tools 10 is much faster to work with than previous versions. Sessions open quicker, and everything feels more responsive. Editors will love the new clip gain features and all users will appreciate the new technical enhancements.

On the hardware side, the brand-new Pro Tools HDX system gives customers the power to do just about anything when it comes to mixing with the added ability to scale the system to increase track counts, power in I/O, using up to three Pro Tools HDX cards and multiple Pro Tools HD series Interfaces. As Ken mentioned, the release of Pro Tools version 10 and HDX hardware contributed to the year-on-year growth in our Pro Tools HD product line.

We continue to see strong growth for our controlled surfaces, particularly in the pro series consoles, Technicolor, an existing Avid System 5 Pro Series console customer, purchased two additional large frame consoles, as well as more Pro Tools gear. And, based on the success experience by Technicolor in Los Angeles, Technicolor France purchased several new ICON and HDX systems. Our post and professional solutions, and the customers who use them, continue to receive formal recognition throughout the industry.

Just a few weeks ago, at the winter NAMM show in Anaheim, California, our post and professional solutions won multiple awards, including three technical excellence and creativity awards from the TEC Foundation for excellence in audio. Pro Tools 9 for workstation technology, VENUE 2.9 for sound reinforcement console, and Pro Tools HD Native for computer audio hardware.

More importantly, the sound engineers, editors, producers, and other audio professionals who use some of these same award winning products were also honored with tech awards in several categories, including record production album award for the Album 21 by Adele, the television sound production award for Saturday Night Live on NBC, the film sound production award for the movie Inception from Warner Bros.

And, the studio design project award for the Jungle City Studios in New York City, which also was the site of our special customer event launching Pro Tools 10 last quarter. Also, during the fourth quarter, we received the Sound On Sound magazine digital audio workstation award for Pro Tools 9. Lastly, we won the Music Merchandise Review 2011 dealers choice award for software line of the year for Sibelius 7, our leading music notational software.

While revenue for our creative enthusiast segment was challenging last quarter, we did see increasing market share for our Digital Audio workstation and studio monitors, offset by lower sales in our interface and media controllers and consumer video editing product lines. Reports indicate that the overall consumer video editing market was weak in the fourth quarter of 2011.

Our release of the new Fast Track C400 and C600 interfaces in Q4 were also met with positive reviews, including reviewers in Mix magazine and Audiofanzine who commented on the quality of the Fast Track C600 design, citing the overall look and ease of use. And, just last week, we expanded our mobile application offerings with the announcement of our first video editing application for the iPad, Avid Studio.

The new app appeals to a variety of customers from the first time user to the more advanced editor, looking for the convenience and portability of mobile device solutions. This app from Avid is the first video editing app that offers frame by frame editing accuracy and access to a variety of media, as well as the added ability to extend the capabilities of the mobile app, by linking directly to Avid Studio software on the PC desktop.

We are pleased with the initial response. As of today, we've had approximately 20,000 downloads and are the number one app in the photo video app category. Avid Studio for the iPad is a second companion app from Avid. Despite overall weakness in the consumer markets, which we see continuing, our audio and video products, including Venom, Keystation Mini 32, Sibelius 7, and Avid Studio continue to receive positive reviews, citing quality and value.

We'll continue to leverage those accolades as a way to improve sales and address our customers' demands for the highest quality products. We continue to identify and implement changes across the company to help improve our operational performance. Throughout 2011, we worked to develop an integrated planning process as a way to help us better predict business performance, make timely and impactful business decisions, and measure the business more effectively.

In the fourth quarter of this year, we implemented the first phase of the process, the sales, inventory, and operations planning, or SIOP. And, in just a short period of time, we are seeing early payback from SIOP with reduced inventory levels as a result of better alignment between supply and demand. This is part of the larger effort to standardize the business reporting and analytics used throughout the company.

We have also made some great progress in helping to simplify our business in other areas of the company. We've moved to a more common hardware platform supporting multiple software product offerings, reduced the number of product SKUs within our creative enthusiast offerings by approximately 10%, and also implemented unified licensing programs and software activation card programs as a way to improve our delivery capabilities and increase customer satisfaction.

