Avid Technology Inc (AVID) 2014 Q1 法說會逐字稿

Good day and welcome to the Avid investor conference call.

(Operator Instructions).

Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Tom Fitzsimmons. Please go ahead, sir.

Good morning. I am Tom Fitzsimmons, Director of Investor Relations for Avid. I would like to welcome you to today's call.

With me today are Louis Hernandez Jr., Avid's President and Chief Executive Officer, and John Frederick, Executive Vice President, Chief Financial and Administrative Officer.

Before we get started we wanted to note that during this presentation we will be making forward-looking statements including among others statements related to our recently filed financial statements, future performance related to revenue, operating expenses, earnings, bookings, backlog and free cash flow, our future strategy and business plans, our product plans including Avid Everywhere and our objective to attain relisting on the NASDAQ stock market. These statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Also these statements are based on our expectations as of today, September 24, 2014, and we expressly disclaim any obligation or undertaking to update or revise these statements whether as a result of new information, future events or otherwise. Please review the description of these statements in the risk factors described in our reports filed with the SEC.

In addition, Avid has presented a number of non-GAAP financial measures that it uses to monitor its business including non-GAAP operating results, adjusted EBITDA and free cash flow all of which are defined and reconciled to comparable GAAP measures in tables accompanying the release of our results. These non-GAAP measures reflect how Avid manages its business internally.

Our non-GAAP measures may vary from all other companies presenting non-GAAP measures. Non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles. Our non-GAAP information supplements and is not intended to represent a measure of performance in accordance with or disclosures required by generally accepted accounting principles.

When analyzing Avid's operating performance investors should not consider these non-GAAP financial measures as a substitute for net income or other measures prepared in accordance with GAAP. Avid also references bookings and backlog, operational metrics we use to measure our business. Avid's definition of bookings and backlog is included in our SEC filings.

You may replay this conference call by going to the investor relations page of our website and clicking the events and presentations tab. And now I would like to turn the call over to our President and Chief Executive Officer, Louis Hernandez Jr.

Thanks, Tom. Good morning, everyone, and welcome.

John and I are very pleased to be here today for the first Avid business update call since we joined the Company in early 2013. With the restatement process now behind us we couldn't be more excited to share our vision for Avid and the industry with you.

We are also delighted to now shift the focus of the entire organization to executing on our strategic goals in realizing the significant growth opportunity that we believe exists for Avid and its shareholders. Additionally, the completion of the restatement allows us to reengage with our investors in a way that we couldn't do during the restatement.

On today's call I will give you some insight into work we've done since joining the Company to form our strategy, the progress to date and the financial opportunity that we think exists. I will share more detail on our view of the changing dynamics in the media industry and the economic opportunity available to Avid. And of course I will get in some detail on the strategy itself which is comprised of three distinct phases.

It is also anchored in our Avid Everywhere strategic vision and the establishment of the Avid Customer Association. I will comment on those more shortly.

John Frederick, our Executive Vice President, Chief Financial and Administrative Officer, will then review the financial results through the first quarter of this year and provide some guidance on the remainder of 2014. Also I want to remind you that upon filing the restatement we posted a series of four videos on our investor relations website to explain our strategy and financial expression of that strategy in a more comprehensive way. In addition, we are planning an Investor Day after we file our third-quarter results to provide an even deeper dive.

This will also be a great chance to meet and interact with other members of our management team.

All right, so before we get into more details of the financial results, let me take you back to the beginning because we didn't get a chance to review the strategy when I first started. We will go all the way back to about a year and a half ago in February of 2013.

I joined Avid as President and CEO after serving for number of years as a Board member. And as you might expect I spent the first 100 days or so assessing both our strengths and opportunities to formulate a strategy to resume growth and increase profitability.

We reviewed literally every aspect of our business and the current industry dynamics. And this included detailed financial and market research analysis to ground us in the sizing, segmentation and growth areas of the industry.

I also visited literally hundreds of customers, employees and industry leaders all over the world to help me better understand the biggest pain points in the industry. It was during this time that I confirmed what I had suspected which is that the industry is going through a fundamental change that is putting material pressure on the basic business model of our customers and the technology decisions that they make.

Upon our arrival we also immediately engaged in a deep and thorough analysis of the media value chain to better understand where the growth is the highest, where we are currently participating and where we are in the best position to expand that participation. From there in an effort to think more clearly about how we expand our current distribution, we evaluated our current customer wallet share, looked at our portfolio of products to determine which of the products could be considered anchor products. And we define anchors, by the way, as those products that tend to lead to cross sales of ancillary products.

Additionally, to ensure that we are addressing the market in the best possible way we reviewed the deployment, pricing and packaging options along with the technology that underlines our overall product suite. Now our analysis also included evaluations of a series of cost and investment related areas such as indirect costs, labor rate arbitrage opportunities, product profitability and our assessment of return on historical R&D investments. Naturally it was important to assess the quality of the management team at the same time that was responsible for executing our strategy.

And we made some significant findings. We found that Avid has some pretty fundamental strengths that are deeply rooted and not easily replaced. Chief among these were some of the best known and well-loved technology tools for content creation, a brand that is synonymous with industry defining innovation, a passionate customer community that provides an unmatched ecosystem for distribution, talented and fully engaged employees.

And, within our product set, one of the exciting surprises for me was the foundation of the platform that much of the future strategy could be based upon going forward. However, we also discovered several challenges that needed attention. Although we were investing heavily in products we weren't getting an acceptable return on those investments.

We were not always viewed as strategically as we would like to by our customers and instead were sometimes lumped in with the commodity vendors in an already crowded landscape of media tech companies. And while we had some very talented people here at Avid, we identified a number of improvements to the way we are doing business that we hope translates to future success.

So we concluded that there is a lot to be excited about here at Avid with a unique foundation to build upon, that brand heritage, customer reach and the industry impact remains strong. We believe that if we started with that rich heritage then build upon our core strengths and address our strategic, operational and cultural issues that I mentioned, the results could translate into meaningful financial expression and value creation for Avid and its shareholders.

Now we knew the amount of work ahead of us was substantial and I felt there was truly no time to spare. Now I mentioned that our industry evaluation showed that the customers business model was under tremendous pressure, so let me elaborate on that for a minute.

Now we believe that the media industry is in the midst of a fundamental transformation. The acceleration of almost every aspect of our lives through digitization is impacting many industries. And it is no surprise that the digitization of this connection is also impacting our industry as well.

Digitization is accelerating and completely transforming the media creation to consumption process and that connection between the creative idea and its expression and consumption of that idea as a finished asset. What used to be a linear workflow from preproduction, production, postproduction, and distribution, kind of the number way people think about the production flow and the workflow, with predetermined handoffs between each step, has now fused into a more fluid, more interactive, multidimensional ecosystem.

