Avid Technology Inc (AVID) 2012 Q2 法說會逐字稿

Good afternoon, and welcome to the Avid second-quarter earnings results conference. Today's call is being recorded.

For opening remarks and introductions, I would now like to turn the presentation over to the Director of Investor Relations, Mr. Tom Fitzsimmons.

Good afternoon. I'm Tom Fitzsimmons, director of Investor Relations for Avid. I'd like to welcome you to today's call. With me today are Gary Greenfield, Avid's Chairman and CEO; and Ken Sexton, Executive Vice President, Chief Financial and Administrative Officer. Please note that slides accompanying this presentation can be accessed on the IR page, through the -- listen to the webcast link -- on our website at www.avid.com.

Before we begin, please note that this call includes 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 number of other factors that could cause actual events or results in future periods to differ materially from those indicated by these forward-looking statements; such as adjustments that may be made to average preliminary financial results, including in this release; as a result of the view of certain estimates associated with the sale of Avid's consumer, audio and video product lines; and estimates related to restructuring costs and costs and allowances related to the divestitures; our ability to execute our strategic plan and meet customer needs; our ability to realize operational and financial benefits from the sale of our consumer audio and video product line, and the reduction of workforce announced earlier this month; our ability to sell our professional products through retail sales channels following the divestiture of consumer products sold through these sales channels; 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 or markets; fluctuations in foreign currency exchange rates and seasonal factors; adverse changes in economic conditions and our liquidity.

Additionally, the Company continuously to review certain estimates associated with the divestiture of consumer product lines and the restructuring costs and costs and allowances related to the divestitures taken in the second quarter. A change in those estimates could result in adjustments to the Company's financial statements in its quarterly report on form 10-Q for the quarter ended June 30, 2012, which could be material.

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, Monday, July 30, 2012, and should not be relied upon as representing our estimates or views on any subsequent date. We undertake no obligation to review or update these forward-looking statements, even if the 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 are available in the Investor Relations section of our website at www.avid.com.

For the purpose of understanding our future business model, we 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'd like to turn the call over to Gary.

Thank you, Tom, and welcome to our conference call for the second quarter of 2012. For the second quarter of 2012, we reported revenues of $157.4 million, which is down modestly from last year. Earlier this month, we announced that we had divested our consumer-focused product lines. Excluding the revenue associated with the divested product lines, we had 5% year-on-year growth of our ongoing business.

We remain in a solid financial position, with a quarter-end cash balance of $59 million. On July 2, Avid initiated a series of strategic actions to focus on our media enterprise and Post and Professional customers. As I mentioned, this included the divestiture of our consumer-focused product lines, as well as the rationalization of our business operations in a reduction in workforce. Ken and I will provide color during this call on these actions.

But first, I'll turn the call over to Ken to provide a recap on our financial results for the second quarter.

Thank you, Gary. On a GAAP basis, revenues for the second quarter were $157.4 million, down 3% from $161.8 million for the same period in 2011. Changes in currency exchange rates adversely impacted second-quarter 2012 revenue by approximately $3.5 million on a year-on-year basis. In addition, this year's revenues was negatively impacted by $2.8 million sales returns allowances, directly related to the divestiture of our consumer product lines.

This allowance represents our current estimate of sales returns above normal operating levels, resulting from the divestiture announced on July 2. If you exclude the impact of currency and the provisions related to the divestiture, our second-quarter revenue was up approximately 1% year-on-year.

Our GAAP gross margins as a percentage of revenue was 46.9%, down 4 percentage points from the second quarter of 2011. The decrease is largely attributable to revenue and inventory provisions related to divestitures. Changes in currency exchange rates and revenue mix also negatively impacted gross margins.

Our GAAP operating expenses for the second quarter was $111.7 million, up $18.2 million compared to last year. Operational improvements and expenses were offset by a $15.8 million restructuring charge to operating expense in the quarter, and a $10 million loss provision related to the divestiture of consumer assets.

The divestiture announced July 2 resulted in a current estimated loss of $10 million, as we wrote down assets -- including inventory, goodwill, customer relationships, capitalized software development costs -- to their net realizable value. These assets have been classified as assets held for sale on our balance sheet.

On July 2, we also announced that we would enter into a restructuring plan associated with the divestiture. We expect the gross charge under the plan to be approximately $27 million to $29 million. In the second quarter, we had a charge of $20.6 million, of which $19.9 million was related to the 2012 plan; and $700,000 was a change in estimate from prior plans.