As we move into 2012, we remain focused on improving our profitability and driving revenue growth. We are optimistic about the markets we served, and encouraged by the present opportunities for us to help our customers succeed, particularly with Media Enterprises. With that, I would like to turn the call back to Ken to offer some perspective on 2012 financial outlook, Ken?

Thank you, Gary. Before talking about 2012 expectations, I would like to remind you of our earlier disclaimer regarding forward-looking statements. For 2012, we expect revenue to show low single-digit growth driven by growth from our Media Enterprise customers.

I would also like to review the historical seasonality of our business. My comments on seasonality by quarter are based on our experience over the last several years. In most years, revenues for the first quarter is the lowest quarter in the year and usually down sequentially from the fourth quarter of the prior year.

If you look at historical patterns, revenue could drop as much as the low teens to 20% from the fourth quarter to the first quarter. Over the past few years, Q1 revenue generally represents 23% to 24% of full year revenue. While Q1 generally is our weakest quarter, revenue for the fourth quarter is usually the highest revenue quarter for the year.

Q4 revenue generally represents 27% to 30% of the full year revenue. Our past experience may not be predictive of future seasonality. Please be aware that the timing of recognizing revenue on large transactions, changes in foreign currency exchange rates, and other factors discussed in our SEC filings can cause results to deviate from these normal seasonal patterns.

Because a substantial portion of our operating expenses are not variable with revenue, sequential changes in revenue have a significant impact on our earnings. As a result, earnings generally tend to be much higher in the second half of the year when compared with the first half of the year. It's not unusual for the fourth quarter to have a disproportionate percentage of the total year's earnings.

As of today, we would expect the first quarter non-GAAP operating profit to be near break-even. In addition, due to our tax losses and credit carry-forwards, we do not expect that income taxes will move in proportion to changes in our pretax earnings. We expect to continue to improve our gross margins by focusing on higher margin products, improving supply chain practices, and further operational improvements.

In October 2011, we took action to reduce our ongoing operating expenses, which should provide annual savings of $25 million to $30 million. These actions are substantially complete and we should begin to see the full effect of this savings in the first quarter of 2012. A portion of the savings will cover normal increases such as salary and additional amounts that may be reinvested in areas of the business with stronger growth potential.

We continue to evaluate our portfolio to focus on the best performing products. For 2012, we expect our non-GAAP operating margins on a full-year basis to improve when compared to the 2011 results. As a reminder, our 2011 non-GAAP operating margin was 2.2 percentage points of revenue.

For 2012, we expect that we could achieve approximately 5% non-GAAP operating margins, even if revenue were flat to 2011. We expect our non-GAAP taxes and interest to be in the range of $8 million to $10 million for 2012. The non-GAAP net income just outlined excludes stock-based compensation, amortization of intangibles, restructuring and other charges, and related taxes of about $20 million to $25 million.

Based on these expectations, we could report a GAAP net income for the full year of 2012. The 2012 non-GAAP and GAAP results will include depreciation of about $21 million. Our depreciation plus GAAP operating profit would be about 8% of revenue in 2012 if revenue were flat year-on-year.

We expect to generate cash from operations in 2012 and the need to use the line of credit is expected to be minimal during the year. We also believe that inventory levels will come down further by year end. This concludes our remarks and we would now be happy to take your questions.

Thank you, sir.

(Operator Instructions)

Paul Coster, JPMorgan.

Yes, thank you. Well, it's obviously a lot to be pleased about in the quarter, so congratulations. On the other hand, revenue growth still alludes you and it's going to be fairly modest next year. And yet, there's a lot of very positive drivers for the media creation industry.

Gary, I wonder if you can help us understand why it is that top line growth is still proving so difficult to achieve. Is it the cannibalization of your hardware by software? Is it competition? Is it pricing? What is the headwind?

Well, hey, Paul, thanks for the comments. I think what we're seeing is very consistent. In fact, as you know, we were at the high end of what the street had -- in fact, beyond the high end of what the street had been expecting on the revenue growth because we are seeing growth in the Media Enterprise.

