Avid Technology Inc (AVID) 2017 Q1 法說會逐字稿

Good day, and welcome to the Avid Q1 2017 Earnings Release Call. Today's conference is being recorded. At this time, I'd like to turn it over to Robert Roose, Director of Investor Relations. Please go ahead.

Thank you. Good morning. I'm Robert Roose, Director of Investor Relations at Avid Technology. Welcome to our Q1 2017 earnings call. With me today are Louis Hernandez, Jr., Avid's Chairman and CEO; and Brian Agle, Avid's Senior Vice President and Chief Financial Officer.

On our call today, we'll be using both non-GAAP measures and certain operational metrics, both of which are defined in our Form (inaudible) 8-K and supplemental financial and operational data sheet available on our Investor Relations web page. These non-GAAP measures are also reconciled with GAAP measures in the slide deck that accompanies this call. The tables to our press release and in the supplemental financial and operational data sheet available on the Investor Relations section of our website.

I would also like to remind you that certain statements made on this call are considered forward-looking statements within the meaning of the securities laws such as, for example, statements about expected future operating results and financial performance and the progress of our transformation. Forward-looking statements are inherently uncertain, not guarantees of future performance, and are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Any forward-looking information relayed on this call speaks only as of this date, and we undertake no obligation to update the information, except as required by law.

For additional information, including a discussion of the key risks and uncertainties associated with these forward-looking statements, please see the Forward-Looking Statements section of our press release issued today, as well as Risk Factors and Forward-looking Statements sections of our 2016 annual report on Form 10-K available from the SEC, the Avid Technology website and our Investor Relations Department. We've also added a supplemental presentation in an effort to complement today's narrative. We hope that you will find it helpful.

We will be recording today's call, which will be made available for a 2-week replay. You may replay this conference call and access the supplemental presentation by going to the Investor Relations page of our website and clicking the Events & Presentations tab. Later, we will be conducting a question-and-answer session, and instructions will be given at that time.

And now, I would like to turn the call over to our Chairman, Chief Executive Officer, Louis Hernandez, Jr. Louis?

Thank you, Robert. Hello, everyone. I want to turn to Slide 6 of the presentation. I'm pleased to say that again this quarter, we met or exceeded all our guidance on all financial metrics. Bookings and adjusted free cash flow were above the range. Revenue, non-GAAP operating expense and adjusted EBITDA were in line and free cash flow was positive and improved by over $17 million from a year ago. It also drove a sequential increase in our liquidity position.

Our Avid Everywhere strategy demonstrated continued progress among our enterprise and individual segments. MediaCentral Platform adoption by enterprise has increased 30% from a year ago, and we had several large enterprise deals in the quarter, and I'll review some of those in just a moment.

We also saw continued growth in key metrics for our individual customer segment, which included growth of subscribers which doubled from a year ago, and digital bookings surging 59% from a year ago.

As we approach the end of the transformation, which is on track for completion this quarter, our core financial model is strengthening. As previously discussed, the minimum committed bookings of $76 million related to our commercial deal with Jetsen were included in our Q1 bookings, and that drove a significant increase in recurring bookings and backlog creating greater revenue visibility in the future.

Excluding Greater China, which is represented by Jetsen, bookings grew 9% year-over-year on the strength of NEXIS, our digital offerings and recurring bookings. Meanwhile, our efficiency program continued to drive down non-GAAP operating expenses. Adjusted EBITDA margin was 12%. And we had positive adjusted free cash flow of $6.8 million representing a 52% conversion of adjusted EBITDA.

Looking more to the future, we announced a major strategic cloud alliance with Microsoft at our annual customer event last month. And this represented an important final piece of the Avid Everywhere product strategy that we laid out when we launched the transformation, and I'll cover some of the details about the Microsoft partnership later in the presentation.

We're going to now turn to Slide 7. And as we near the end of the transformation, shift our focus to growth, what's been emerging is a two-pronged strategy focused on enterprise and individuals. Enterprise and individuals alike are taking advantage of the unique platform we have built and the benefits that it offers by bundling applications integrated into the platform whether or not they were created by Avid or third parties. All add significant savings while simplifying workflows.

