Avid Technology Inc (AVID) 2014 Q4 法說會逐字稿

Good day and welcome to the Q4 2014 earnings release call. Today's call is being recorded.

At this time I would like to turn the call over to Tom Fitzsimmons. Please go ahead, sir.

Good afternoon. I am Tom Fitzsimmons, Vice President of Investor Relations for Avid. I'd like to welcome you to today's call. With me today are Luis Fernandez Jr., Avid's Chairman, Chief Executive Officer and President, and John Frederick, Executive Vice President, Chief Financial and Administrative Officer.

Before we get started we want 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, backlog amortization, bookings conversion rate, cost savings and free cash flow, our future strategy and business plans, our product plans and our liquidity. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Also these statements are based on expectations as of today, March 17, 2015, 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 and the risk factors described in our reports filed with the SEC.

In addition, we have presented a number of non-GAAP financial measures that we use to monitor our business including non-GAAP operating results, adjusted EBITDA and free cash flow, all of which are defined and reconciled with comparable GAAP measure 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 how other companies present 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 or GAAP. 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.

We also reference bookings and backlog which are operational metrics we use to measure our business. Our definition of bookings and backlog are included in our SEC filings and financial press releases.

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 Chairman, Chief Executive Officer and President, Luis Hernandez, Jr.

Thanks, Tom. Good afternoon, everyone, and welcome. I am very pleased to be here today to provide a business update and review of our performance in 2014.

Over the past year, Avid has made some remarkable progress on our three-pronged transformation effort, which included the most sweeping product announcements since our inception with Avid Everywhere, our groundbreaking service approach with the Avid Advantage, and the launch of the Avid Customer Association, which some have called the largest most ambitious media collaborative network in the world.

As a result of solid execution, we have delivered on our commitment to drive improved financial results while also building a solid foundation for future growth and expansion.

You recall that our first priority in the transformation was to create sustainable EBITDA and cash flow growth by stabilizing our bookings, expanding our margins and executing our efficiency programs. The focus on products that address the most significant business issues the industry faces along with a targeted cost structure to drive growth and value has had a direct impact on our financial results.

Newer, high-margin products such as the Avid Media Central platform, new modules to subscription and cloud offerings and the expansion to adjacent market has not only produced higher margins and stabilized bookings, it has also allowed us to accelerate the shift away from lower margins and lower growth products. Once we fully work through this transition away from lower margin products, you should begin to see higher bookings growth and ultimately greater revenue growth.

This margin expansion along with the impact of the cost savings programs should convert into sustainable EBITDA and free cash flow growth.

We are pleased that we have been able to see meaningful progress on our key initiatives that we outlined. In fact, not only have bookings stabilized reversing a long-term negative trend, but in Q4 we delivered our highest bookings quarter since 2011, grew our revenue backlog by 19% over 2013, continued to shift towards higher profit products and executed on our continued cost savings. These efforts culminated in $72 million worth of adjusted EBITDA, which was at the high end of our recently increased guidance range.

We are also pleased that we converted about 18% of that adjusted EBITDA to free cash flow, which is more than double the conversion rate of the previous year; and in Q4, we had the highest quarter of free cash flow generation since 2012.

Also contributing to the adjusted EBITDA success was the $10 million of operating expense savings in 2014. As I mentioned earlier, full-year adjusted EBITDA of $72 million was at the high end of our recently raised guidance range. We accomplished these results largely from our higher margin products outperforming the rest of the suite, bookings and backlog converting more profitably to adjusted EBITDA, accelerating the adoption of the platform cloud and subscription offerings and continued cost reduction efforts.

In the six-quarter period ending Q4 2014, we reversed a trend of declining bookings by reporting year-over-year quarterly bookings growth in five of the last six quarters. This bookings stabilization is a clear sign that the transformation efforts have been successful despite the dampening effects of the restatement. Meanwhile, and perhaps more importantly, we are concentrating our efforts on the most profitable offerings and those central to our strategy of addressing our customers' most critical pain points. We conducted a deep review of our products and industry segments to determine which parts of the value chain were growing the fastest, which parts we were participating in, which products led to higher cross-selling and the related products or service profitability profile.

We use this review to direct our investment in sales efforts towards products we believe will generate more profitable growth going forward.

This strategy has allowed us to become more disciplined as we make product investments and evaluate individual deals in the sales process. We believe this discipline is reflected in the 7% annual growth of the higher-margin products on a constant dollar basis.

At the same time revenue visibility has also increased as backlog from transactions after 2010 has risen by about $72 million, or 19% since the end of 2013. On the cost side, we continue to see the impact of executing our cost savings projects; non-GAAP annual operating expenses have decreased by 3%, or $10 million compared to 2013 and we believe significant opportunities remain to reduce operating expenses even further.

We also achieved another quarter on both sequential and year-over-year free cash flow improvement. Q4 free cash flow was about $16 million representing an $8 million increase over 2013 and the highest quarterly free cash flow recorded since 2012 marking three consecutive quarters of material improvement.