One of the challenges, however, that our clients are often still set up organizationally in the traditional siloed structure following a more static value chain. And many of them are in some rate of adapting and struggling to adapt to this new multi-dimensional value chain.

They face increasing pressure to continue to create great content, in fact more of it, record numbers, but also do it more collaboratively and at a lower cost and derive incremental value from every asset being created. There's a lot more pressure on getting more out of each asset that you create.

So this creative pressure puts intense demands on their base business model and their operations. And the interesting thing is it is now impacting not only how they are organized, which is a pretty fundamental question, who they hire and of course the technology they deploy. Unfortunately, the vendor community is even further behind in adapting.

Too many vendors are highly siloed with proprietary solutions forcing the industry to allocate far too much time and way too many resources just to make all the pieces work together. The outsize cost of interoperability across the workflow highlights the need for a more single, integrated solution designed to reduce those touch points and more efficiently link the creative process to the monetization process.

Further, the vendor community is too fragmented and too dependent on proprietary technology. It almost seemed that there was pride in being unique in terms of how you connect to other people.

Other technologies such as financial tech, for example, it's a much larger market but they have far fewer vendors in part because there's a lot more standards to connect all the components. The media tech segment is among the most inefficient that I have ever seen which creates unnecessary complexity and cost burden for our customers.

At Avid we realized we had some unique advantages in our proven and trusted brand. We mentioned we have fantastic global distribution and among the most recognized and influential clients in the world. In fact, we have customers in over 140 countries including every major economic market and more than 50% of our sales come from outside the Americas.

We also had invested in some very advanced technology. But despite these advantages we weren't focused enough on solving the most intense pain points of the industry and instead remained fairly narrowly immersed in what we knew best.

Although we are among the first to digitize the creative side of the media value chain we didn't really capitalize on this role as the rest of the value chain also became digitized. And as a result we weren't participating in the higher growth areas of the value chain within our existing products. We hadn't kept up with the industry's most strategic needs which were in the areas of much higher growth and hadn't reviewed adjacent industries that could use our existing technologies and services.

So as a result of all of this we felt we had relatively low return on deployed capital. And finally the Company needed a higher sense of urgency, greater accountability, particularly to financial discipline. And so it has also become clear at that time that we really needed a new management team to execute on some of these challenges that we had ahead of us.

Immediately following our analysis we developed a three-phase transformational strategy to capitalize on our strengths, to recapture our leadership and dramatically alter the financial profile of the Company. Now the first phase was to better execute in the markets that we serve today and to begin to quickly capitalize on the broad and deep growth opportunities that we had identified. This better execution meant some basic things like reviewing indirect spend, reviewing the geographic footprint of our employee base, increasing product profitability, focusing on more cross-selling to increase the share of customer wallet, improved general sales execution with crisper messaging about who we are, where we are going, why we are different.

It also meant refining our pricing and packaging, creating a higher sense of urgency culturally and demanding more financial accountability for any decisions we are making within the Company. Now John will review the results shortly but we believe that our efforts are starting to have a significant impact on both our bookings, growth and profitability. And one point of evidence is the fact, as many of you know, we've had four consecutive quarters of year-over-year growth in bookings and lower operating costs.

The second phase was to capitalize on higher growth segments within our existing products, segments such as corporate, education, government, live events, sports as some examples, areas where we can take the products we have and focus them in areas where we didn't have to make many changes in order to grow in new areas. Now this includes better targeted cross-selling to attack the rich wallet share opportunity, addressing the independent professional market more directly and offering flexible delivery and pricing options.

Some vendors may force their customers into the cloud but we don't believe that that is innovation. Rather, it can be an impediment to solving the real problems our customers face.

We believe that our customers should have the flexibility to deploy and pay for their solutions in a way that works best for them and meet their strategic and operational need. Naturally that should absolutely include cloud and subscription but it should also include on-premise or floating license and frankly any combination therein, whatever works best for them.

The third and final phase of our strategy is to move into the higher growth, long-term growth areas and increase our strategic relevance to the market. We think the total product and services spend in the media tech market is somewhere around $47 billion annually. Our existing product portfolio covers roughly $10 billion of that market of which we have around 6% market share.

We think there is an incremental $5 billion of annual spend in the higher growth segments of the market. And if we include our platform products and service offerings once the site is fully filled out, which we have described through Avid Everywhere, we believe we can address a large portion of that incremental $5 billion market in the growth segments.

So the market opportunity is substantial right now. But there's much more opportunity once we execute on our longer-term product strategy.

Let me turn to the two pillars that are supporting the success of our transformational strategy, Avid Everywhere, which is our product and solutions suite and the Avid Customer Association, our attempt to more closely engage with customers and our community. Hopefully by now you have heard all about Average Everywhere. With Avid Everywhere we have introduced our strategic vision of providing a flexible and open common platform to address the most intense business issues facing the industry, in a much more efficient way for both Avid and its customers.

And at the same time we wanted to provide deployment options both in the cloud or on-premise by license or subscription. Some in the industry have been frustrated that they have been forced to a single delivery or pricing model like cloud or subscription that benefits more the vendor than the actual customer and in fact in some cases may actually be more costly and less flexible. Our view is that our customers will be limited by only their own imagination and their strategy, not by limits dictated by their vendor.

At the same time we will be expanding our market opportunity by taking this approach, getting in areas we haven't been in before with more flexible pricing and deployment options. Now Avid Everywhere was designed to get a better return on our extensive distribution network that I mentioned earlier, drive higher cross-sell activity, access that relatively untapped market of independent professionals and move us into the higher growth segments of the market all while addressing the most important market pain points at a time when the industry needs us most.

With Avid Everywhere we can continue to deliver the finest professional creative technology tools but now extend those technology tools all the way to distribution and delivery with one common integrated platform in a much more efficient and powerful way. As I mentioned earlier, Avid began the industry's digital transformation with just one piece of the workflow, taking film at our beginning and allowing it to be edited digitally, thus allowing the industry to do things it simply couldn't do before and do it more efficiently.

As we have seen more and more the workflow become digitized, we are seeing the same need for innovation, to automate now the entire digital workflow. Since we already participate in the creative phase digitally, we can add more value to that digital file record such as adding metadata, protecting that file, allowing it to be repurposed and distributed at a much lower cost by doing it upfront.

And by doing it that way we eliminate handoffs and make the process simpler and less costly. Now equally critical to our strategy is the engagement with our community, which is why we created the Avid Customer Association. I spent, as I mentioned earlier and frankly continue to spend, a great deal of time in the field with customers from every geography and segment of the market and I was surprised at how willing they were, eager to share their thoughts, experiences, challenges and ideas with me.

And this is like no other association you have heard of before. Think about the largest, most influential media companies in the world working together for common good through technology. That's what we are talking about and that's why we formed the Avid Customer Association.