The second-quarter charge for the 2012 plan includes $15.8 million related to the elimination of positions and closures of certain locations; and $4.8 million related to the estimated returns allowances and the write-down of certain assets. We expect to incur the remainder of the charge, which is largely relating to the timing of facility actions, later in the fiscal year. The charge is higher than the estimate provided on July 2, due to the restructuring charges related to divested product line, revenue, and inventory.

Included in our GAAP tax provision of $903,000 for the quarter are two discrete tax items -- a tax benefit of $3.8 million and a tax expense of $2.5 million, which net to a tax benefit of $1.3 million, related to foreign withholding tax matters on intercompany accounts. During the quarter, we adopted a plan to settle several intercompany accounts, resulting in a tax refund of a previously accrued tax, followed by an intercompany dividend which will generate a withholding tax expense.

The GAAP net loss for the quarter was $39 million or $1.01 per share. This compared to a GAAP net loss in the second quarter of last year of $11.1 million or $0.29 per share.

Our GAAP net loss for the second quarter of 2012 includes the following items -- restructuring costs and costs and allowances related to the divestiture of $20.6 million; a loss on assets held for sale of $10 million; amortization of intangible assets of $1.8 million; stock-based compensation of $2.2 million; acquisition-related costs of $974 million (sic - see press release, $974,000); and a favorable tax adjustment of $674,000 related to these items.

Excluding these items, which total $34.9 million, the second-quarter non-GAAP net loss was $4.1 million, or $0.11 per share. This compares to a non-GAAP net loss of $3.4 million, or $0.09 per share for the second quarter of 2011, which excludes $7.8 million of similar charges. A reconciliation of GAAP to non-GAAP results is also included in the press release announcing our second-quarter results.

In addition, we provided supplemental revenue data segregating our divested product lines in the press release, so investors can better understand the ongoing business. I will first focus on revenue -- then with, and then without, revenue associated with our divested product lines.

Our overall product revenue, excluding the allowance for divestitures, for the second quarter was $125.9 million, down 3% year on year. Weakness in divested product line revenues, plus currency changes, offset the growth in our ongoing business. Service revenues remained strong at $34.4 million, up 7% year on year. All three of our service lines -- customer support, professional services, and training -- had year-on-year growth for the quarter.

I will now speak to our revenue, excluding the revenue attributable to our divested product lines. If you exclude the revenue attributable to our divested product lines from our second-quarter results, our ongoing business was up 5% for the second quarter, and 7% on a constant-dollar basis. Our ongoing product revenue for the second quarter was $109.3 million, up 4% year on year. Service revenues were not impacted by the divested product lines; and, as I just mentioned, were up 7% year on year.

We continue to see a mix shift towards our maintenance revenue, and continued to develop programs to grow this recurring revenue stream. Video revenues for the ongoing products in the second quarter were $95.8 million, up 9% compared to the second quarter of 2011. The majority of our service revenue is related to video, and as I mentioned, we experienced good growth in all of our service businesses. Video product revenue was $62.7 million, up almost 10% year on year.

Consistent with the double-digit year-on-year growth we had in Media Enterprises, the products that serve this market -- shared storage, broadcast, newsroom, and Interplay -- all grew year on year for the quarter and on a year-to-date basis. We're excited about the offerings in this portion of the business, and believe the increased focus on the Media Enterprise portion of the business will allow for strong performance.

These growth rates in video were offset somewhat by decline in revenue related to our professional video editing products. The decline in Pro editing line was primarily due to decline in revenue for our hardware and hardware bundles for Pro editing, which are attributable to our openness strategy. Our professional video editing revenue for software products continues to show strong growth, with over 40% year-on-year growth for the second quarter and on a year-to-date basis.

Professional editor units sales, including cross grades, were up almost 30% year on year. A good portion of the revenue and units growth for professional editing was driven by the Symphony upgrade and cross grade second-quarter promotion. We continue to see customers switching from other video editing platforms, and resurgence in requests for advanced software functionality we believe can best -- be best fulfilled by Avid.

Our ongoing audio revenue for the second quarter was $48 million, down 3% compared to the period last year. We had a decline in live systems and control surface product lines for the quarter. But both have shown 7% revenue growth over the past 12 months. Live sound was down sequentially, mostly due to a large demand for the tour sound season in the first quarter. VENUE remains the leader as the top-used system for North American's 10 top tours, a statistic we've not held for the past three years.

The control surface product line has a longer lead time; and, although revenue was down for the quarter, the pipeline for this product line appears strong. The Pro Tools HD portion of the business had another strong quarter, with double-digit growth compared to last year, and almost 25% growth over the last 12 months. Gary will provide some color on this product line in a moment.