If you convert that free cash flow to a per-share metric, we generated about $0.41 per share this last quarter as compared to $0.22 for Q4 2013.

Our full-year 2014 free cash flow of approximately $13 million represented a 129% increase versus the prior period. We believe these results demonstrate that the growth strategy we put in place is working. A solid performance in Q4 capped off a transformational year for Avid and has set the stage for continued momentum in 2015. And of course it goes without saying that we are excited to be back on NASDAQ and we are honored to ring the opening bell on January 16, which represented a ceremonial end to the restatement process that ushered Avid into its next phase of growth and success.

I can tell you we're excited about 2015, which represents both an opportunity to continue to execute on the progress we have made to date and a chance to break new ground as we roll out a steady diet of game-changing innovations.

Now John will discuss our 2015 guidance in more detail later but at a high-level we will be guiding towards a 1% to 5% bookings growth on a constant dollar basis, a roughly 50% to 150% increase in free cash flow and a flat to 8% increase in adjusted EBITDA.

Now as a reminder, we believe that we have hit the floor on adjusted EBITDA for both 2015 and future adjusted EBITDA should not drop below our 2014 results.

So that you fully appreciate the guidance, keep in mind that we will still be working through about $33 million of non-cash restatement related revenue headwinds in 2015 from the 2011 non-cash revenue amortization. We are pleased that the increased visibility has put us significantly ahead of schedule in terms of overcoming that revenue pressure.

Now as we have met the investment community it was clear that we needed to provide better visibility into the effects of the restatement, so we are pleased to present what we think is a fairly simple but effective approach to building our revenue models. John will spend a little more time on that later on this guidance.

I would now like to get a little more specific about how we expect to achieve our 2015 goals. We plan to continue executing on those parts of the strategy where we have already seen progress and expand our work streams to include new opportunities that will advance our overall mission of helping content creators and distributors connect with consumers more powerfully, more collaboratively, efficiently and of course more profitably.

We generally think that our addressable markets fall into three broad tiers. Tier 1 includes strategic and key accounts, typically enterprise-level accounts. These would be accounts such as NBC Universal, Disney, BBC and TV Global, for example.

Tier 2 consists of creative team, professional enterprises and institutions that include most traditional media types and non-media verticals. Examples of Tier 2 would include organizations like post houses, universities, film studios, houses of worship, local station groups just to name a few.

Tier 3 consists of the independent creative professional and enthusiasts and while we have historically focused on the top two tiers, the Tier 3 market thus far has been largely untapped by Avid.

We have identified several growth opportunities that we believe will yield the greatest return. For Tier 1 and 2, we are focused on driving the adoption of the Media Central platform and then cross-selling and up-selling higher-margin products across the entire workflow. We plan on building our creative suite by adding more and more applications to address the rest of the media value chain in a lower cost and more powerful way.

For Tier 3, we will be launching a series of new products including subscription and cloud offerings. This is a new area of focus that has already brought us thousands of new customers and opens the door to an almost $2 billion market not previously targeted. Today the volume of creating content and demand by consumers and the population of artists producing that content are at all time high and we want to provide everyone with the tools to tell their story.

Imagine that aspiring independent video professional just getting started could easily have access to the same tools that are used for television shows of the highest production qualities such as Game of Thrones, or movies such as Birdman or American Sniper for only $49 per month via our cloud subscription model.

Or the indie recording artists who can create music using the same workstation as Pharrell Williams, the Foo Fighters or Katy Perry for only $24.99 per month. What is even more exciting though I think is all those aspiring artists who can subscribe to our entry-level offering for free with the recently announced ProTools First.

With Media Composer and ProTools cloud-based subscription offering, creative artists at all levels now have the ability to use the best tools at a pricing model that works for them. You can expect to see us continue to make more of our portfolio available on a cloud subscription basis in the future.

Next, the Avid Marketplace will allow everyone on the Media Central platform to engage with a community of artists, have access to plug-ins and apps on the app store easily store and share their work for cloud collaboration and storage as well as buy and sell media assets on the content marketplace. The Avid Marketplace allows artists to distribute, be recognized for and be paid for their work by providing a safe and secure cloud-based platform to monetize their assets among a massive global network of potential purchasers.

The Avid Marketplace really is about engaging and growing the artist community, which is a key to creating meaningful value to the various monetization channels available to us. The Tier 3 community not only can connect globally with each other but easily participate in the rest of the value chain with our Tier 1 and 2 media companies. We see a powerful ecosystem for anyone who wants to participate in media and a lifetime value of that customer can be very significant.

Our free ProTools First offering is a good example of how we can efficiently accelerate community growth ultimately leading to upgrades, marketplace transactions, cloud storage and other revenue opportunities.