And I think we announced it some called it the most influential collection of media visionaries in the world. And it is designed to harness the power of this collective community and formalize this collaboration with us. It's an organization run for and by our customers and I think people were surprised at the industry luminaries on our Board and advisory groups.

Now the engagement has been really overwhelming and we are really pleased to report we have over 1,000 members and growing. This group comprises many of the most influential and well-known media companies in the industry.

So this is the strategy that we have been executing on for the past year based on those learnings I mentioned earlier. And I am happy to report that it has been successful so far.

Bookings, as I mentioned, have reversed a downward trend resulting in four consecutive quarters of growth. It has resulted in lower non-GAAP operating costs. And the bookings growth was partially offset by products that we have been deemphasizing in lieu of new products that are more profitable.

Our visibility has improved and backlog is around $549 million at the end of the first quarter. And in April of this year we launched our cloud-based offerings, the marketplace and the connectivity toolkit, all three of which have created quite a buzz in the industry.

Now these cloud-based solutions and the marketplace will be more heavily marketed with a series of additional cloud-based products mid-next year. But what has been most exciting, I think, is that the working modules of the platform today are commercially available and are being adopted by our customers at really an amazing rate, because you never know when you launch new platforms like this how well it will be accepted.

Here are just a few examples of customers embracing the Avid Everywhere vision and putting the power of the platform to work for them to solve some of their most critical business issues. I'm just going to give you a couple of quick examples.

CBC, Canada's largest multiplatform broadcaster, is the latest global broadcaster leader to adopt the Avid Everywhere vision and put the MediaCentral Platform at the heart of its operations. Migrating to the platform will allow CBC to eliminate more than 20 legacy archive collection and integrate metadata for more than 25 million analog and digital media assets into a single, consistent catalog and index database. It's pretty powerful.

Now CBC can quickly and cost-effectively produce television, mobile, web, radio content using legacy and new media assets through a single browser interface at anytime from anywhere. We have also seen the world's fastest growing broadcaster with operations in Europe, the Americas and the Middle East consolidate their technology around the Avid Everywhere MediaCentral Platform, allowing their infrastructure to scale with their rapid growth.

Another example in both the UK and Korea we've seen examples of leading broadcasters who are facing a pretty typical problem, compression in their ad revenue, increasing competition, internal cost pressures and accelerating demands to deliver compelling content faster. Only the Avid MediaCentral Platform offered the collaborative capabilities, resolution support and openness required to meet their needs and efficiently deliver content across consumer devices and multiple digital channels.

Now on the audio side of Avid Everywhere I'm going to give you an example with the Berklee College of Music, right here in Boston. They recently deployed our professional audio production solutions to enable real-time, collaborative workflows between students in their new 10-studio production complex in Boston and their complex in Valencia, Spain.

The new workflow delivers seamless, faster global team working capabilities which is becoming the standard in many professional workflow projects, our platform-enabled solutions, this real-time global collaboration, ways that weren't really possible before. It is really exciting to see some of these well-recognized, large enterprise clients adopting the Avid Everywhere vision.

And just recently at IBC, maybe some of you have read about this, which is Europe's largest media tradeshow, we revealed the next phase of Avid Everywhere platform-enabled innovations including Avid Resolution Independence, something that got a lot of attention. It's a completely fluid architecture for working with material of any resolution.

Now the reason it got so much attention, it's a foundational solution to the high resolution problem that our customers are facing. So as HD turns to 4K, which will then turn to 8K and so on, we address this at an architectural level to scale with any resolution across the entire workflow.

If you went to IBC, you would see plenty of vendors who had solutions for 4K and that is where it ended. The problem is every new turn of technology would require yet another costly upgrade. It is like rats chasing cheese on a treadmill.

The problem is they are never going to get there. So rather than needing each vendor to upgrade 4K across their piece of the siloed workflow, we addressed it through MediaCentral Platform, which is agnostic to resolution and demonstrate a quantum leap forward in an age of rapid accelerating resolution. So this is a totally different way to think of this problem and clients really began to appreciate why you want a platform approach because this is such a unique and powerful and dramatically more efficient way to solve this resolution problem.

We also revealed a number of partner connectivity integrations which highlight the efficiency of our recently announced connectivity toolkit as a way for our partners to seamlessly join the platform and make their products available on the Avid marketplace. So you can think about the platform as like your iOS on your mobile phone, on your smartphone, connectivity toolkit allows you to connect applications, ours or third parties, and they are available through the Avid marketplace.

In fact, these vendors that we announced that are connected to the platform can take advantage of the Avid Resolution Independence capability I just mentioned. So we are helping them solving their own resolution issues by connecting to the platform. It just makes it more efficient for everybody.

And these are both great examples of why the platform approach is better. It simply makes things more efficient for customers and now our partners as well.

Now with customer collaboration equally important as technology to our own growth strategy we also introduced the Avid Advantage, an initiative that is setting a new standard for service in the industry, delivered by our new Avid Global Services organization that we also recently announced. Some of you may remember that we hired Rick Lowenstein, who reports now directly to me, earlier this year to lead the Services group. He was a new hire in a new role reporting directly to me.

Rick came to us from Adobe with over 20 years of industry experience and has upgraded his team to address what we see as a significant opportunity as customers are looking for their vendors more than ever to help them manage their technology needs with enhanced service offerings. So we are excited about these new announcements and proud of how we represent another step forward in fully delivering the Avid Everywhere vision.

Hopefully that was helpful. I would now like to shift and turn to our operating leverage.

As part of our first phase of the transformation we have rationalized our indirect spending and product portfolio and reallocated resources to investment that we think will yield a higher return. We expanded our approach to strategic sales planning, tightened our strategic messaging and rationalized our indirect channel to maximize our reach.

Culturally we have improved internal processes to emphasize urgency and accountability. And we aligned our compensation incentives with the execution of our strategic goals for growth, profitability and cash flow.

Finally, we changed all but one of the management team members to execute the challenges ahead. So I think you can sense we are pretty excited about the opportunity ahead of us. We remain focused on executing on addressing the most critical industry issues, driving growth and improving profitability.

I hope you found this more detailed explanation of our strategy helpful. And while we are encouraged by the early proof points on bookings growth and lower operating costs we know our work is just beginning. And we look forward to continuing to update you, our investors, on our progress.

So with that I'd like to now introduce John Frederick, our Executive Vice President, Chief Financial Officer and Chief Administrative Officer, to review the more detailed financial results. John?

Thank you, Louis. Before we get into the results I would like to briefly expand on what Louis just mentioned around some of the early proof points of our strategy and how they convert to a financial expression.

About four months after we began to execute our strategy we noticed that bookings began to reverse a period of decline. And we believe we have reached an inflection point in the third quarter of 2013.