Flexible deployment and pricing options make it an ideal way to participate in the media value chain.

We get enterprises. If you go to the top of this slide, we get enterprises on the platform with an initial set of applications. This is a strategy. And they typically see their cost and total cost of ownership improve as they switch from CapEx to an OpEx model. We increased our wallet share and they expand their suite purchasing new products and replacing competitors. In this model, customers save money, they have more visibility into their future IT spend, streamline operations and can efficiently add new applications and services as their business evolves. For Avid, it results in a more predictable and scalable recurring revenue stream as the platform and enterprise pricing drive customer retention and optimize lifetime value.

Individuals are excited about the subscription pricing and entry level freemium models that provide even more opportunities to see new parts in the market. Once customers are on the platform with subscription applications, they can expand wallet share with additional complementary plug-ins and apps. This is all facilitated by our digital channel, which drives programmatic upsell and cross-sell opportunities.

Individuals can acquire the world's greatest tools under flexible pricing models, and they can easily access additional products and services as their needs grow. Avid is able to appeal to a much larger share of the individual market, retain these customers and optimize their lifetime value as their needs and purchases increase over time.

I'm going to turn now to Slide 6. And you can see from some of our key metrics that we continue to make progress on the Avid Everywhere strategy for enterprises and individuals that I just outlined. We had strong continued platform adoption with 30% year-over-year growth, and this is an important vehicle towards getting on the platform for cross-sell and growth of wallet share for these enterprise customers. The growth in the cloud-enabled subscriptions and digital sales demonstrate our continued progress in attracting retaining individual customers, the majority of which, we believe, are new to Avid.

Paying subscribers grew to almost 71,000 as of the end of Q1, up 2x from last year. This is another strong sequential increase as well with more than 10,000 paying cloud-enabled subscribers added in the quarter. Sales through our digital channels were up 59% year-over-year.

So our strategy to increase subscriptions, the maintenance, long-term committed enterprise contracts continue to drive a shift in the recurring revenue bookings. Recurring revenue bookings were 63% of total bookings for the quarter. Normalized the bookings related to the large commercial deal we announced with Jetsen this quarter, that metric was 38%, up from 34% a year ago. And remember, this metric was just 13% before we started this whole transformation here at Avid. And we've continued to successfully deliver on our efficiency program. We reduced non-GAAP operating expenses 17% year-over-year, and we continued to execute on greater than $30 million of savings targeted for this year having successfully completed the $76 million savings program in 2016.

Okay, let's turn over to page -- Slide #9. In Q1, we continued to have momentum signing enterprise agreements. Now as a reminder with our strategy for enterprises, we're taking a business that has historically included periodic upgrades driven by budget cycles, so a heavy CapEx model, and converted into an OpEx model with broader, larger dollar, long-term contracts driven by progressive volume-based pricing and the ability to bundle applications and increasing the recurring revenue. As a result, long-term customers are stepping up their investments significantly as we move from a CapEx to an OpEx model. And these customers are continuing to add to their investments as their businesses grow and evolve.

I think most of you know Sinclair block Broadcast, which was a larger station group owner, was one of the first major examples of this trend. Interestingly, after being a customer for many years, we have signed them to a 10-year enterprise deal, our largest deal in history. More recently, after they acquired the Tennis Channel, they expanded the relationship to include additional products and services. As you may know, Sinclair continues to be very acquisitive in the market and we congratulate them on their recent announcement with Tribune.

In Q4 of this year, we signed a multiyear, multimillion dollar global enterprise agreement in cloud-based newsroom project with our long-term customer, Al Jazeera. In Q1, as an extension of this deal with Al Jazeera, we won a multimillion dollar media asset management project in which we will displace a competitor and help them further standardize on Avid Everywhere. This is the model that we hope will emerge for all enterprise clients. Now other leading global media customers are stepping up their commitment to Avid in Q1, including MTV3 and France Televisions. MTV3 is a leading television network in Finland and the multiyear agreement includes an upgrade of its Artist Suite, Production Suite and Media Suite applications, all powered by the MediaCentral Platform and supported by NEXIS storage. The agreement allows MTV3 to expand its newsroom and move to an efficient operating featuring collaborative workflows.