Now I will discuss the second-quarter results, beyond revenue, on a non-GAAP basis. Our non-GAAP gross margin was 49.6%, which was down 1.9 percentage points year on year. For the second quarter, our product gross margin was 47.1%, and services gross margin was 58.8%.

Approximately half of the year-on-year decline in our gross margins as a percentage of revenue is attributable to the lower margins on divested product lines in the second quarter. And the majority of the remaining change was related to adverse changes in currency rates and product mix.

Our service gross margins, on both GAAP and non-GAAP basis, were up over 3 percentage points year on year. This improvement is attributable to higher maintenance revenue on lower delivery costs. Some of the increase in maintenance revenue is attributable to the focus on expanding our products and service bundles. In addition, we improved gross margins for our professional service business, as we move beyond lower-margin legacy projects, which adversely impacted our 2011 professional services performance.

Our non-GAAP operating expenses for the second quarter was $81.7 million, which represents a $4.8 million decreased year on year, and a $53.2 million decrease on a sequential basis.

That's a $3.2 million decrease.

Okay. Excuse me; sorry about that, a $3.2 million decrease. Compensation expenses declined by $4.9 million year on year, related to the restructuring action taken in October of 2011. The Company remains focused on non-compensation-related spending, which was also down year-on-year for the quarter. A portion of the reduction in expenses is related to changes in foreign currency exchange rates.

The non-GAAP operating loss for the second quarter was $2.1 million, compared to a $3.1 million non-GAAP operating loss in the second quarter of 2011.

Now turning to the balance sheet. We increased our cash balances by almost $10 million sequentially, and ended the quarter with $59.4 million of cash with, no draw on our line of credit. For the quarter, we generated $13.5 million of cash from operations.

The second-quarter cash from operations included $1.8 million of cash payments related to our restructuring activities. Our quarter-end cash balances do not include the proceeds from divested product lines of approximately $14.5 million, a portion of which remains in escrow. The amount of the aggregate proceeds differs from the amount announced on July 2 because it reflects post-closing inventory adjustments. We expect these proceeds to cover the majority of the 2012 cash payments associated with our recently announced restructuring activities.

We continue to see improvement in our inventory. Our inventory at the end of the quarter was $77.8 million. Approximately $10.7 million of the inventory has been re-classed into assets held for sale line on the balance sheet. In aggregate, our inventory was down $15.2 million since March 31, 2012, and $22.9 million since the beginning of the year. We continue to see the benefit of up improved systems and processes in balancing demand and supply. The annualized inventory turn for the second quarter were 3.6 turns.

Our accounts receivable balance of $89.2 million is in line with our expected increase in revenue. The days sales outstanding for the quarter were 51 days, which is consistent with the historical levels and our aging improved compared to prior periods.

On the personnel side, we ended the quarter with 1172 employees and 406 contractors. As a result of the choice July 2 action, we expect to end the third quarter with about 1425 employees and to reduce our contract employee base from Q2 levels.

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

Thanks, Ken. I'd like to provide more context on the strategic actions we announced July 2; which, as I mentioned earlier, included divesting our consumer product lines, a rationalization of our business operations, and a headcount reduction, which amounted in total to about 20% of our full-time headcount. Taken together, these actions will allow us to streamline the Company's operations while moving the Company away from low-growth, low-margin sectors, which we expect will drive and improve financial performance.

More specifically, these actions will allow us to focus more effectively on the Media Enterprise and the Post & Professional market segments where, according to our analysis, we anticipate the strongest growth, and where Avid excels as the recognized leader.

Based on our analysis, we believe the Media Enterprises market is growing at approximately 6% to 8% compounded annual growth rate. We believe our customers in this segment often rely on complex workflows that span content, acquisition, creation, editing and distribution; and Avid uniquely offers solutions that span the entire workflow, giving us a significant competitive advantage.

On the Post & Professional side, we believe that the market is growing at a slower rate of about 2% to 3% compounded annual growth. This diverse segment includes independent editors, educators, technicians, recording facilities, rental companies and many others that help create professional media. At a time when many of our competitors are moving to a consumer-centric strategy, we are seeing increasing opportunities to gain share in the sector.

As Ken mentioned, results for the second-quarter are encouraging, and reinforce our strategy, with the Media Enterprise portion of the business achieving double-digit growth compared to the same quarter last year. This growth was offset by a decline in our Post & Professional businesses, which was more challenged; partially due to lower professional editing revenue, which Ken mentioned earlier.