We also noticed that customers became more open-minded to enhance service relationships including multiyear renewals. Since then bookings have increased about 4% year-over-year on an LTM basis through the second quarter of 2014. This compares with year-over-year booking declines of 11% for 2012 and 16% for the LTM period ended June 30, 2013, which was immediately before we hit our bookings growth inflection point.

We also observed a dramatic increase in platform unit sales. In fact, LTM units through Q2 2014 increased over 60%.

The unit increase while in and of itself not directly financially immaterial, relates to a product that is the anchor of the digital media workflow and is highly correlated with cross-selling other products. So if we put this in context the sales of the platforms generally represent about less than 10% of the total bookings value of the typical media enterprise deal.

So to put that in context, that should give you some sense for the cross-selling opportunities by just using the products that we have to sell today. In addition to the platform, our research suggests that our editor products and consoles are also highly correlated to cross-selling. These anchor products form a significant component of our growth thesis.

We also realized that we had a valuable asset in our distribution network. We have a substantial geographic footprint and cover some of the most important media companies in the world.

Over 50% of our business originates outside the Americas. And we currently sell into over 140 countries, about which 60% is accomplished through channel partners including all major and emerging markets. And at the customer level in the last 12 months we've sold into all major film studios, 8 of the 10 leading international news networks and 12 of the 15 largest station groups.

So when you combine the ubiquity of a single platform, which is the workflow anchor with our broad distribution capability, you have the underpinning for a substantial growth thesis. And as you can imagine this growth thesis is made even more powerful with targeted value-oriented M&A that takes advantage of the cross synergies from a single platform and the booking synergies that derive from a substantial distribution capability.

At the same time we were rearchitecting the Company's products and executing on sales-related improvements we were also driving to a leaner, more directed cost structure. In fact, we have reduced expenses in the LTM Q1 2014 period on a non-GAAP basis by about $15 million, or 5% from the end of 2012 or just before we joined Avid.

So with the proof points properly sized and the growth thesis framed I would like to quickly touch on the restatement. I am very pleased that we've completed the process and filed our 2013 Form 10-K and now our first-quarter 2014 Form 10-Q.

As we have communicated before we expect to file our second-quarter 10-Q within 40 days at which point we expect to be current with our required SEC filings. We expect to be on a more normal filing schedule as we enter into filing our third-quarter results.

Additionally, when we apply for a relisting on the NASDAQ -- we will apply for the relisting on the NASDAQ stock market shortly -- and we expect to be relisted sometime after we file our second-quarter results. But before we put the restatement completely behind us I would like to recap the process. This will be a little bit repetitive for the folks who have watched the videos but probably would be best if we covered it now for those who haven't viewed the videos.

Before I get into that I would like to personally thank our investor community for the support demonstrated during the period. It was certainly an unexpected development for the Company, our investors and for Louis and me as a new management team. And that being said I very much appreciate our investors' patience during this challenging period.

So if we take it back to May 2013, we had concluded that many of our software updates represented implied post-contract support or PCS, and that the Company's accounting for implied PCS needed to be corrected. Software updates, you will recall, typically take the form of bug fixes, upgrades and enhancements which in many cases had been made available to our customers at no charge. As a result our previously issued financial statements couldn't be relied upon any longer.

While there are various nuances and complexities to the accounting to support transactions and implied PCS, at a high level under the accounting rules we couldn't establish fair value for the software updates. And as a result rules require that some or all of the transaction be recognized ratably over the period in which the software updates are expected to be delivered rather than simply recognizing the revenue generally when the product was provided to the customer.

The vast majority of our products were impacted by this in the periods that the software updates are expected to be provided very significantly amongst the product and the product releases from just a few months to several years. So to put that in context, with more than 700 software updates occurring over a period of 8.5 years, the complexity of the restatement and the level of work effort was significant.

In all material respects recognizing the revenue ratably impacts the timing but not the total amount of the revenue. Effectively we are taking the same amount of revenue and recognizing it over a longer period of time thereby increasing the amount of deferred revenue on our balance sheet. Naturally the increase in deferred revenue is expected to provide a higher degree of recurring revenue.

I should also highlight that in the pre-2011 timeframe the vast majority of our restated revenue was based on a ratable recognition model. However, as of January 1, 2011, accounting standards update number 2009-14 became effective and materially changed our accounting for many customer arrangements. In short, we were required to begin recognizing revenue on certain portions of our customer arrangements immediately which was a change from the pre-2011 accounting rules under which we deferred most of the revenue.

To frame this before 2011 we deferred about 70% of our bookings. Conversely, after 2010 we now defer closer to 30% of our bookings.

Consequently after 2011, we will now add materially less to deferred revenue than in previous years but still much more than our historical accounting practices. Therefore, as pre-2011 deferred revenue burns off we will have a meaningful revenue headwind to overcome which will not abate until 2017. This headwind will be somewhat offset in increasing amounts by amortization of deferred revenue from transactions recorded after 2010.

Also I'd like to remind you that we are deferring revenue for these transactions. We are also recognizing the material costs associated with those transactions in the period which it is actually incurred, so for example, when the product is shipped. Therefore, the revenue amortization impacts our margins at 100%.

As the amount of revenue recognized from pre-2011 period declines, this creates a challenge for revenue and gross margin as a percentage of revenue for the comparable periods. The impact of the declining pre-2011 deferred revenue and the increasing post-2010 deferred revenue means that it is impractical to normalize our revenue by simply adding back the effects of the pre-2011 transactions as there continues to be deferrals that are not yet reflected in our results on a fully normalized basis.

In addition to restating our revenue, we are also restating the result for impairment of goodwill, our presentation for discontinued operations, revised accruals related to restructuring reserves and a number of other adjustments that individually wouldn't be considered material or warrant restatement; however, since the books were reopened we corrected those items. We provide more information on these other items as well as a deeper dive into revenue for our investors in our investor video series.

Before I get into the review of the results I wanted to discuss some of the key metrics that we will be focused on as we move forward. Our transformation is based upon three pillars, driving growth, improving profitability and addressing cultural challenges. We believe these transformative initiatives will translate into a financial expression that will ultimately convert to higher shareholder value reflecting the value that the community places on us.

We will endeavor to provide what we believe are meaningful metrics to our investors to assess our performance and our execution against the strategy as we recognize that given the restatement the amortization of deferred revenue it may be challenging to make such assessments based on traditional GAAP metrics. We believe that looking at bookings as an operational metric we use as a leading indicator of growth, adjusted EBITDA and free cash flow may be informative indicators as to our operational performance. There is a detailed description of each of these metrics in the 2013 financial results video posted on our website and a summary of these metrics in the press releases announcing both our 2013 results and our first-quarter 2014 results.