And, we saw particularly strong performance in growth in EMEA for us. And, we continue to take advantage of that growth. Where we have areas where we have not had profitable lines, we commented on that we have an example, in our creative enthusiast space cut 10% of our SKUs, well, that's an impact on growth. But you do see how that's translated to improved to profitability in our first, our first GAAP net income, and first GAAP net income in sometime. So, we do continue -- we are seeing improvements in our performance. We have struggled with a challenging consumer market, and that has been part of it.

I would say that there has been some effect from the impact of unbundling our software from hardware. But, at the same times, you are seeing, again, improved margins as a result of a strategy that we laid out sometime ago of businesses that would have more of a recurring nature, the stronger service revenue and maintenance revenue that Ken spoke to in his highlights, as well as having more software, which of course drives more profitability for us.

So, I think that as we transition from -- as we transition our model in terms of focus more on the Media Enterprise, focus more on software, focus more on recurring revenue, you are going to see a dampening effect. Plus, I think Ken mentioned one of the things that I think you, along with many others, had encouraged us to do, was to become stronger in the education market.

That cost us an easy -- that cost us 1% of growth, as an example. We're pleased with the outcome, we're pleased with the outcome of the fourth quarter. I hear everyone on the need for growth. We are taking a focus on how we can improve our profitability with no growth. But, at the same time, focus on the growth opportunities that the Media Enterprise is presenting to us.

Okay. Just one follow-up question. Ken, you've pointed towards the seasonality. In part, I would mention that is because of the -- some consumer exposure, in part because of the enterprise buying cycle.

If you could just talk us through that dynamic a little bit. And then, I know that we keep asking this and I know you no longer segment consumer in the video segment, but is it still material? And, how much is it -- does the consumer video account for that seasonal mix?

Sure. Before I answer the question, I just want to clarify one thing. Tom Fitzsimmons pointed out to me when I talked about this 8% -- percentage of revenue when you add depreciation, I was meant to say a non-GAAP operating margin not a GAAP operating margin. So, if I said that, I just want to clarify that for everybody on the call. I was referring to non-GAAP operating margins plus depreciation.

On the seasonality, Paul, it actually is driven a lot more by the Enterprise customers. We do have the effect where we do get stronger sales through retail in the fourth quarter of the year. However, if you look at the larger bump sequentially generally from the third quarter to the fourth quarter, you're generally going to find it's more driven by larger transactions probably with Media Enterprise customers.

Now, in a lot of cases, that may have been projects we worked on for a couple of quarters. And, it just seems that historically that seems to -- they seem to hit the threshold of revenue recognition in the fourth quarter or we closed some larger transactions in the fourth quarter.

But, that's just historically what's happened with the company. So, it's more driven by those customers and therefore it's not driven by the consumer video. The consumer video sales is really made up of two components. One is we have a legacy hardware piece and the other one is that we have a software piece.

And, I'd say that for the legacy hardware piece, which we're not investing anything in, that was something with which we expected to go down a little bit as years went on and the focus become more and more on the software piece. Now, I think that on the software piece, that overall, that also has not increased. But, overall, the consumer video software/hardware does not make up a significant portion of the video revenue or the overall revenue for the company. So, it by itself doesn't have a big impact when it moves.

Thank you.

Steven Frankel, Dougherty.

Good afternoon. I'll go at Paul's question a little differently. And, traditionally, Avid and others in your industry were large beneficiaries of events like the Olympics and the election cycle.

But, I seem to remember last time around, NBC built a central editing facility in New York rather than on site. Has that reduced their demand for equipment from you this time around as we head into the summer Olympics?

Well, Steve, I can't really comment on individual customers, customer's workflow without their particular permission. What I will say is that we are benefiting from the summer Olympics, from the London Olympics, from all of our customers. I've commented on this in the past, because many people think in 2012, it will mean that we benefit from it.

It really means, six -- it is true some of the revenue may not be recognized, but most of those bookings occur well in advance. No one wants to go into the Iowa caucus' or the Florida race, or whatever it is, here in the states without being well prepared and having their systems in place and tested.