Another important component that we've mentioned before is the development of the connectivity toolkit, which spans all customer tiers. This tool allows third parties to create applications and plug-ins that leverage those common services on the Avid MediaCentral platform. These are tools built by partners so that their solutions interact with Avid products as if they were one of our own. These can span from high-value workflow tools used by strategic enterprise customers such as newsroom graphics to a single audio plug-in aimed at ProTools First user and sold in our community marketplace. A great example is our recent announcement that Avid's shared storage system now supports Adobe Premiere Pro. This unprecedented collaboration delivers the openness of Avid Everywhere.

With the connectivity toolkit, we are able to offer even more solutions across the workflow and participate in a large portion of the overall media ecosystem.

In connection with identifying these growth engines and better defining our accessible market, we have aligned how we go to market to coincide with each of these tiers. In Tier 1 and 2, we leverage both our direct sales force and our broad resell and distribution networks to continue to drive platform adoption and cross-sell activity. We recently rationalized our partner network to better align with the highest performing partners and we have invested in these partnerships through increased training and improved commercial terms designed to specifically align incentives with our strategic goals.

In Tier 3, we will employ a focused digital strategy designed to attract, engage, convert and enthuse those independent professionals that are new to the Avid family.

Now turning to the operating model, we've also been laser focused on creating a leaner more directed cost structure. Our migration to a common platform architecture has enabled us to drive efficiency while increasing the speed of new products to the market. And while we have been successful thus far in reducing operating costs, we continue to see opportunity for increased savings of between 1% and 4% in 2015.

So I hope this update was helpful in demonstrating execution on our strategy and areas of focus for 2015. You can see that we have been very busy and are pleased that we've delivered on our commitment initiatives such as sustainable EBITDA growth, greater future revenue visibility, an efficient cost structure and improved cash generation.

Our bookings reflect a focus on high profit, higher growth products resulting in sustainable EBITDA and a growing backlog of recurring revenue. This provides the foundation for our next phase where we optimize existing growth engines and turn to new ones including assessing the multibillion-dollar independent professional market through our Tier 3 strategy.

Our well-defined growth engines and efficient operating model provide an outstanding platform for both organic sustained earnings growth and for future acquisitions. Again, the difference that we feel we make in this rapidly evolving media landscape is enabling the connection between content creators, distributors and consumers, more powerfully, collaboratively, efficiently and profitably. We are building on our heritage and addressing the most important issues to drive value for our community and our shareholders.

So with that I would like to now turn it over to John Frederick to review our detailed financial results. John?

Thanks, Louis. Before I get into the discussion of my financials, I wanted to remind everybody about the reason we have for the timing at our conference calls.

As you know, the Company has undergone tremendous changes and the financial expression of our business has developed meaningful complexity due to the impact of the restatement. To address that complexity, we have over the past few calls provided for additional time between filing our materials and holding our investor call to allow for some additional time for investors to absorb the materials.

Additionally, we produced a series of videos to help you better understand the business with the newest one being posted today, which provides help in modeling the Company's revenue. In the near future, we will be adding another video to help frame the Tier 3 market.

We have received some great feedback from our investors on the video series and we will continue proactively posting informational videos to update our investors on our strategy, vision and plans.

And finally, we've been actively engaging with existing shareholders as well as prospective shareholders, which we'll continue to do to help them understand the power of this opportunity we have here at Avid. That said, as we exit 2014 now that we have dealt with some of the most intense complexity, we will be evaluating the best time to adapt to a more typical filing [con-call] cadence, that is filing after the close of trading and having the call shortly thereafter.

So as we reflect on 2014, we are pleased to have made so much progress on our strategic plan and that our financial results reflects this progress. As Louis mentioned and as I want to reemphasize, in 2014 our key goals were to first, stabilize bookings while using product profitability as a guide to deemphasize less profitable products and emphasize more profitable platform-related products.

Second, use a combination of improved product profitability in a leaner more directed cost structure to generate sustainable adjusted EBITDA growth. And finally, improve cash flow conversion of EBITDA into free cash flow. Our results are in line with those targets and establish a solid baseline from which to build towards 2015.

Adjusted EBITDA of $72 million was at the high end of our guidance we provided in November. While on a year-over-year basis, we continue to have a difficult comp because of the pre-2011 deferred revenue runoff, we are ahead of where we expected to be and continue to convert more current bookings to revenue.

Annual bookings were $519 million as we closed the year with our strongest bookings quarter in three years. Due to the strengthening of the dollar, we experienced currency translation pressure, particularly on the euro and yen denominated business, which muted our performance somewhat. That said, bookings were flat on a year-over-year basis on a constant dollar basis.

Currency movements in 2014 had a nearly 1% unfavorable impact on our bookings growth rate for the year. We ended the year with $25 million of cash with nothing drawn on our asset-based revolver. Free cash flow for 2014 was $12.7 million, or more than double the $5.5 million we generated in 2013. We converted 18% of adjusted EBITDA into free cash flow in 2014 as compared to a 7% conversion rate in 2013. So a significant improvement.

As I have discussed in the past, our cash flow is heavily influenced by the timing of deal closure and the mix of bookings within a quarter, which I will discuss in a little bit more detail in a moment. The impact of timing and mix of bookings as well as the stronger dollar pushed cash flow results somewhat below guidance.