France Televisions is one -- is the national public television broadcaster of France, and their multiyear agreement includes an end-to-end Avid workflow powered by MediaCentral with NEXIS storage and a range of bundled applications and services. The agreement allows France TV to standardize production tools to support and share content across a worldwide news facility and move to an IT infrastructure based on a virtual environment.

Overall, we're pleased with the traction we're seeing with these enterprise deals. We've made progress on our internal processes to close this type of business, including recently formalizing enterprise pricing. However, these agreements are large and complex, and the timing of when they close remains difficult to predict. We look forward to continuing to optimize our processes to make this a more predictable part of our business.

I'm going to turn now to Slide 10. And I'd just like to provide a quick update on the commercial agreement in equity investment that we signed with Jetsen in Q1. The exclusive commercial agreement for Greater China became effective on signing in January, and both organizations have been very active in promoting the partnership in the region. I spent time in China in March with Jetsen's leadership to jointly participate in trade shows, client meetings and various celebrations to promote and drive awareness of the alliance. And it's clear that there is very tight alignment among both of our organizations to make this deal a success and outperform the minimum targets.

Now as Brian will discuss further, our bookings in Q1 included the total 3-year minimum commitment from Jetsen, which guarantees 15% annual growth. The initial launch of the partnership is on track. We transferred the relevant employees in the region to Jetsen, and payments have been received consistent with the obligations in the agreement.

Finally, the $18 million equity investment is on track and expected to close by the end of Q2 2017.

And now I'll turn the call over to Brian to review our financial results and guidance in more detail. Brian?

Thank you, Louis, and good morning, everyone. We had a strong first quarter, meeting or exceeding our guidance on all metrics. In particular, bookings and adjusted free cash flow were favorable to our guidance. Revenue non-GAAP operating expenses and adjusted EBITDA fell within the guidance range.

Let's move to Slide 13 to discuss Q1 results in more detail. We had both sequential and year-over-year growth in bookings and adjusted free cash flow. Total bookings, which included $76 million related to the 3-year commercial agreement with Jetsen, were $179.7 million on a constant currency basis, up 34% sequentially and up 83% year-over-year. On an as-reported basis, bookings were $172.3 million, up 37% sequentially and up 86% year-over-year.

We were pleased with our bookings performance in the quarter. Excluding Greater China, bookings grew 9% year-over-year, including storage, which was up 25%, and digital, which was up 59% year-over-year. Non-GAAP revenue was $104.1 million for the first quarter, down 10% sequentially and down 28% year-over-year.

Excluding the impact of the pre-2011 revenue amortization and the elimination of implied postcontract support, or PCS, revenue was down 3% sequentially as anticipated, resulting from lower 2016 bookings. We note a $25 million year-over-year decrease in the impact of pre-2011 revenue amortization and the elimination of PCS. These adjustments are moving to immaterial levels, providing a clear financial picture and better conversion of EBITDA to free cash flow.

Our non-GAAP gross margin as a percentage of revenue was 63%, increasing 110 basis points sequentially and down 830 basis points year-over-year. If you normalize for the impact of pre-2011 revenue amortization and elimination of PCS, our gross margin as a percentage of revenue was 62.2%, up 410 basis points sequentially and down 240 basis points year-over-year.

Non-GAAP operating expenses for the quarter were $56.1 million, which was within our guidance range of $54 million to $58 million. Our non-GAAP operating expenses decreased $11.4 million year-over-year or 17%, and increased $6 million sequentially or 12%. The sequential increase is primarily due to a $4 million unfavorable swing related to unrealized foreign currency loss from revaluation of our balance sheet and higher amounts accrued for variable compensation programs. Adjusted EBITDA of $13 million was near the high end of our guidance range for the quarter. Excluding the impact of the pre-2011 revenue amortization and the elimination of implied PCS, our adjusted EBITDA was down 6% year-over-year and decreased 27% sequentially. Adjusted EBITDA margin as a percentage of revenue was 12%, and we were pleased to see a strong conversion rate to adjusted free cash flow.