As we look ahead, we believe the newly focused Avid is positioned well to seize the opportunities emerging in the Media Enterprise and Post & Professional markets, driven by several industry trends. Some of these trends -- like the move from analog to digital, or from SD to HD -- are well understood and have been underway for some time. Others, such as the switch to online and mobile consumption, or the emergence of cloud-enabled technologies, are still relatively new.

In all cases, we think an exceptional opportunity exists to lead with innovative solutions that anticipate customer needs and fulfill increased market requirements. We believe that Avid is uniquely positioned to best meet our customers' needs. To be clear, we are already capitalizing on many of these opportunities today.

As an example, at the very beginning of Q2, we announced a new product, Interplay Sphere, at the NAB conference. And, in fact, Interplay Sphere breaks down the walls of the newsroom by giving journalists the ability to grab powerful, in-depth stories wherever they are actually happening; and speed them to time while still maintaining full connectivity with the news operations, and with others involved in crafting the finished story.

At NAB, we also announced a multiplatform distribution technology designed to help content owners effectively distribute and monetize their media assets across different screens and platforms. The importance of multiplatform distribution is supported by research from a recent Nielsen report, which shows greater than 85% of tablet and smartphone users in the US are using their second screen device while watching TV; and 69% of tablet users watching two screens simultaneously.

In addition, a recent Devoncroft study indicated that multiplatform distribution is by far the largest trend for broadcasters in 2012. Avid is capitalizing on this trend, and we believe taking a clear leadership session with this new NPD solution. As I speak, we are in the middle of the 2012 Olympic Games taking place in London. This is the biggest sporting event and broadcast event in the world, and Avid is playing an active role.

As I mentioned last quarter, NBC Olympics, a division of NBC Sports Group, chose Avid for their sixth consecutive Olympic Games. And we announced that they will deploy their most comprehensive Avid workflow in the history of NBC Olympics. Avid is also supporting many of the other over 120 Olympic broadcasters.

As Ken mentioned, we have seen strong growth in our Pro Tools HD product line. With the release of Pro Tools HDX, we have seen healthy upgrades that continue to grow on a year-over-year basis. From large enterprise customers with multiple rooms and workstations to the independent professional, Pro Tools HDX has been adopted by the professional community.

Overall, the economic environment for broadcast is encouraging. US TV upfront ad sales are forecast to be up 4%, with cable growth over 6%, despite increased investment in online advertising; and the European net TV advertising revenues are expected to increase by 5% in 2012, according to reports by former telecoms and media at Barclays Capital.

This relatively positive outlook sure to encourage investments in technologies that will help broadcasters and media enterprises become more efficient and make them more able to capitalize on the trends that we discussed earlier. Our broadcast customers tell us they need ways to deliver content faster and more efficiently than ever, and this favors Avid because we can provide the integrated workflow solutions they need. As an example, Univision is implementing an Avid workflow comprised of Interplay storage and professional services to help them implement a new production operation to support their multiplatform and distribution requirements.

This Avid solution enables them to consolidate and automate many of the manual tasks and operations that were associated with taking in thousands of hours of contents, providing quality control, closed captioning, and distribution. Paramount Pictures post-production sound outlet, Technicolor, also used a wide range of Avid solutions to outfit their new 90,000-square-foot facility in California. They describe Avid solutions as offering the most time- and cost-sensitive sensitive workflow capabilities.

These are a few examples of media enterprises that are taking advantage of Avid solutions. We're looking forward to the international broadcasters conference in Amsterdam this coming September, where we'll showcase our broadcast and news production solutions, as well as unveil the results of the survey we conducted to better understand the needs of our customers and the impact of new technologies on their businesses.

We are also planning a much-expanded channel partner forum, including expansive audio and video product training. Our mission remains the same -- inspire passion; unleash creativity; and realize dreams in a digital world. And I am encouraged by the opportunity in front of us.

With that, I'd like to turn the call back to Ken, to offer some perspective on 2012 financial outlook.

Thanks, Gary. Before talking about 2012 expectations, I'd like to remind you of our earlier disclaimer regarding forward-looking statements.

Consistent with our past practice, from earlier this year, our guidance will focus on operating margins as a percentage of revenue for the full year. The actions taken in July were intended to streamline our business, focus on areas of strength, and expand our margins in this year and beyond.

To assist investors in better understanding our historical revenue results for our ongoing business, we provided a supplemental revenue table with today's press release.