The same would be true of the Olympics. I would say that we are -- we do continue to benefit from it. The -- as you know, the Olympics have been produced. And, they have changed their workflows. And, the types of efficiencies that an Avid can provide is really a benefit.

And, is enhanced through the distributive operations such as editing and such as remote production -- excuse me, such as local production and remote capture, distributor capture an event like the Olympics. Not trying to be evasive, but I hope that helps you understand. We really are helping those types of productions, not being hurt by them.

Okay. And, at one point, you thought China would be a very large opportunity for you. Could you give us an update on how your penetration there is going?

I would say in China, it -- so, we continue to focus on the emerging markets. And, for us, the emerging markets we continue to think about as the China region, China, Hong Kong, Taiwan. We think of Brazil, all of South America and the Gulf states and a few others as our emerging markets.

And, we continue to be pleased with our progress in China, certainly in the film industry. We are the -- we are not only the gold standard, we're the everything standard in the film industry in China. Obviously the economics for China creates some challenges.

But, on the other hand, when we did our executive briefing series in Beijing, we not only had our largest crowd, we probably had three times our largest crowd show up at the executive briefing series. So, it's an emerging market. It has the opportunity to associate with emerging markets. It has the learning and training to go with that market as well. And, we are seeing progress made in the market.

I think this is a -- not a -- we started that major investment over the course of last year. I think that's an investment that will be realized. But, one sense, it's a longer term, not long-term, but longer-term investment that will be benefiting us. But, we are pleased with the progress being made.

Okay. What do you think your market share is now in the Pro market, given all the cross grades you did from Final Cut --?

Well, it's hard to say and also hard to define that Pro market, Steve. First of all, remember for every one of those cross grades we did people still have their copies of Final Cut, as an example. It wasn't like they had to give that up. We are seeing, and we have seen the units of Media Composer do pretty well overall, but that of course excludes education.

So, I can't really estimate that per se. What we do know is that in the major theatrical releases as a whole, not in all cases, as a whole, those tend to be Avid solutions, whether it be Avid Media Composer or Avid Pro Tools or a combination of both, of course, or some of our storage systems, et cetera. And, we aren't seeing -- we stopped seeing the erosion a couple years ago. We believe we are gaining, but I don't think it's been long enough.

I think we'll have to wait for Frost & Sullivan and others to be doing some of those surveys. An example of -- Bunim/Murray is an example, that's 130 seats that used to be Final Cut that are now Avid. WWE, which we talked about last quarters, were 30 seats or something, off the top of my head, I think 34 seats, that used to be Final Cut that are now Avid.

We're seeing more and more of that, particularly for people who are generating professional content. I would hesitate to speculate on a market share at this time, Steve. Remember that big changeover only started in June when it was clear that Avid was a company committed to the professionals. So, early in that transition.

Okay, thank you. That's all I have for now.

Andrew Abrams, Avian Securities.

Hi, guys. Just a quick question on the impact of Final Cut in the last maybe quarter or two with the changes that they've made. Have you seen an impact, an appreciable impact or a measurable impact, in your business on a general basis? Or is it still one of the long-term effects of the changes they made in Final Cut?

Well, I just -- Andy, thanks. We just gave some examples of customers that have made the transition. And, I think we are seeing that impact. We obviously have -- saw our units for education grow considerably. Remember though that some of these students are freshmen, some of them are graduating seniors.

And so, all of this is about a longer-term commitment. The -- what I will say, and I shared it on prior calls, is that some companies, including some we've mentioned, were not even companies that would engage in a conversation with us a year ago. In fact, we just hosted one in Burlington last week.

And, those companies are willing to engage with us in a conversation. Now, we've got to indicate to them why not only are we committed to the professional, we are the right solution for them. And, they are pushing us hard on that. And, I will say that Apple's innovation in Final Cut is pushing us and is one of the reasons that resulted in products that help redefine the new world, such as Media Composer 6.

I won't say it's long-term. I would say that this is a -- we will see this changeover occurring over a couple year periods. And, one of the reasons is that a company -- you just bought the 2011, whatever it is, Tiger car model and the 2012 comes over with a brand-new body, that doesn't mean you get rid of -- you don't start looking for a new car until you're three to five years into the cycle.