We have provided the chart here on Slide 14 to give you some context on historical bookings of the Greater China region through Q1. In Q1, Greater China bookings, the 3-year commitment from Jetsen of $76 million, includes an annual commit of 15% year-over-year growth or better. If you exclude Greater China, rest of the world bookings were up 9% year-over-year. Future quarter bookings will not include Greater China until the minimum is achieved.

From an operational perspective, we are now executing on the additional $30 million efficiency program savings in 2017 by leveraging the development platform, enabling more opportunities for talent alignment, related facilities rationalization and improved product profitability. This is an addition to the original $76 million annualized savings goal achieved last year.

Now on to Slide 16. At the end of Q1, we had total liquidity of $52 million, including $47 million of cash and a $5 million undrawn revolver. Our accounts receivable balance was $43.6 million on March 31, 2017, which was essentially flat with our year-end balance.

Day sales outstanding, or DSO, was 38 days at the end of the quarter. Inventory was down $1.6 million to $49.1 million sequentially with an inventory turn ratio of 3.4x. Our deferred revenue was down consistent with our revenue amortization and our off-balance sheet backlog was $271.2 million, up $67.6 million sequentially, which reflects the bookings of Jetsen.

On a year-over-year basis, our off-balance sheet backlog increased over $82 million. We define off-balance sheet backlog as customer orders we have yet to ship, fulfill or invoice. The combination of deferred revenue and backlog is $494.2 million as of 3/31/17. This provides us improved visibility into our 2017 revenue.

Long-term debt at the end of Q1 was $189.3 million. We are comfortable with our debt ratios and we are in compliance with our bank covenants.

Moving to Slide 17. Turning now to our adjusted free cash flow generation for the quarter, we were pleased to see adjusted free cash flow increase $16.2 million year-over-year to $6.8 million. Adjusted free cash flow was favorable to our guidance range, and this is the second consecutive quarter of positive adjusted free cash flow. We're also pleased to see the reversal of a trend in the sequential change in adjusted free cash flow.

A year ago, we reported the use of adjusted free cash flow after generating adjusted free cash flow in Q4 2015. In the same periods this year, we generated adjusted free cash flow in both quarters, sequentially improving cash generation. The increase was driven by a continued execution of the efficiency program and an increased focus on operational EBITDA converting to cash.

In addition to providing new adjusted free cash flow reporting, this quarter we have expanded our presentation within our reconciliation tables to include free cash flow reporting, which we define as GAAP net cash provided by operating activities less capital expenditures. We believe this presentation will assist investors in understanding free cash flow and the adjustments for nonrecurring items.

Free cash flow before adjustments improved $17.5 million year-over-year. As we look forward, we will continue to focus our execution on generating free cash flow.

On Slide 19, we have presented our Q2 2017 financial guidance. For the second quarter, we expect bookings on a constant currency basis to be between $95 million to $109 million and on as -- on an as-reported basis to be between $87 million and $101 million. Please note that these guidance ranges exclude bookings for Greater China, which represents $5.4 million of bookings in second quarter of 2016. We are guiding GAAP revenue for Q2 to be in the range of $93 million to $103 million and non-GAAP operating expenses to be between the range of $53 million to $57 million. Adjusted EBITDA is expected to be in the range of $6 million to $12 million. Adjusted free cash flow to be in the range of negative $4 million to positive $4 million.

We are reaffirming our guidance for the full year of 2017, as we communicated to you on our last earnings call on March 23, 2017.

Slide 20 shows our strategy for both enterprises and individuals, both pretransformation and today, driving the move to more recurring bookings and visibility. Enterprises are moving from a CapEx-heavy model toward an OpEx model driving more recurring revenue, lower retention costs and higher lifetime value for Avid. Individuals are increasingly interested in subscription models and cloud deployment options. This approach also proves recurring revenue for Avid and increases lifetime value as well as offering new customer acquisition opportunities.

As you can see from the charts on the right-hand side, the benefits to Avid in evolving our products and solutions as part of the transformation are clear. On an LTM basis, recurring revenue bookings as a percentage of revenue have grown from 21% in 2013 to a bit under 50% over the past 12 months. Since we began the transformation, we have seen significant changes in our financial model. Please note that the dotted lines represent our guidance range for 2017. As the impact of the pre-2011 revenue amortization and the elimination of implied PCS on the revenue approaches an end, we begin to have a clear picture of our financial performance. Bookings are increasingly shifting to more recurring and we have reduced our operating expenses, reflecting a leaner, more directed cost structure. As operational EBITDA continues to increase, our financial results will be more stable, profitable and have improved free cash flow conversion.