So with that framed I would like to briefly highlight our performance against these metrics. Bookings in 2013 were $523 million as compared to $545 million in 2012. As a reminder, however, we believe we hit an inflection point for bookings growth in the third quarter of 2013 whereby we reversed the trend of declining bookings and have since recorded four consecutive quarters of bookings growth. In fact, quarterly bookings of $126.1 million for the first quarter and $127.7 million in the second quarter of 2014 represents an aggregate improvement of over 3% over the first half of 2013.

On a trailing 12-month period through June 30, 2014, bookings were $531 million, a 4% improvement over the same period in 2013. We expect this growth trend generally to continue as we execute against our transformative strategy although we may experience an occasional quarterly trend break reflecting the choppiness of deal timing and the effect of the restatement process.

We have seen strong performance in many of our anchor products including the MediaCentral Platform, the foundation of Avid Everywhere, the newly released Modular Audio Control Surface and Avid Global Services among others. It is also worth noting that as customers realize that the value of being on the MediaCentral Platform and as a result we are seeing larger individual enterprise deals which by their nature can tend to make bookings and revenue a bit choppy based on both the timing of closure and the timing of delivery.

Our adjusted EBITDA for the fiscal year 2013 was $80 million which compares to $118 million for 2012. This decrease was primarily a result of lower amortization of revenue from transactions originating in the pre-2011 time period.

For the first quarter of 2014, adjusted EBITDA was $20 million which compares to $18.2 million for the same quarter last year reflecting a $1.8 million, or 10% increase. Both 2013 and first-quarter 2014 were impacted by declining revenue amortization from pre-2011 transactions. We were able to show a year-over-year increase in adjusted EBITDA in the first quarter of 2014 notwithstanding that pre-2011 revenue headwind primarily due to the timing of revenue of a few large deals that impacted the first quarter as well as higher gross margin for both products and services as well as lower overall operating expenses.

One recent observation which will impact our future results is that as our customers understand the value of the leveraging the platform and getting more of their workflow integrated, we are now seeing larger, more complex deals which at times may have elongated delivery expectations. As a result, this can make quarterly results somewhat inconsistent depending on the timing and delivery of these multimillion dollar deals.

While we benefited from that timing in Q1 we don't believe the favorable results represent a permanent trendbreak yet and the impact of the pre-2011 revenue runoff will become more apparent in future quarters. That said we are pleased to see the results of our strategic initiatives in the form of targeted lower-cost, improving direct gross margins which we believe is part of a longer-term trend.

Our free cash flow for the fiscal 2013 was $5.5 million as compared to $44 million in 2012. This decrease was primarily related to significant working capital improvements which were made in 2012 which were not repeated in 2013. While we continue to focus on managing working capital the 2012 levels of year-over-year improvements and working capital simply aren't sustainable.

For the first quarter of 2014 our free cash flow was a use of cash of approximately $14 million. This use of cash was due to seasonal payments related to our operations including payments related to our 2013 variable compensation programs. I will touch on free cash flow expectations for the remainder of 2014 shortly.

So with the update on the metrics done I would like to now discuss our operating results on both a GAAP and non-GAAP basis. The Company has historically disclosed non-GAAP financial results with the intention of removing unusual nonrecurring and nonoperational activity from our reported results.

Examples of those types of costs that we've excluded from our non-GAAP operating results include restructuring costs, stock-based compensation, amortization and impairment of intangible assets. Additionally, our non-GAAP financial results exclude other unusual items such as costs related to the restatement which as you recall is a relatively large number, M&A related activity and the impact of significant legal settlements. We believe that excluding these items provide a more representative view of our operating results.

Our revenue for the fiscal 2013 was $563 million as compared to $635.7 million in 2012. The reduction in revenue again is primarily related to the lower amount of revenue from transactions originating before 2011. A portion of this reduction was also caused by lower bookings on a year-over-year basis representing the trend of declining bookings before we hit the growth inflection point in the third quarter of 2013.

Revenue for the first quarter of 2014 was $135 million compared to $136.1 million in the first quarter last year. There was approximately $8 million less revenue related to transactions originating before 2011 in the first quarter this year as compared to the prior year.

On a GAAP gross margin basis as a percentage of revenue, we reported 60.3% gross margin for the fiscal 2013, as compared to 60.8% in 2012. On a non-GAAP basis, gross margin was 60.7% in 2013, and 61.4% from the prior -- compared to 61.4% in the prior year. The lower revenue amortization from pre-2011 transactions had an inverse -- had an adverse impact on gross margin for both fiscals 2013 and the first quarter of 2014.

Partially offsetting this downward pressure from the pre-2011 runoff are improvements in managing our supply chain resulting in improved product margins on shipments made during that period. Since revenue amortization has such an impact on our gross margin, I would also like to mention that our direct variable product margin is approximately 70% of product bookings.

For the first quarter of 2014, GAAP and non-GAAP gross margin of 62.4% and 62.6% respectively, compared to gross margins of 61.1% and 61.7% in the same period last year. Again, considering the pressures created by lower pre-2011 revenue runoff, this increase in gross margin reflects improvements in our operating efficiency as we execute on our operational initiatives.

In addition, we've also been very focused on reviewing deal fundamentals to ensure that deal structure has optimized our profitability and cash flow characteristics.

GAAP operating expenses for fiscal 2013 was $315 million, a reduction of almost $20 million from 2012. The lower GAAP operating expense is due to lower restructuring costs and operational spending, offset by increased expenses related to the restatement of about $21 million. The non-GAAP operating expense was $280 million, a reduction of approximately $13 million as compared to last year.

Operationally, we have been successful in lowering expenses, reflecting the many cost improvement initiatives that we have implemented over the past year and a half.

Our non-GAAP general and administrative costs increased in 2013, due to the investments in our finance and accounting organization, as you can imagine, and expenses related to the implementation of our cost reduction programs. For the first quarter of 2014, GAAP operating expenses were $74.6 million as compared to $74 million in the same period in 2013.

Q1 2014 GAAP operating expenses include $3.4 million more of restatement-related expenses as compared to the prior year. Non-GAAP operating expenses were $68.8 million in the first quarter of 2014, as compared to $70.6 million in 2013. This decline in non-GAAP operating expenses was due to savings resulting from operational initiatives, primarily related to lower headcount and personnel costs, as well as cost savings generated by our efforts on managing indirect procurement.

GAAP operating income for fiscal 2013 was $24.8 million as compared to $53.2 million in 2012. Non-GAAP operating income was $61.6 million as compared to $97.1 million in 2012. So while GAAP and non-GAAP operating income was down approximately $28 million and $36 million respectively, considering the $61 million reduction in operating income from lower amortization of pre-2011 revenue transactions, the improvement in operational performance that partially offset the lower amortization as a result of the transformation is pretty encouraging.