So, we have to wait for those cycle changeovers, but we're engaging those customers. We're engaging those customers right now. We will continue to share examples as we have, and we're happy with those. But, it is a journey for us.

Got it. And, maybe you could talk just a little bit more about the hardware. It's very commendable that you guys are moving more toward an open platform and a software-oriented platform. Is it in your eyes an inevitable result that the continuation of lower hardware sales just continues?

Or is it as the new platform came out, is it more you get a big jump at the beginning because people are excited about the fact that it's an open platform? And then, it goes back closer to where it was before? What's your perspective there?

Yes, so, remember we've done two different things with our hardware. So, first of all, with Pro Tools, we have created an open version of the software only. We have taken a look at our results for the fourth quarter. And, we do know that as a result of those, the results, that the number of updates and things like that, which we really didn't have access to, continue to be very strong.

And, we also changed the pricing, and I commented on this, I believe, last quarter, that we were doing some things. If not, our pricing so that we could create a more excelling value for a combination of an Avid audio hardware/software combination versus an Avid software with someone else's hardware.

So, we created a more compelling combination and that is indeed working for us. In the case of Media Composer, where people talk about our proprietary hardware, what we did is open up the monitoring. In other words, when you see all that video playing, when you see all the monitoring of that, we had a -- some of that would work on your desktop or your notebook and we added a high end solution for that.

One called Mojo and one called Nitris DX. We actually lowered the price because of the openness in the marketplace. We lowered the price of our own I/O as well at the same time substantially, 40% to 50%, or so, where we can still be profitable because of change in manufacturing since we designed it.

We did see a higher number of units for some of those products. New units in the Mojo DX, which is our HD solution at our low end I/O than we had in the past. So, we were encouraged by that. We were also encouraged like those Final Cut units aren't -- when they move over cross gauge, they have existing open I/O.

And, I don't think we would have had access to that -- to those customers had we not opened it up. The differentiation with our I/O is that we offer an Avid advantage solution. What do we mean by that? We can offload some graphics processing, we can do some transcoding, we can do some other things with our I/O and we're aware of that. So, we can do special things.

So, it is impacting us. Again, those new Final Cut users are using their existing I/Os. So, we're not getting the system sales that we might otherwise have had with that. But, it is overall having a very, very positive impact on the marketplace. And, we will find the equilibrium between our software with open I/O and our software with our optimized I/O.

Great. Thanks, very much.

(Operator Instructions)

Barbara Coffey, Brigantine.

Hi, couple quick questions. As you look at the network storage market, are there certain companies that are moving more quickly, is it more the broadcast market or the media market? And, after the Sony has come back online with high quality videocassettes, are you still seeing people focused on this area?

Yes, so, Barbara, I'm going to answer the second half of your question first and then come back around to the first half. Digital workflows are clearly a driving message in the marketplace today. Now, it is true the tapes that you speak to are digital workflow -- participate in digital workflows. But, once -- people were looking for digital workflows, file-based workflows, even prior to the tape shortage a year ago.

And, it's hard to believe -- not quite a year ago, but roughly a year ago when all that occurred. That -- once they started looking, they have continued looking. And, they are continuing to move forward on that. That's not to suggest there won't be a tape demand for some time. But, people are certainly accelerating their move towards asset-based and digitally-based workflows that are there.

The second thing that is driving, in my view, that is driving the move towards more storage, is of course just HD. We've talked about the drive towards HD, 70% of sites still not HD around the world, 350 stations here in the states are still not HD, and that's just recent data. But, as people move towards HD, and even for existing shows, we're -- it's driving demand.

And, the third reason that is driving demand, and I think the thing that we're seeing, that's a little different this year in that -- those first two things, by the way, were driven by, I would say, mostly the Media Enterprise, some post, but mostly the Media Enterprise. The third thing we're seeing is a desire on the part of post for collaborative editing.

And, I commented on that when we were talking about the post. So, that ISIS 5000, which we did not have a year, year and a half ago, has been -- is one of our strongest lines for us. So, it's not just about our traditional ISIS 7000, which is high performance, high volume users for the work group.