In conclusion, we are pleased with our results for the first quarter, particularly with the strength in adjusted free cash flow, which we believe is an important indicator of our successful transition to a more predictable and stable financial and operational performance. When combined with our Avid Everywhere strategy, we believe the company is setting an exciting trajectory for long-term success.

I'll now turn it back to Louis for some closing remarks.

Thanks, Brian. Let me wrap things up now. On Page 23, as you know, we began this transformation back in 2013, and we said that this transformation would end in Q2 '17. Remarkably, we are on track to complete that this quarter. You've seen that as we're winding down the effects of the transformation, we're preparing for growth with our strategic initiatives, the new sales model we've talked about before, and getting ready for the cloud, and begin to shift to a more aggressive commercial and selling focus.

If you chip to Page 24, one of the big things that we have built during this transformation is a common platform for the media industry. And if you think about the way we've described this before, this allows you to run applications within the entire workflow from the time you create an application to consuming an application. I'm not going to go through Slide 24 in detail, but if you think about an operating system like on your smartphone, where the apps sit on top of it, underneath it is an operating system that allows you to run various applications across the entire workflow. The idea was for us to create an application that allows us to solve the bigger industry problems anchored in our heritage products, allowing us to add applications to solve the more critical and faster growing areas. And that's what we've done here with MediaCentral.

You saw the statistics of this growing 30% last quarter year-over-year, and this continues to be installed in some of the largest media companies in the world. What's listed on 24 are some of the services. Underneath those apps on your phone, what does that operating system actually do? And that's what's listed here. I'm not going to go through them in detail, but I did want to give you a couple of examples. Media services in the upper left, for example. Any application or storage digitally that you connect to this platform, you're allowed to -- you will have the ability to index so that you can search through a floating taxonomy where this asset is. Just that one service feature, making that available across all the applications within an enterprise and all your storage, is a dramatic service and cuts down on your operating needs. And this is what makes the platform so powerful.

The Connectivity Toolkit is a free tool we allow third parties to access, and this allows them to certify their applications to this platform so that when a client runs the MediaCentral Platform and they have a third-party product, if it's been certified, they have the comfort of knowing it'll work in an integrated way with the platform. That is the power of what we have created.

We have spent hundreds of millions of dollars on this platform and it is why so many large media enterprises are adopting it rapidly.

Now I'm going to click onto Page 25. And you can see in this image that it becomes the baseline, the foundation for everything else within the media enterprise. If you click again, you will see the client application layer appear. Now the way the client experiences it once they have MediaCentral installed, is they enter in the upper left through any operating system, any device, any channel. Once they're on to the platform, this is a common user experience, any of the applications that they have purchased will appear. Now for those of you on the phone who maybe are not in media just to appreciate this, before the industry literally had where you would log off and log on to different systems that were connected. In this world, that operates more like an enterprise application that you're used to seeing, once you log on, all the applications and features that you have purchased are available.

So if you were going to do -- create an asset, you would use one of our artist tools, like an editing or mixer or graphics, and you would begin to create the storyline that you would like to do. If you wanted to work with others, you can go to the marketplace on the artist community and find tens of thousands of professionals where you can review their work, the ratings on their work and invite them to sessions to create a better, more engaging piece of content. So if somebody's in China and you're in Brazil and you like the way their sound is for your story, you can incorporate them, allocate tracks to them and work as though they were next to you. Very powerful tool.

If you are working on different tools while you're in a mixing session, let's say, on Pro Tools, the system would identify that, save you mix downtime by identifying through a pop-up window in our marketplace, say, hey, you're working on a different plug-in. If you want to work on the same plug-in, click here. It purchases it. You would have set up your purchasing capability and you two can keep working, creating that asset and it saves mix downtime later because you're on the same tool. That's what the App Store does for you.