For the first quarter of 2014 non-GAAP operating profit was $15.6 million as compared to $13.4 million in the same period in 2013 in spite of $8 million of adverse impact of the pre-2011 revenue amortization burndown, again reflecting the conversion of our strategic and operational projects to a financial expression as well as the choppiness of revenue from some of the larger deals.

Now I'd like to turn to the balance sheet. So I will be -- for our purposes today I will be keeping the discussion mostly focused on Q1 although I will touch on our cash balance at June 30, 2014, as this is a metric that we have previously talked about in a prior release.

Our cash balance as of March 31 was $22.2 million. During the first quarter we saw a reduction of our cash from the end of 2013 primarily related to spending on the restatement and previous restructuring activities. Additionally during Q1 we made certain seasonal payments that are not expected in any material amount to extend into other quarters of 2014.

At June 30, 2014, our cash balance was $23 million. We had also -- we also had a $5 million draw on our credit facility for working capital purposes at that time. We expect to repay all amounts under our credit facility during the fourth quarter of 2014.

Accounts receivable of $58.4 million as of March 31 represented DSO of 39 days. However, until the amortization of pre-2011 revenue dissipates changes in DSO may not be entirely representative of working capital management effectiveness.

Inventory at the end of first quarter was $58.2 million, which reflects a reduction of almost $2 million from the end of 2013 and approximately $8 million from the same point last year. Our inventory continues to trend down as we improve sales forecasting and as we become more efficient in working with our supply chain.

Our annualized inventory turns for the first quarter were 3.5 turns as compared to 3.1 turns in the same period last year. Deferred revenue as of March 31, 2014, was $452 million which compares to $467 million at the end of 2013 and $541 million at March 31, 2013. Deferred revenue is significantly impacted by those pre-2011 transactions that we've talked about before which are being deferred and being recognized over a period of years.

Additionally, for those transactions originating after 2010 we are deferring a larger portion of those transactions than we had historically thereby contributing to the deferred revenue balance. We have also begun to share backlog information as an operational metric to help provide visibility into the total quantum of revenue that we have under contract that hasn't been recognized in the income statement. Backlog would include both deferred revenue but would also include future revenue that is under contract that hasn't yet been paid for by our customers.

Our backlog as of March 31, 2014, was $549 million. After normalizing for the impact to the pre-2011 backlog we saw an increase of $16.5 million in backlog from the end of 2013 further improving our revenue visibility.

So with that I will start to talk about some guidance for 2014. But before getting into that I would like to remind you of our earlier disclaimer regarding forward-looking statements.

Our intention is to provide guidance for the remainder of 2014 and update as needed. We initially provided guidance on our 2014 full year in our press release announcing the filing of our Form 10-K which I can reaffirm today.

We expect bookings for 2014 will increase approximately 3% over 2013 as we become more efficient in cross-selling and as we expand activities to include higher growth segments of the market. We would generally expect the velocity of our bookings growth to increase over time.

Because of the value proposition of our common platform, namely MediaCentral Platform, customers include Avid in more portions of their workflow. So we are now beginning to see larger, more competence of deals. While these types of transactions will drive future growth these deals by their nature are more binary and timing could impact quarterly results in the form of choppiness.

From a revenue perspective due to the declining amortization of pre-2011 revenue we expect revenue to decline about 5% compared to 2013 with a non-GAAP gross margin of around 59%. As we complete our strategic projects we've begun to see the benefits of cost efficiencies in the form of lower indirect vendor spend, wage rate arbitrage and rationalized discretionary spending. We anticipate this trend will continue for the remainder of 2014 and in fact into 2015.

We expect non-GAAP operating expenses for 2014 to be in a range of $265 million to $275 million. At the low end of this range this would represent approximately a $15 million or 5% reduction from 2013 and a $28 million, or 10% reduction from 2012.

Finally, non-GAAP adjusted EBITDA is expected to be in a range of $58 million to $65 million for 2014, or approximately 11% to 12% of revenue. Even with the impact of all the restatement related activity we believe that this adjusted EBITDA margin is virtually near the floor and will serve as a basis for our planning going forward.

Naturally as we layer the improvements from our operational transformation over time we would expect our margins to begin to expand. We would expect our GAAP to non-GAAP adjustments to be approximately $26 million to $30 million; once again, these include costs associated with restatement, restructuring expenses, stock-based comp, amortization of intangible assets and related tax adjustments.

So with all the progress the team has made in executing on growth, cost and cultural initiatives, it is no surprise that the impact is being reflected in our operating results and our guidance for the remainder of 2014. And as we kick off our 2015 planning process we are equally excited about seeing the collective effort of the organization being further translated in the financial results and consequently value for our shareholders.

So with that we will be happy to take questions in a moment. But first I'd like to turn it back to Louis for just a few closing remarks.

Great. Thanks, John. This past year and a half has certainly been challenging yet an exhilarating time for Avid.

We've had to work through a complex time and resource consuming restatement process and like to again congratulate John and the finance and legal teams on completing the restatement and acknowledge the extraordinary amount of effort that it took. This has been a long and complicated process and I am very proud of the team that worked so tirelessly until completion.

However, even while we were immersed in this process the Company never lost its focus. We've been executed well on our strategy of addressing the most intense issues that our customers face, building on our heritage and driving growth and profitability. We have made great progress, I think, in directing cost toward those areas that have a better return and the progress is showing in our results and the adoption of the newest products.

While our growth is tempered by the deemphasis in lower profit products it is balanced in higher profitability rates. Finally, customer engagement as demonstrated by the Avid Customer Association, is very strong as we demonstrate our commitment to working closely with the largest media institutions in the world to help solve their most pressing issues.

As you can see we have been very busy here at Avid and we have a high sense of urgency to help our customers adjust to the changing world. To date we have been pleased with the results and are equally motivated to redouble our efforts to accelerate the value creation we believe is possible.

On behalf of the entire Avid management team thank you again for your support and patience during the restatement. We are very pleased to finally be able to share the strategic and operational update with the investors.

The team is energized by the opportunity, encouraged by the early results and anxious to continue to execute our strategy. So at that time, operator, I will be happy to take questions.

(Operator Instructions). [Jeff Barjek, Coastrate Capital]

Good morning, guys, from the West Coast. Thank you.

Louis, so maybe just talk about longer term just maybe the opportunities and if it is still right to call it video versus audio. And then secondly what is the -- is the dollar spend that Avid has been missing and that you expect to capture, is that from new products you are developing, is it just I can't believe we are not selling more products to the same customers we already have, or does it reflect your sense of once you build a platform you're going to make acquisitions and sell into that?

Hi, Jeff, thanks for joining so early. Good to talk to you. I look forward to meeting you and spending more time in person.