For the collaborative work group, ISIS 5000 continues to be very powerful. And, we are seeing a lot of growth in the post market, where you have a small number could be just a couple three up to 30 or 40 users, using our work group solutions. And, I think that's a new demand that we see an increasing amount of.

And, when they start looking at it, what kind of sales cycle or process is it? Because I'm fairly sure this isn't a very short sales cycle.

Well, remarkably with a post, we just -- just to use Bunim/Murray as an example, we didn't actually start talking to them until after the Final Cut 10 announcement. As you all know, we put the press release out a little bit ago. And, as you can imagine, we closed that transaction before that. I don't know what you would mean by short. A Media Enterprise sale can take us on a good day six months, it can take us a year.

In the post space we see closer to 90-day, short of 60, maybe as long as 100-day, 120-day type of transactions, which we consider reasonably rapid. That's for the initial buy. In the case of both Media Enterprises and in the case of post, as people add storage, that could be a two-week sales cycle, 30-day sales cycle, as people want to add to their ISIS family of storage.

Okay, thank you.

Yes.

Andrew Snett, Wells Fargo Advisors.

Yes, can you hear me?

Yes.

Okay, it looks like your service revenue for the quarter and the year grew nicely. Can you comment on what you think are opportunities to grow that? Are those one-offs when you sell your systems? Or are you looking to build longer term service revenue stream as your systems get more sophisticated and the users need more help in designing and maintaining those systems. Thank you.

So, when we talk, when we speak about services and our service revenue growing, we're really speaking to -- what we're really speaking to is both professional services and maintenance services growing for us. The services that you spoke to are really -- is really about our professional services when we are talking about design, when we're talking about implementation, et cetera.

And, indeed, we do see a strong demand for that. And, we did in fact see our strongest. On a percentage basis, we would have seen our strongest growth in that last year. On an absolute basis, the stronger growth -- on an absolute -- by the way, that's small numbers as a result of our permanent services.

And, we do see that increasing as we go forward. Because as people are implementing asset-based solutions, they need more integration with their existing systems, as well as with their corporate systems. And, that does require more of a design effort, as well as more of a tailoring and implementation effort.

But, that being said, is that's -- that growth, while good, was -- that growth, while good, is still small numbers. The bigger growth, both on a percentage basis for the year and as well as absolute dollars grew on our customer success. And, that's really as a result of several things.

One, yes, we see that as a longer term and not one-off. We are improving our attach rates, which mean that our initial sale has more people sign up for the support as we help our customers understand the value. And, we've also created a tier value so if you don't want -- you have, what I'll simplify for you, which is our standard support, which is very good.

Some people go, I don't need -- I need the VW, not the middle of the road. And, some people say I need the Cadillac solution. And, we can offer customers either. But, by offering them a range, we can offer them a range of value for what they are doing.

So, we're increasing our attach rates. And, our maintenance was actually up. And, Ken, correct me if I'm wrong, I think it was up 12% last year, or Tom? I'm going off the top of my head. But, it was up in that range last year.

Yes, for the full year.

And, of course, as we get better attach rates, it means when renewal opportunities come up, that's stronger. This is part of a strategy that we laid out a couple years ago and shared with you all to move towards more of a recurring revenue. Because, as you can also imagine, that recurring revenue is, by the way, creating a more predictable revenue flow, also creates a more profitable revenue flow for us.

Exactly. Okay. Well, thank you.

Paul Coster, JPMorgan.

Yes, thank you. Ken, just want to quickly check on the depreciation number again and your estimate of CapEx for the year ahead.

Well, the depreciation number for the year is $21 million. CapEx for 2011 ran about 75% to 80% of total revenue -- I mean, total depreciation. I've got to pull up my cash flow here. And, we don't expect moving forward that that ratio would change substantially in 2012.

Okay. Thank you.

So, operator, I understand there's no more questions in the queue, is that correct?

That is correct.

Well, I want to thank you all for joining us. We are -- we feel like we had a good finish to 2011. And, I appreciate your questions, look forward to talking to you all in the future. Thank you, very much.

That does conclude our conference call for today, everyone. We do thank you all for your participation.