The content marketplace is finished goods where you can define what that good is so that you can incorporate other sounds or other content into your workflow. Depending on what your role is in the workflow of integration solutions, if you have a studio, then you can use tools like virtual studio, augmented reality, virtual reality, interactive graphics to make that a deeper, more engaging story in a studio environment. If you're a company or an enterprise that has production capabilities, then you'd want to use other apps like broadcast graphics, channel branding and playouts, sports enhancement, et cetera. And while these applications are running, you have media services available for you to purchase, production asset management, media asset management, social media management, multichannel distribution, all available, all integrated onto a common platform. You just pick and choose the apps that meet your needs in the workflow. For individuals, it'll be a different set of applications, and for large enterprises, it'll be probably a larger bundle.

Now let's say that you want to work with a product that is not created by Avid. Everything I just described was applications created by Avid. You would simply pop out to the marketplace of alliance partners, where we have over 2,000 certified products. So any of the applications that I mentioned before, if you prefer to use a competitor's products, or there's applications that we don't have, you simply go to the marketplace with the comfort of knowing it's certified on the platform, all integrated, simple and easy to use.

The nice thing about this model is the deployment and pricing options are available to anything on this application. This is what we have created with Avid Everywhere and everything above the MediaCentral and to the left of the MediaCentral event bus. So the client integrated in media applications, those are Avid applications. And Avid intends to have applications where it believes it can have the very best product in the market with a comprehensive suite. Anything else will flip to the alliance partners through the marketplace so that you always have the very best products and flexibility to choose what you'd like.

Now the next step and the final step in the original white paper we wrote in 2013 for the product strategy is putting everything in the cloud. And that's what we announced a couple of weeks ago on Saturday. I know some of you were there.

And essentially, once you put MediaCentral and the MediaCentral event bus in the cloud, then all applications are in the cloud. We have had a couple of creative tools in the cloud already, that's what's driving our cloud-enabled subscriptions. But we announced that the entire stack, if you think about this for a minute. If you're a media enterprise, your entire operation can now run in the cloud with the largest, most complete applications in the industry through a single vendor. And it can run traditional on-premise, private or public cloud. And that's where, on the next slide, the revised logo of Avid Everywhere includes the same colors that are cloud-enabled, and that's why on the next page, we announce the Microsoft-Avid partnership.

Now as many of you know, Avid held its 3-day Annual Conference event before the NAB industry show in April. And this year's event was certainly the most exciting and well attended since the inception of the Avid Everywhere strategy. We had over 1,300 registered attendees from 44 different countries. We had 70-plus speakers and contributors from our community, leaders and luminaries across the industry. We had over 115 million social media impressions at Avid Connect and the NAB Conference, eclipsing any of the other 3,000 exhibiting and vendors. It was really exciting. And the event featured the unveiling of Avid's cloud strategy, including the slate of new products and the announcement of the strategic cloud alliance with Microsoft. Now with these announcements, the event represented the culmination of the initial product vision of Avid Everywhere and provided a view into the next phase of growth and journey into the cloud. I'm going to turn now to Slide 30 and give you a little more details on the cloud alliance with Microsoft. It's really important to us. We went through a 6-month process to evaluate all major cloud vendors through a set of criteria in RFP that included the scale of the cloud network, the enterprise experience of the vendor. We looked at the flexibility of the approach to cloud deployments. We evaluated the strategic alignment and cultural fit. We looked at their investment in media and entertainment as an area of focus. And of course, their economic commitment to Avid. And after a pretty extensive time period and detailed assessment, Microsoft was the clear standout. And the combination of Microsoft and Avid's capabilities we think will create the most powerful value proposition possible for media customers moving into the cloud. Microsoft leverages decades of experience of helping enterprises move to the cloud and has a full spectrum of capabilities of extensive media services available through 38 Azure regions across the globe, more than any other major cloud provider.

The cloud-based offering will be built on Avid's portfolio of the industry's best and most comprehensive creative tools and media workflow solutions that leverage Avid's flexible approach to licensing, deployment and commercial options.

The alliance includes a significant contribution of resources from both companies, including commitments in technology, development and go-to-market efforts. And in addition, Microsoft will make additional cash and in-kind investments to accelerate the go-to-market of targeted solutions.