Revenue for 2014 was $530 million, which was down 5.9% from 2013. Again, the significant strengthening of the dollar against the yen and the euro pushed the results slightly below our guidance.

Gross margin of 61.6% was higher than expected as we continue to shift to more profitable products. When comparing against the prior year, our success stabilizing bookings with higher-margin products helped offset the bottom-line impact of the pre-2011 deferred revenue burn down.

Operating expenses of $270 million was consistent with our guidance and almost $10 million less than 2013.

So with that, now I will turn to the key financial metrics for the fourth quarter. Q4 bookings were $153 million on a reported basis and as I mentioned, were the highest since Q4 2011. The bookings were heavily weighted to later in the quarter, which impacted cash flow timing and was a factor in free cash flow results being below guidance.

We saw a continuation of a multi-quarter trend toward increasing contract support bookings both on an annual and multiyear basis. We believe the trend to a multiyear support contract reflects our clients' acknowledging the platform's strategic relevance to their businesses and continued improved service resulting in longer-term commitments and improved future revenue visibility.

In addition, we had encouraging adoption of annual support contracts by Media Composer and ProTools users. In fact, we had over 90,000 ProTools and Media Composer software related annual contracts sold in the fourth quarter alone.

As I mentioned, the currency pressure we experienced was significant but on a constant dollar basis, the fourth quarter bookings were up 4% on a year-over-year basis while on a reported currency basis, they were up about 2%. We talked a lot about the focus on higher profit products and if you highlight the sales progress on those higher-margin products, we saw 7% growth on a constant dollar basis over the prior year, again outpacing the rest of the portfolio.

We are continuing to convert more and more of adjusted EBITDA to free cash flow as free cash flow in the quarter was $16 million, which represents the highest quarter free cash flow since 2012. It was $8 million higher than the third quarter and almost double the same quarter last year.

Adjusted EBITDA of $14 million was at the high end of our guidance coming out of Q3 and although it was down from last year by about $5 million, if you consider the $10 million of pre-2011 deferred revenue amortization headwind, the operating performance actually improved. As a reminder, this headwind will continue to impact results through 2016.

We talked recently about the product -- about the progress of our subscription base. As a reminder, we launched our subscription offering for Media Composer in May of 2014 and experienced steady adoption since even without the benefit of heavy marketing support. We ended 2014 with over 5300 subscribers, which represented a 65% increase from the end of 2014 -- sorry -- from Q3 2014 and from the end of February, we were up about 7000 Media Composer subscribers, most of which who are new customers.

We believe that many of these were Adobe customers who are now opting for more professionally oriented solutions at the same price point as the Adobe offering. And now that we have launched ProTools Cloud subscription and Collaboration in Q1, we will be much more aggressive with our digital strategy and related digital marketing efforts. And we will be certainly giving additional marketing support to these new offerings.

I will now shift to our operating results on both a GAAP and non-GAAP basis for the fourth quarter. As a reminder, the tables in our press release provide a description and a reconciliation of non-GAAP to GAAP results.

Revenue for the fourth quarter was $128.2 million as compared to $147.1 million for the same quarter last year. Much of this decrease was related to lower amortization from the pre-2011 period.

We also saw a mix shift towards longer-term contracts that closed late in Q4 and while they may not have been immediately accretive to revenue, they certainly helped drive an increase in revenue backlog by almost $72 million from the prior year, which improves revenue visibility and is very a profitable increase in revenue backlog.

GAAP gross margin for the fourth quarter was 60.6%, which represented an increase of 140 basis points from the prior year. Non-GAAP gross margin was 60.8% for the fourth quarter and was 130 basis points higher year-over-year.

We continue to focus on a leaner more directed cost structure and as a consequence, our nonmaterial cost of sales for the quarter was down meaningfully on a year-over-year basis.

We also experienced stronger direct product margins as we accelerated the growth of higher margin products and deemphasized those with lower margins. GAAP operating expenses were $80.3 million, down about $5 million from the fourth quarter of 2013.

Operating expenses included about $3.9 million of restatement related expenses as compared to $8.2 million in the same period last year. These lingering restatement expenses largely relate to continued investment in our systems and some accounting and consulting and process remediation related to significant deficiencies and material weaknesses we identified throughout the restatement process.

Non-GAAP operating expenses of $67.5 million were $5.5 million or 8% lower than the fourth quarter of 2013 as we are clearly seeing the benefit of our strategic initiatives to drive a leaner more directed cost structure. We've seen lower costs in almost all areas of spending including compensation, travel, hardware development, communications and consulting just to name a few and expect to continue to see this trend into 2015 but more on that in a bit.

Non-GAAP operating profit for the quarter was $10.4 million as compared to $14.4 million in the same period last year. Again, lower operating expenses and a higher gross margin as a percentage of revenue helped mute the negative effect of the restatement accounting.