I think it is really a factor of -- it's a function of all the things that you just described. So when we looked at the segmentation, where the dollars were being spent, what our market share was, we basically said how much are they spending in total, how much of what they are spending can we offer today, of what we are spending today and we offer today, how much penetration do we have? And in almost every category we were underperforming.

So number one, in the areas we are performing in today, the products we have today it is the slowest growing area of the total media value chain. So the creative side of the technology production workflow is not the bigger problem. The challenge is that they are needing to produce more than ever but the budgets are shifting to how to monetize, protect, redistribute through more channels and more devices.

And so when we looked at the media value chain, number one, we felt like we can have deeper penetration even in the products we have today through better cross-selling and better sales execution. But we really needed to get involved and think about how we can participate in those higher growth areas as we move through that value chain. And it was based upon those conclusions that we decided we needed a platform that can accommodate modules to participate within those same clients not only in the creative process but all the way to distribution and delivery.

And instead of even in our own products if you look at iNews and Pro Tools and Media Composer, etc., when we make changes we have to make it in each of those product suites. So the first thing we had to do mathematically was decide what things are common during the workflow of a media file whether or not it is for a broadcast, film, a piece of music or a game and let's put those technology tools on a common shared platform. And that does two things.

It makes it more efficient for us to make enhancements to the product categories we are in today. But then it also allows us to participate in new categories in a much more agile way and at a lower cost.

So when we launched Avid Everywhere the vision in 2013 with the white paper, kind of gave more details at IBC last year and then launched it formally five months ago, we actually had the platform available. Some of the modules that have been historically some of our strengths delivered in a more agile form. And then we launched new modules that allowed you to do for instance cloud-based editorial but also distribution and delivery, etc.

I think most recently examples of the connectivity toolkit, which essentially tries to eliminate one of the biggest problems the industry has, we estimate maybe 25% of the cost in the entire workflow is spent just putting all the pieces together. And the way it works today is if you are a vendor selling to John, our CFO, and John is also a customer of mine, you will write connections to my software. When it doesn't work for John they will call you, you will blame me, I will blame you, we are both wasting time and money and the customer is still unhappy.

So the way the connectivity toolkit works is let's just give them a wrapper of our tools. You will be certified on the tool. Once you create a connection I will certify it for a fee and then we will post to a marketplace.

Once I certify it part of that fee includes me taking those service calls, so we eliminate this confusion of who is responsible for whether or not this works. I think we are going to reduce greatly John's cost as a customer and he will then see the benefit of buying into the platform because everything is more seamless and integrated.

So that is an example of getting into new areas of the value chain, the connectivity toolkit, the marketplace, the distribution modules. These are examples of getting into the higher growth areas. So we want to do better in the markets that we are in through better cross-selling and better deal structure.

Also allow for different delivery. And then we want to expand into more of the workflow.

Second question that I wanted to address that you mentioned is the segmentation between audio. And I'm going to add another component, audio versus video, and then large enterprise versus independent professionals.

We really didn't have a chance to go after the independent professionals as aggressively until we had a subscription-based cloud-based offering which we recently announced. And you will see more of our offerings the cloud and subscription, have a cloud and subscription based option.

What we are seeing so far is our large media companies are pretty much staying on-prem. They are looking at our floating licenses and some subscription. If they go cloud they are more interested in private, not public.

If you move down market to the independent professionals where we picked up some of those clients but many of them didn't have an option. I think Frost & Sullivan announced through their last report last year that there was no high-end sophisticated editorial tool available in the cloud. The options that are available to that independent professional did not include Avid until very recently.

And so we now have a chance I think with our cloud-based -- so with the platform we can do better cross-selling in a large market and hopefully be more profitable through cross-selling once you get on the platform. In the independent professionals end now with the subscription and cloud-based offerings which will be increasing, we will be able to go after that segment that we really couldn't go after aggressively before.

Finally, if you look at audio and video one of the reasons the Company has struggled historically is they are on two different platforms. One thing we did with the Avid MediaCentral Platform was put a lot of the engines for both audio and video on the same platform.

This does two things for audio. It makes it more economically advantageous for us to stay in the audio market because we are now starting to share tools. And I think our S6 console, which has been doing pretty well for us, is a good example.

That is a fully digitized. So if you know about those consoles this is a componentized so you can make it larger and smaller. It is tactile with the touch buttons and also programmable screen.

So you kind of have the best of all. But the big thing it is fully networked on the platform. What this means is that file record can be shared through the video side of the house or the audio side of the house equally.

You can also on and off board that file record because it is sharing a common iOS platform. And that is one of the big advantages. Now we don't have to have this debate as directly, is audio or video better economically on a product profitability basis because they are now sharing many of the same tools making it easier for us to exploit both pieces of that.

I think on the audio side also the marketplace in connectivity where there is even more of a disjointed vendor community will make it more clear that you should be on the Avid MediaCentral Platform even if you are just working on the audio side and we can deliver that now more profitably. So I know that was a long explanation, so I think it was all of the things that you looked at, you asked about, and it's a function of the research that we have done.

We need to get better in the markets we are in, which is mostly large media and mostly on the editorial side. We can do better there and cross-sell more. With the platform we will even have a greater and greater footprint to sell to and it will address where the higher spendings are.

Two, with the delivery options we will be able to go down market without having separate products; it's on the same product platform. So that will -- we will be able to be more competitive and it still meets our profitability gates that we would want.

Third, with the audio and video now being on a common platform it allows us to be more aggressive in marketing to both without the same trouble we would have of assessing which is a better deployment of capital because they are sharing the same platform. So now we really get to focus mostly on where the best return on deployed capital in selling into each of those markets. So hopefully, I know that's a long answer, but hopefully that addressed your question?

One follow-up really quickly. Thank you.

One of the problems this Company has always had under any accounting regime is the ability to translate seemingly high gross margin products into operating profits. And obviously you have addressed, even though it is looking messy, some of the operating expenses and I think your quote was they are down 10% since 2012.

But my question is on the R&D side. I have never quite understood the level of R&D spend. And I know the Company has got any variety of R&D centers all around the world and just seemingly disjointed spend efforts.

And that was a huge number in dropping gross margin dollars down to shareholder dollars. What exactly going forward is either as a percentage of bookings or as an actual dollar cash amount spent on R&D in 2015, what is the right number?

Let me answer it strategically and then John will kick in on the right number, which is probably what you want. But let me remind you of the platform.

We were basically -- my conclusions were subscale at each product category. So even though some people would look at our Company and say hey with this sized company why don't you get more scale and return over R&D, one of the problems is because we were so siloed in our own product architecture just like the rest of the industry, we didn't have enough scale to get in my view an adequate return on R&D investment and it was hard to scale.