Revenues for the ongoing products were $585.6 million for 2011, with $278 million in the first half and $307.6 million in the second half of 2011. For the first half of 2012, revenue for our go-forward business was $278.6 million, up slightly from last year. Keep in mind that our fourth quarter is historically the strongest quarter. Over the last six fiscal quarters, non-GAAP gross margins have ranged from 49.6% to 54.2%. The divestiture of our consumer lines, along with our operational improvements, is expected to improve our non-GAAP gross margins as a percentage of revenue going forward.

For the second half of 2012, we expect gross margins to be at 55% or higher. In the second half of 2011, non-GAAP operating expenses were $172.3 million. We currently expect these expenses for the second half to decrease by 17% to 20% when compared to last year. While we're not giving revenue guidance, if revenue for the ongoing lines remained at the same levels as last year's second half, or $308 million, we would report 2012 revenue of almost $620 million.

If we're able to achieve this level of revenue, we would expect to report non-GAAP operating margins for the second half of 2012 in the low teens, and achieve 5% non-GAAP operating margins for the full year. We expect full-year non-GAAP taxes and interest to be in the range of $5 million to $7 million for 2012.

The non-GAAP net income just outlined excludes stock-based compensation, amortization of intangibles, restructuring and other charges, acquisition costs, losses on assets held for sale, and related taxes of about $55 million to $60 million. If our second-half 2012 revenue was the same as the second half of 2011, excluding divested product lines, we would expect we could report -- we would report a GAAP net loss for the full year of $30 million to $36 million.

This concludes our remarks, and we would now be happy to take your questions.

Operator, can you open it up for questions please?

Absolutely. (Operator Instructions). Mike Olson, Piper Jaffray.

Good afternoon. If you look at -- excluding consumer, and just look at the pro audio segment, I think it still shrunk a bit year over year. What you think needs to happen to return to growth in that pro audio segment? Or is it just, perhaps, a function of no significant industry upgrade cycles underway? And will it continue to be relatively challenging?

I think we get a mixture out there. We actually had growth. You might remember audio grew, I think, 5% in the second quarter of last year. So you do get some cyclicality, as Ken explained, with live sound because of the way concert seasons go. So I think that we actually are seeing -- first of all, most of -- we've already talked about the Post & Professional business be at a slower growth rate of 2% to 3%. Most of audio is in that Post & Professional segment.

But I think we are seeing growth in that segment. It just happened to be in this quarter because of cyclicality. In our console business, we didn't see it. Pro Tools HDX continued to perform very well. Other aspects of it performed quite well. Plus, I think, excluding the consumer business -- I think Ken commented on it -- pro audio actually grew.

Pro audio was down 3%.

Was down 3%.

3% overall. One of the things I would say that impacts it -- it's hard to take a growth rate in one quarter and project it over a long period of time. The timing of new product releases impact it. And along with it, as I mentioned, on the control surface side, there's longer cycles there. We've had great growth in both live sound and control surfaces over the last several quarters. And the expectations for those product lines continue to be very positive moving forward.

(multiple speakers) I meant Pro Tools, HD Pro audio tools.

Pro Tools HD grew very strongly.

Grew very strongly, and that's what I meant, I'm sorry.

Okay, got it. And then what's the pricing like for the pro video editing tools? Have we seen a stabilization in pricing? Or are you continuing to do the discounting to gain share with customers that may be switching from other tools?

I don't think -- in fact, the reverse. We need to separate out on Pro Tools. We actually raised the price on Media Composer, though. Did you say Media Composer or Pro Tools?

In video.

I'm sorry. The lowering of the ASP on Media Composer, we talked about last quarter, and we hinted at a little bit this quarter -- it's really driven by the fact that there's less hardware being sold with the systems. We commented on the software sales were up -- were actually up 40%. Unit sales were up sort of similar, so you sort of suggest ASPs are sort of staying -- ASPs would be staying about the same on the software side, and our gross margins are staying about the same. But we're selling -- we lowered the price of our video hardware. That's not going to go away. And also people are -- because if people want to use Final Cut, our hardware today -- when we open up Media Composer, we're only able to open up the software; the hardware has been designed for a proprietary world. And so folks are buying open hardware that would work with Media Composer, and Final Cut, and other products out there. So the software pricing isn't changing. We intentionally -- it wasn't discounted, we intentionally lowered the price of the hardware to make it more competitive with the open hardware that's out there. Does that make sense?

Yes, thanks a lot.

(Operator Instructions). And we have no more questions in queue.

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

This concludes today's call. Have a wonderful day.