So next I will turn to the balance sheet. As I mentioned earlier, we ended the quarter with $25 million of cash and no draw on our available line of credit. Accounts receivable of $55 million represents DSO of 38 days which is consistent with last quarter and last year. It is important to note however, that until the amortization of the pre-2011 revenue dissipates, changes in DSO may not be representative of working capital management effectiveness.

Inventory of $48 million was down 20% as compared to the end of 2013. Our annualized inventory turns for the fourth quarter were 4.2 turns as compared to 3.5 turns in the same period last year.

We've made significant progress over the past two years in managing inventory and we believe we can continue to improve turns but would expect inventory improvements to be more modest in 2015.

Deferred revenue was $415 million at the end of 2014 as compared to $467 million at the end of the prior year. Deferred revenue was lower due to the amortization of pre-2011 transactions masking the growth from more recent sales activity. In fact, if you were to exclude the impact of these transactions, our deferred revenue has increased over $39 million or 14% in the past year.

Revenue backlog was $540 million at the end of 2014 as compared to $559 million at the end of 2013. Again, if you remove the impact of the pre-2011 deferred revenue, revenue backlog grew almost $72 million or 19% to $455 million in the past year, reflecting the continued trend towards increased revenue visibility.

Speaking of our balance sheet, I am sure you have taken note of the recent consolidation trends in what continues to be a highly fragmented industry. Central to our value creation strategy is the ability to consolidate other market participants onto our common platform and in the process expand our coverage of the media value chain. We believe that in order to execute on some of the strategic growth initiatives we may need to raise capital. But given the current nature of the debt markets, we see an opportunity to put some debt capital to work on targeted transactions.

Next I'll turn to 2015. Consistent with our historical practice, we will provide annual guidance and then update you on a quarterly basis. However, before I get into the specific guidance for 2015, I will touch on the impact of changing currency rates on our business.

Like many other US companies that do business globally, we've been impacted by the strengthening dollar causing our sales denominated in foreign currency to translate at a lower conversion rate. Approximately 60% of our revenue is transacted outside the US and about one-third of our bookings are transacted in currencies that are primarily the euro, pound sterling and yen. We have sales offices and development centers around the world which provides some natural hedge to profit against the strengthening dollar, however.

We also monitor our local pricing for changes in the macroeconomic conditions and can adjust as appropriate. That said, a strong dollar mutes our performance on a reported currency basis.

So with that as a backdrop I would like to discuss our guidance for 2015. I will first start with our three key metrics, adjusted EBITDA, free cash flow and bookings.

As we mentioned on our last call, we expected the low end of the 2014 guidance of $64 million to establish the floor for adjusted EBITDA. That said, based on the 2014 results and the outlook for 2015 driven by our expectation of a continued shift to higher-margin products and the availability of incremental cost refinements, we expect our 2015 adjusted EBITDA to be in a range of $72 million to $78 million, perhaps with a slight bias to the higher end of the range.

We expect free cash flow generation to be in a range of $18 million to $30 million as compared to the $12.7 million we reported in 2014. This reflects an adjusted EBITDA conversion rate of 23% to 42%, which would be a substantial improvement over the 18% in 2014 and the 7% in 2013. We expect annual bookings on a constant dollar basis to be up between 1% and 5% for the year. If the exchange rate stayed at current levels we would expect that the translation of reported results headwind could be approximately 2 percentage points.

I would also like to mention that our quarterly skew may be tilted a bit towards the second half of the year as we fully implement our digital strategy for Tier 3 customers and the normally strong fourth-quarter seasonality.

Turning next to the P&L, we expect 2015 to be from flat to up 3% from last year as more of the building backlog converts to revenue. This is in spite of the continued reduction from the pre-2011 amortized revenue. In fact, we expect about another $33 million less of this revenue amortization in 2015, further highlighting the growth in new cash generating profitable bookings to revenue. I know the impact of this amortization has proven to be a challenge for the investment community in creating a financial model for us here at Avid and in just a moment I'll provide some suggestions to simply and effectively break down the primary drivers of revenue. These drivers should prove to be the basis for building what we think to be a reasonable revenue model.

We expect non-GAAP gross margin to be between 60% and 61% consistent with our 2014 performance even with reduction in pre-2011 revenue amortization. Non-GAAP operating expense is expected to be flat to down 4% as compared to 2014. We expect to realize the full effect of cost programs that we started and implemented in 2014 as well as capitalize on some new cost refinement projects in 2015 like our wage rate arbitrage projects that we have going currently.

GAAP to non-GAAP adjustments are expected to be approximately between $17 million and $20 million. As a reminder, these items include costs associated with stock-based compensation, restatement and restructuring expenses, amortization of intangibles and tax related adjustments.

As it relates to capital spending, we anticipate that 2015 capital expenditures will be between $18 million and $20 million. This is an increase over 2014 and is largely influenced by the investments in our digital marketplace strategy and facility and infrastructure builds in lower-cost regions as we execute on our wage rate arbitrage projects. We believe that both of these investments have compelling return on investments in the near-term.