So by putting all of our products on a shared platform we will not only be more agile, we should be able to drive down the cost of innovation and take advantage of the scale that naturally should be available to us. So that is number one.

And you have seen R&D and you will see R&D continue to decline even as our innovation output increases and we get into new products because we now have a platform. That is number one.

Number two, we are making the shift -- the Company had historically been very tied to hardware. And as obviously we are moving toward an IP-based system and most of everything we have announced is IP-related, where we still have hardware it is integrated into the software elements.

And so you will see us see and feel and look and deliver more software like margins and part of the key is a platform that we can leverage. And those two will allow us to get into new areas with a better return on deployed R&D.

Lastly, we have instituted a series of financial disciplines to make sure it is more clear that we deploy capital in a way that has an adequate return and hold ourselves accountable. And I think those are the things I would say historically that maybe we haven't been as focused on.

And so we spent a ton of money on R&D in part because of the siloed natures but in part because it wasn't clear we were spending in areas that were growing. We were so desperate for growth I think they kept spending in areas that we were already in even though segments of the market are not growing.

So it probably wasn't the best use of capital. So those are some of the tools we are putting in place. And, John, if you want to address more directly his question, that would be great.

Sure. Good morning, Jeff.

So I think the comment that Louis made is absolutely correct. You will see that the overall costs will trend down over time.

Naturally we are not giving guidance for 2015 yet but I think it is fair to say that costs will come down. Having said that, we have a pretty particular ROIC, return on invested capital, filter in every one of the decisions we make around it.

And so we are very focused on the cash-on-cash return within say if you kind of put it in the frame of reference we spent roughly $95 million in the 2013 period. So we will be focused on cash-on-cash return.

And the reason that we are focused on that is we have this tremendous channel of distribution as a Company. You'll recall that we sell to nearly all of the largest, most important media enterprise companies in the world but our penetration is actually fairly shallow.

So that gets reflected in our market share that is say give or take mid single digits. And when you couple that with the statistics I gave earlier which is the MediaCentral Platform in a number enterprise deal is a little bit less than 10%, the cross-selling thesis becomes pretty important.

So I think for us the low-hanging fruit first was the kind of culture of the products, look at the returns on each, maximize the returns on investment that we are making. Overall the cost will come down over time, you will see that reflected likely in higher profitability. But really we are focused on getting the maximum return on every dollar of invested capital.

Thank you.

Jason Kraft, Cato Partners.

Hey, guys. Thanks for doing the call.

I've got a simple four-part question and I will speak very slowly on this. Using first-quarter 2014 as a baseline, what is the current maintenance revenue run rate and what in your view is an acceptable rate of growth on that balance going forward? What is the gross margin on that?

And your estimation, given we just talked a little bit about R&D, what percentage of your R&D expense applies to maintaining and innovating that maintenance stream? Thanks.

All right, so I will attempt to address your questions. So if I recall in our services line about 70% of our services line is related to support. So that would give you a frame of reference for how big the stream is.

As you can imagine, our gross margin on support is really not terribly different than anybody else's support. So you can interpret that as being relatively high gross margins.

And I think the way to think about R&D, and Louis may have a point of view too, but in the end the way to think about R&D is we deploy it based on return on invested capital, cash-on-cash return, to address the platform approach. I think it is a little difficult to identify the portion of R&D spend that pertains specifically to supporting the product.

Okay, and then any comment on what you think an acceptable rate of growth would be on the support balance?

Yes, what I can tell you is that we don't have -- there's three things I would highlight strategically. Number one is, we don't have enough penetration on our maintenance as we should within our customer base. So to me there's a lot of opportunity there.

Number two, as we rollout our subscription pricing obviously that will change the way you look at support, etc. The way we looked at R&D before and without getting into our accounting as an example that we just restated, I think that was somewhat a reflection of the culture which was that you just did whatever it took to continue to service that market without looking at the lifetime maturity of a given product set. And the reason I am bringing that up is if you look at product profitability one of the variables we look at is where the product is in the lifecycle efficacy and also the growth opportunity.

So if you have a mature product in a mature market you might expect a much much higher gross margin than you would on an invested product that we are just launching into a high-growth new area as an example. And so when you look at it that way if I were to break it down for you most of where our maintenance comes from are on our more mature products where I think that we are under penetrated in maintenance.

And I would expect that without much increase in R&D you should expect growth and higher profits. Now part of the problem there though is the pricing pressure and compression that is put on the business generated from the business model of our clients is that they want to spend less and less on how to create -- creating is not the problem, the business problem -- they still need to create great content.

That is clear and consumption is going through the roof right now, so that is the good news. The bad news is you have to keep creating great content, more collaborative at lower cost but where the real budgets are going up is -- and you have to deliver it with more channels and more devices in order to monetize and that is where the budgets are in the right.

And so the way it is impacting our clients and therefore us is so you are seeing budgets shift to distribution and delivery and monetization away from the creative side, which is where we are. So while I said that we are underpenetrated on maintenance, it is going to be tough to fight for increased dollars on that side. But we should have higher maintenance and we probably need to -- we are looking and have looked at product profitability and lifecycle efficacy.

I'm not sure it makes sense to spend a lot more on R&D there because A, the dynamic I just expressed to you and the overall budget changes there. It would be better to deploy that R&D dollars in the higher growth areas where budgets are expanding and now that we have a platform we will be able to do that.

So that is a long way of saying you should probably expect slightly higher maintenance rates that are very profitable because R&D will be coming down for some of those mature areas. That is why we did the anchor analysis. We wanted to know which of the anchors need to do higher cross-selling and make sure we are investing enough to get those anchors and the cross-selling should happen at a higher rate.

And then looking at profitability between the anchors and the complementary, gives us the view into where we should be deploying R&D dollars. And that's why John was saying it really depends -- that was his way of saying it really depends on where you are in that value chain and our assessment for us to give you a target for R&D.

Overall we think you will continue to see more operating leverage in the model. Total cost should continue to come down and we are working on a series of initiatives and you will see that in our 2015 guidance when we get to that.

Yes, and I think what I would also add, Jason, is if you think about it from a customer market perspective, the maintenance or support uptake on our largest enterprise customer is generally very very high. When I say very very high you can read (technical difficulty).

As you get into independent professionals, small post and the like, that support uptake rate is much lower, say circa 60%. So we have some room to grow there. And one of the interesting things that we are doing is you probably read about the fact that we now have a subscription-based product and as we grow in our subscription product and I don't want to overweight on it because it is not a huge segment of our business, but it is nonetheless strategically important, the implicit support rates are going to get much higher as we get more people onto subscription.

Okay. Thanks for the comments. Helpful.

And there are no further questions at this time.

Great. Thanks, everybody, for joining us. Look forward to talking again soon, bye-bye.

This does conclude today's presentation. We thank you all for your participation.