So we expect the partnership to yield a steady stream of hosted solutions and services over the next 18 months and the first wave to be offered in the second half of this year. So with this announcement, Avid is making a significant play to the cloud, and we believe the alliance will open up meaningful opportunities, become a major driver of growth over the next several years.

So with that, I'd like to just recap now on Page 31.

We met or beat all of the metrics on performance and drove an improvement in our liquidity position. These areas continue to be a top priority for Avid.

Our key metrics for the platform adoption, subscriptions, digital, recurring and efficiency demonstrate that the Avid Everywhere strategy for enterprises and individuals is working. Q1 results and our reaffirmed 2017 guidance reveal a core financial model that is emerging, that is more clear with greater visibility and profitability as we improve free cash flow conversion.

We're excited about the opportunities available through the strategic cloud alliance with Microsoft and ready to lead the media and entertainment industry into the cloud.

And with that, Operator, we'll now be available for questions.

(Operator Instructions) We'll go first to Hamed Khorsand with BWS.

So first question. How much of, in the guidance, is there impact related to the NEXIS upgrade, if any?

So it is included. I'll just say that as we see NEXIS continue to grow, our plan is we expect to see that to continue to have continued strength.

Yes, I would say, NEXIS grew 50% in Q4, it grew another 23% here in this last quarter. It's continuing to accelerate. Because it's a new product, it's not a linear estimate of how it's going to grow, but we anticipate that NEXIS will continue to grow. You probably heard on those large enterprise deals, it's included in every one of them. If you think about what NEXIS does, it's significantly more dense. It increases capacity of a packet size by almost 600%. It's an easy way to start the enterprise conversation because the ROI is pretty immediate, and it's pretty much being included in every large enterprise deal. So we expect great things from NEXIS over the long term. And I think the most important thing, it's completely cloud-enabled. So it's part of the conversation, every major enterprise deal. But it enjoys the difficulty in -- because it's tied to those large enterprise deals, it's hard to predict exactly the pace at which those will come in. But I suspect that NEXIS is on its way to becoming the industry standard if you look at its growth rate compared to any other vendor in the storage base for media.

Okay. And then is there any cash costs or investments that you have to make as far as being ready and capable for the Microsoft partnership?

We're making -- any outlays in terms of cash or costs are included in the guidance that we've provided for the year. I think, remember, this was an RFP issued by us to the vendors. So most of the economics were coming the other way, where they were investing cash and in-kind to promote, integrate and support them being the primary vendor of us. Remember, if you want large volumes going to your network, Avid does have the largest concentration of applications in the media industry today. And so you can imagine their excitement of getting that vendor onto their network because they want to drive packet and volume on the cloud network. So as a result, they worked pretty hard to convince us that they're going to do as much as they can to make it a very good experience to our customers. So there's investments on both sides. I think Avid had budgeted for the year, a degree of investment that is included in our guidance. And the incremental is really coming from the cloud provider that we selected Microsoft. We think they're an excellent choice. You probably saw Scott Guthrie, who runs Azure and reports directly to Satya with their (inaudible) event for the weekend. Some of you may have seen him. And I think it demonstrated the level of commitment and excitement they have for the partnership.

(Operator Instructions) We'll go next to Steven Frankel with Dougherty.

So when I go back to my notes from the Q4 call, I had that Q1 was supposed to have around $7 million in Pro Tools accelerated revenue. And I think you called out about $1 million. What's changed there? And what happens in the next couple of quarters relative to Pro Tools PCS?

Yes, so, Steve, we were happy with our revenue and our operating revenue. The -- not only the estimate for the PCS revenue, but ended up with that $1.7 million and going forward, that's really an immaterial amount. We're pleased that, that particular revenue adjustment is behind us. And we think it'll be -- allow everyone on the financials to have more clear visibility into what's happening. So the estimate, it's just we ended up at $1.7 million and again, going forward, it will be effectively 0.

Okay. And then in terms of free cash flow, your guidance in Q2, what do you have built in to that number in terms of adjustments for restructuring, efficiency program, et cetera?

Yes. So as we look to Q2, the adjustments and efficiency program, $3.6 million.