As we traveled the country this past fall meeting with investors, we heard consistent feedback about the need to offer a better predictive methodology for modeling our revenue. Given that pre-2011 revenue was a material yet declining portion of our revenue and that simply excluding this revenue is not reflective of our operating performance, we have certainly taken that feedback to heart. I will walk through some of the components now as a way to think about our revenue modeling but we are also posting an illustrative example on our IR website shortly after the call.

There are two primary components in our revenue in any given period. First, revenue backlog that converts to revenue in the period, and second, revenue from current period bookings. We have disclosed revenue backlog at the end of 2014 in our earnings release supplemental schedules along with the annual amortization of that revenue backlog. As a reminder, included in our revenue backlog includes revenue to be amortized from periods before 2011, revenue to be amortized from periods after 2010 and backlog. We have historically not provided an amortization schedule for revenue backlog but have included one in the supplemental schedules to our earnings release and in a revenue modeling presentation on our investor relations webpage, which will be posted shortly.

We find it useful to break up revenue backlog as the pre-2011 deferred revenue is relatively fixed and will roll into revenue at known amounts every period. For the period after 2010, this amount of amortization changes every period as we add new bookings to the total. The last piece is simply the conversion of current bookings into revenue and in our suggested model we would provide an assumed conversion rate to apply the forecasted bookings. This conversion rate would indicate how that revenue gets recognized over time and is based on our current product mix but it is certainly subject to fluctuation as that mix changes.

So for example, of our 2014 ending backlog of $540 million, we disclosed that we expect $289 million to amortize into revenue in 2015; $151 million to amortize in 2016; $62 million in 2017 and so on. We expect that 47% to 48% of our expected 2015 bookings range will convert to revenue during 2015 with the rest going into backlog and recognized over the following years. That math adds up to a range of $530 million to $546 million for 2015 revenue, which aligns with the revenue guidance we just provided.

It also allows someone to model out the future years as well by applying an assumed conversion rate to future year's bookings. We certainly hope that the formula provided provides some assistance in revenue modeling. Of course actual conversion of backlog in bookings into revenue in the future may vary meaningfully from rates in prior periods and from the rate we've assumed for purposes of our 2015 guidance.

Also currency changes will impact the results but at least this will hopefully provide a useful framework. Again, please refer to the materials that we posted on the IR website that we will be providing here shortly in terms of an illustrative model of our suggested formula.

Of course we will be happy to field questions off-line as you all work through your individual models.

So with that, I will turn it back to Louis for some closing remarks.

Thanks, John. We are very pleased to have delivered on the initiatives that we outlined before, stabilization of bookings, shift to higher-margin products, execution on our cost savings programs, reworking our channel partner strategy and launching strategic new products and services. This work has laid the foundation for creating sustainable EBITDA growth and cash flow generation in the coming years as we optimize existing growth engines and turn to new ones including assessing the multibillion-dollar independent professional market through our cloud-based subscription and collaborative community marketplace.

Ultimately, this is about driving value for our customers and of course our shareholders by solving the industry's biggest issues in a unique and compelling way, enabling that connection between content creators, distributors and consumers more powerfully, more collaboratively, efficiently and more profitably.

So on behalf of the entire Avid management team, thank you again for your support and we look forward to talking to you again soon.

At this time we would be happy to take questions. Operator?

Thank you. (Operator Instructions). Stephen Frankel, Dougherty & Company.

Maybe we could start by sizing those late signing maintenance contracts that you got in Q4.

Yes, so let me talk about it in the context of the full-year and then I want to talk about kind of how the timing of bookings overall went through the fourth quarter.

First, with respect to bookings in support contracts, we had a pretty significant uptick on a year-over-year basis. In fact, we went from roughly $107 million in maintenance last year to about $130 million this year. So we were up about 21% to kind of put the growth rate in perspective. And then fourth quarter was a little bit unique in terms of the timing of bookings within the quarter. About 74% of our bookings happened in the third month of the quarter. In fact about half of our bookings happened in the last two weeks of the quarter, so it was quite backend loaded.

And then you talked a lot in your prepared remarks about these new higher-growth, higher-margin products. Can you give us an idea of what percent of 2014 bookings were represented by these product families?

Sure. So as we began the year, marketed products -- I will flip it around and talk about the non-marketed products. We began the year with non-marketed products being give or take under say 10% percent of total bookings and that number declined during the course of the year and has progressively gotten smaller.

(multiple speakers)

As it relates to the higher-margin products, specifically, these are the products that are really related to things around the platform, so for instance, it would be anything like, any new software around the platform, the MediaCentral platform, literally anything that is attached to the platform. All are highly biased toward software solutions which have traditional software margins.

So what percentage of bookings do they represent?

The marketed products is more than 90% of our total bookings. The platform related products would be give or take roughly three-quarters, maybe 80% of it.

And then would you be saying that all of those are constituted at these higher margin, higher growth products? So you've made this transition already?

We are down to the last -- yes, we are down to that under 10%, basically. We went through a review, Steve, of every existing product, its growth attributes, where it lied in the value chain and what its margins were and then every new product that we have launched has to meet a specific economic criteria and it is those two that we would call actively marketed products that are the growth products.

Now we had had a portion of the product suite that we discontinued immediately, essentially. Not formal discontinued from an accounting sense but deemphasized immediately and another approximately 10% that we over time wanted to de-emphasize. And because of the success in the new products primarily we were able to deemphasize those at a faster rate and the trade was stabilized bookings but that's why you have seen the margin rates come up combined with the cost savings has resulted in the EBITDA growing at a much faster rate.

I guess my initial reaction is I would think that these newer higher growth products could grow bookings faster than 7%, or do you think that is just kind of the market rate we should expect?

I think first as you know in our industry, those are very healthy growth rates for the heritage part of our business and what we are trying to do is continue to launch new products, which should see -- continue to experience higher growth rates than the industry average on the creative side. As we move into the distribution and monetization side of the value chain, those growth rates tend to be much higher. Those are double digits up to high double digits. And so I think what you would want to pay attention to is right now we are launching new products that extend our anchor products on the creative side and we are trying to connect all the way to distribution and as we continue to launch more and more products, we will move to the right of the creative side and those will result in -- should result in higher bookings rates.

And so you have seen us launch our strategy way back in 2013. We then had a technical white paper. We then launched the first platform and applications in April 2014. We came right back at IBC, a whole new slew of products. Here at NAB was the first time we got into the Tier 3 very aggressively with our first product, our subscriptions offerings, etc. And then at NAB coming up, will be the next set and you will see a steady diet of new applications and the growth rates should shift as we move over.

What we wanted to start out with was those products that can build off our anchor heritage products so that our cross-sell rates were much higher because they were things that our clients and decision-makers were used to doing. The only other thing I would add is, Tier 3 is white space forest for the most part and once we begin to actively market there, I would suspect that you may see higher growth rates.

And then that is certainly not baked into our forward-looking projections in any material way.

Because we don't have a lot of experience there, I think you could see we have been pretty conservative and that's why you saw even last year our guidance raise and then we went to the high end of that. I think that's the kind of profile that we are going to have as a management team is always being conservative. John mentioned on the bookings that we are biased towards the high end of that range -- I mean on the EBITDA -- the high end of the range. And as we get more comfortable and see traction here, we will reflect that in any guidance we provide.

I think it is helpful to remind ourselves kind of where we started when we joined here. Bookings were in 2012 declined about 11%. 2013 declined 4% but really the first half decline -- they actually rebounded and we started to grow after we started the transformation. So if you kind of take out the change in strategy, 2013 would have declined much more than the 4%, so the lead in was we were really starting out at a point less than zero on a decline rate basis.

Okay, and then a last one. Would you care to give us a preview of what you are going to be talking about and showing at NAB?

I can give you a high-level at the level that we have been talking about with clients, so everything I am about to say is stuff that I've already said publicly to our clients.

First of all I've been on the road, Steve, for about eight weeks. I just got back last night from Dubai. We have been talking about the subscription ProTools, the first free version of ProTools and what that means to cloud-based storage in the marketplace. We've also talked about our metadata module to ensure that artists get paid. It is an encrypted module that you have to have so that if it shows up on YouTube we know who the artist was, what session it was from and when it was created, really fighting for artists.

The things that we have hinted will be coming to NAB is everything on our artist suite will eventually have a free version. As you know, the free version of ProTools is a professional grade but has limited capabilities. You have three projects, three storage you can work on, limited plug-ins and limited tracks. The reason that is important is once you collaborate with somebody else, if they don't have ProTools, they can download it and immediately began working. Once they have tested out the three projects they were either have to upgrade or they will have to buy storage and plug-ins from us and it's a way to engage also tied into our educational strategy, which we signaled is also coming shortly.

You will have more first products coming. You will have our educational strategy most likely. We've signaled to people that there will be some enhancements to our media suite which include the asset management where we have a very strong position and that is a higher growth area we would like to capitalize on.

You will also see some storage announcements and hopefully a series of other announcements that will fully demonstrate that we want to connect the creative process to the consumption of the asset around the content marketplace, the app store, etc., some of these very new areas that people are not used to seeing Avid deliver.

So that's a high-level preview of some of the things we've talked about publicly with our clients.

Okay, great. Thank you. I'll let somebody else ask some questions.

James Medvedeff, Cowen and Company.

I wanted to ask -- just dig a little bit more into the three-tier strategy. So the first tier, the enterprise level, what would you say your penetration rate is at the customers that you've already -- what would you say the penetration potential might be, unpenetrated potential, at existing customers?

The way I would think about it, James, I will start and then John will add. But first of all, Tier 1 accounts on our heritage products we have very deep penetration, so what we are trying to do expand the wallet share into the rest of the workflow.