So, Steve, I think the noise of the PCS has gone to 0. So that should clarify the model. And the one-times are continuing to get smaller at a pretty dramatic rate and that should continue.

Okay. And then in terms of bookings guidance. I mean, you guys did a good job growing bookings 9% ex Jetsen in Q1. But it looks like you're guiding flat in Q2 given NAB, given NEXIS momentum. Why is the guidance only flat in Q2?

So the upper third of the range represents growth. But I think as we've mentioned before, we really are, as a company, Louis, myself, we just are focused on certainty and credibility building here.

Okay, appreciate that. And what was Jetsen revenue in the quarter in Q1?

So we don't break that out now. Frankly, if -- as the equity investment comes in, you may have visibility to that going forward.

Okay. And what's the level of kind of barebone maintenance CapEx that we should expect for the year?

So we put in, I think barebones is probably $8 million to $10 million. That's barebones. That doesn't allow me to be very popular within the company, but that's $8 million to $10 million barebones.

And the post-2010 deferred revenue backlog is still declining. When does that start to grow again?

So we're actually, this quarter, we're actually pleased with how our backlog, our deferred revenue is really leveled out. It has been declining and it's really leveled out this quarter. And so we look forward, as the bookings come in and as we reported the future, we're hopeful with our strategy that, that does begin to decline. But I think the interesting thing is the trend is leveling out and we hope to see it turn shortly.

Okay. And would you offer any insight into the bookings assumptions you're making to get to your full year revenue guidance?

I'm sorry, Steve, can you repeat that?

I'm just looking for -- you obviously have some kind of bookings assumptions that you're making to get to your full year revenue number. I wondered if you might give us some high-level commentary around that, if you're not going to give us the actual number.

Yes. So let me say a couple of things. Number one, based on the bookings that we're giving, that certainly translates into revenue that translates into meeting that annual guidance. As you know, a key aspect here with respect to the bookings is the mix, how much is services, how much is product. And so, yes, the bookings does allow for the annual revenue guidance to be met. But what will really drive it and determine it is the mix of product and services.

Yes, I think the other thing I would say for your modeling purposes, Steve, this is Louis, is that if you look at the -- one thing is what the level of bookings is, the other is what's coming out of backlog. And one thing I would say about total bookings is the assumed -- I think you can assume there will be a higher conversion of booking to a revenue dollar, which is, I think, what he was alluding to. So it won't -- if you looked at prior years, there will be a higher conversion of booking dollar to a revenue dollar this year. And if you look at the backlog that you were talking about post-2010, you can see that flattening out. So if you look at from the end of last year to the beginning of -- to first quarter compared to the end of, I'm sorry, if you look at the end of '16, I'm sorry, '15 into '16 and then the end of '16 into '17, you'll see that the post-2011 is flattening out. And I believe you'll start to see that reverse itself now if you looked at from Q4 to Q1, you'll see that's essentially flat. And then when you look at total backlog, of course, you saw a significant increase largely because of Jetsen. But even without Jensen, that's going up. So total backlog is increasing, total visibility, and of course, that helps on the revenue line. And if you also have a higher conversion from a booking dollar to revenue, you should expect that, that ratio will get tighter over time. And so that's a long way of saying a booking dollar will convert more directly to a revenue dollar. The rest, the second half of '17, and it should be that way going forward. You've also seen EBITDA tighten up as a conversion and then EBITDA to cash. And you're seeing the quality of that adjusted EBITDA and free cash flow, which we separated for you, go up because the one-times are getting smaller at a fast rate and also, the quality of the revenue dollar is getting better because the PCS piece has been eliminated now. So hopefully, everything will start to become very clear and look more like a normal conversion of booking to revenue, revenue EBITDA, EBITDA to cash in the second half of the year.

And in terms of those adjustments, will we still see these efficiency program adjustments in the P&L throughout this year?

We'll see those through the year. We expect to see those into '18 taper off.

With no further questions, I'd like to turn it back to Robert Roose for closing remarks.

Thank you for joining the call today. We look forward to connecting with many of you very soon. Thank you.

That concludes today's conference. We thank you for your participation. You may now disconnect.