So to give you an example, a major film studio is going to be probably 100% of the top studios use us for our creative tools. If you go into news and production, it is probably between 70% and 80%. If you go into paid audio files or major recording studios, you're probably talking around 70%. Now that penetration rate is only for a very narrow piece of the workflow being the creative suite. And as you know, we started by taking a piece of film, for instance, converting it to a digital file record. Now that the entire workflow has been digitized, we think there is anywhere between 3 times and 10 times the amount of spend occurring that we can participate in by launching new apps that extend off our creative suite sharing a common services layer, which is called the Avid MediaCentral platform.

For Tier 1, the strategy is we have long-term relationships with thousands of the largest media companies in the world. We are anchored there and after they finish with our file, that file goes through a series of other steps before it is consumed by you. And what we've been adding is continued to expand the products so that we capture more of that wallet share. So we have high penetration rate in the products we have today but we want to extend that wallet share over time. That is the strategy for Tier 1.

For Tier 2, it's similar except they need less of the entire suite, they want to pick and choose their anchor, where they participate in the ecosystem, sharing the same service platform that Tier 1 does and then cross-sell from there. So it's less of an enterprisewide sale. It starts with a specific functional usage and then expands from there.

Tier 2 what's important there is our channel strategy. We have recently as we mentioned before, rationalized those channels and reduced almost half of the partners and now are investing and trying to get them to act as one organized sales organization where we can push through campaigns and products globally. So that was just completed at the end of the year. We are just rolling out campaigns now to the same thing, launch new products, capture more wallet share from our anchor tenancy.

And then Tier 3, total white space, open opportunity. We really only participated there opportunistically and we are now launching a very aggressive digital strategy. We needed to get the platform up. We needed to get subscription for Media Composer and now for ProTools and with our first product and you will see more along with the marketplace and cloud-based storage, we have a way to price and package to really go aggressively after Tier 3s and that should be white space, primarily and that is the piece that John was mentioning. It's not really built in in any aggressive way into our models. We just felt like we don't have enough experience to call out what is possible there. But we are obviously very excited about the opportunity given the size of that market, which is just under $2 billion by our estimate.

So that gives you hopefully a high-level view of each of the tiers.

And so if you try to wrap some dollars around it and look at our market share for Tier 1, Tier 2 in total, the total workflow is say give or take a $54 billion to $55 billion market. We participate in about an $8 billion segment of that $54 billion or $55 billion market with about a 6% or 7% market share.

So reflecting on what Louis said, when you have the anchor tenancy, it makes it a bit easier for you to cross-sell and upsell across the value chain and because we are able to do that in a relatively efficient way, having that anchor tenancy it makes it easier for the access the rest of that $8 billion market.

I can tell you that once our clients are on the platform, which you have heard, they start involving us in very strategic conversations. For instance, let's say security has become a big issue with some of the studios. That file usually starts off a camera with our software. After that it continues on its journey. Well if you were going to add encryption, ghosting, watermarking, the sooner in the value chain you add it the better. So rather than going to a separate vendor who will have another siloed solution, why not just deliver that through another application on a common suite of ours as an example of the kind of interest that our clients are having now that they have bought into the platform approach.

And so not only have we launched products already that we are cross-selling, there is going to be a steady diet of apps that make it more efficient and more powerful to do earlier in the cycle because of where we lie in the total workflow. And that is what we are trying to capitalize on and I would say that given the sales of the platform, you can anticipate there's a lot of conversations we are having in addition to the products we are launching where people would rather do it on a common service platform because it is cheaper and its earlier in the workflow and a just makes it easier to do when you start earlier in the cycle.

Great. Thanks. That's really good color. So in many cases this deeper or this cross-sell/upsell may not even include -- require you to displace another vendor, it is sort of white space within your existing customer base. Is that fair to say?

There are some examples where we would be replacing a vendor. Other times that it would be white space depending on what the feature and function is. And then separately, don't forget we had this Connectivity Toolkit. We believe that 25% of the budgets are wasted just connecting all the pieces because there's so much proprietary technology connecting this workflow. So even if you don't use us in a piece, if you have our platform, you can use the Connectivity Toolkit and more efficiently connect the other pieces whether or not it is our product or somebody else's.

We've announced 22 certified vendors. We recently announced Adobe. And the point is is that for all those Adobe clients, the problem is not a better editor, a better piece of storage, a better ingest, a better play out. It's the entire workflow more efficiently and we provide it with a platform a way to do that.

Great. Just one more on gross margins. The delta between the anchor type products and the new products, is there a way that you can characterize which class of products, or which class of customer is the higher-margin and what the delta could be between the high and the low end?

Well, if you are talking about it as a percentage gross margin because they are mostly software applications, the margins tend to be quite high around products around the platform. So it would be kind of traditional enterprise software sort of margins generally.

Okay, that's great. Thanks again.

That will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Fitzsimmons for any additional or closing remarks.

I'd like to thank you all for joining the call today and we look forward to seeing you soon.

Thank you.

This does conclude the conference. We thank you for your participation.