Avid Technology Inc (AVID) 2017 Q2 法說會逐字稿

Good day, and welcome to the Avid Q2 2017 Earnings Release Call. Today's call is being recorded. At this time, I would like to turn the conference over to [Emily Walt] from Investor Relations. Please go ahead.

Good afternoon. Thank you, operator. My name is [Emily Walt] and on behalf of Investor Relations at Avid Technology, I'd like to welcome you to our Second Quarter 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 will be using both non-GAAP measures and certain operational metrics, both of which are defined on our Form 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 some of the key risks and uncertainties associated with these forward-looking statements, please see the Forward-Looking Statements section of our press release today, as well as the Risk Factors and Forward-looking Statements sections of our 2016 annual report on Form 10-K available from the SEC, the Avid Technology website or 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 on 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 and Chief Executive Officer, Louis Hernandez, Jr.

Thank you, Emily. Hello, everyone, and thank you for joining us on our call today. I'm going to be on Slide 6 of the presentation. First, I'm pleased to say that, again, this quarter we met or exceeded our guidance for all financial metrics. Adjusted free cash flow was above the range and improved by over $36 million from a year ago. Bookings, revenue, non-GAAP operating expenses and adjusted EBITDA were in line with guidance, and we saw our second consecutive quarter of free cash flow. We completed the transformation we began in 2013, and I could not be prouder of this accomplishment. I wanted to thank all of our employees, our customers, our partners and our investors for supporting us through this incredible journey. We've built the industry's first cloud-enabled enterprise platforms which is essentially an operating system for the media industry. It's complemented with the comprehensive set of applications across the entire media workflow, and we have certified almost 2,000 products to this ecosystem. This allows us to address the industry's most significant challenges and positions the company for long-term growth.

The platform has allowed us to share common technologies across our suite of products allowing us to create a leaner and more directed cost structure focused on high return investments and the agility to launch new products and services less expensively.

In total, we are on target to reduce total spend by $106 million by year-end. At the same time, revenues have stabilized and adjusted EBITDA has improved. The end of the transformation also adds clarity and transparency to our financial results as the impact of the non-marketed products have runoff and the accounting adjustments have ended. As the company transitions to the growth mode, the company's operating results have become more predictable, and there has been a significant shift to higher recurring revenues. Revenues, as I mentioned have stabilized despite the significant shift to recurring revenues, which often accompanies a dip in the revenue. So we are very pleased that it's stable, while we're shifting to recurring. And adjusted EBITDA is converting to cash at a more normalized rate. The company's cloud-enabled platform, comprehensive application suite and marketplace of third-party products, along with greater flexibility on delivering pricing has driven a significant increase in recurring revenue bookings and contractually committed backlog, which is providing improved visibility going forward.

Today, Avid's cloud-enabled enterprise platform has uniquely positioned the company to capitalize on opportunities ahead. The adoption of the MediaCentral Platform by large media enterprises continues. We've now had several quarters of enterprise transactions with several large enterprise deals, again, this quarter which I'll review in just a moment. On the opposite side of the spectrum for individuals, new customers made up a substantial majority of paying individual cloud-enabled subscribers representing a 91% increase year-over-year.

Our strategic alliance with Microsoft is going well and we're really excited about the coming quarters of cloud-related releases that we'll be announcing with them. While there's obviously remaining challenges ahead, I'm confident in the company's ability to execute on this strategy moving forward, and look forward to sharing the results as we move to the second half of the year. I'm going to move to the next page now. And I know we've talked, some of you have heard us talk about the transformation, a quick recap upper left. We have this amazing distribution, great global brands, category-leading products but they were in slower-growth areas. We built this enterprise platform for the entire workflow, put those applications on and then added applications to allow us to participate in the higher-growth areas. We knew it had to be an open and flexible platform, which is on the right. In the center therein blue, are all the certified applications. So if you want competitive products that can share the platform, or third-party products, they are all integrated onto a common platform. The result would be an ability for us to package and price products, for both Tier 1 at the high end and also, Tier 3 at the low end in a very cost-effective way. Therefore, expanding our market, increasing revenue streams, and driving down costs.

And on the next page really highlights what it took to complete this transition and why we're so excited about our position for long-term growth. I think it would be hard for you to find many companies that have gone through the dramatic set of changes that Avid has. I know a lot of people talk about transformation but if you look at some of these statistics, I think you'll agree, it has been pretty amazing journey for us. The amount of innovation that we've done during this change, 20% of our entire code base has been written in the last 3.5 years. 22% of our patents, and you know we have a pretty large patent portfolio, have been granted during this transformation period. The platform that we have created not only allowed us to launch 44 new products, but actually decreased our development resource needs by 25% because of the flexibility and extensibility. This has been a major shift in the technology investment for this company.

And of course, we needed a different kind of talent pool to help us address today's issues. 65% of the employees are new since we started the transformation. 65% of the entire direct employee community. And what we really needed was the teams in the right places, the right people to drive this strategy. Of course, we also had relocated 70% of our officers and redeployed our workforce to be closer to our customers to deliver better service. As a result of the changes and the investments, we've also been able to drive up efficiency. The $106 million savings program that we launched will be completed by the end of this year. We've already completed the majority of that and are on track to complete the plan changes this year. And as a result, you've seen us work through the non-marketed products, which we're completely finished with now, and the tail of the restatement with some of the accounting adjustments is also complete. The real thing I'm most excited about is why we did this in the first place and it is to benefit our community, our customers. MediaCentral  platform was designed to address the most significant problems the industry faces. We now have technology and tools to allow much greater agility and flexibility, and we can provide better service and deployment models to meet those customers' needs. In the end, it is an end-to-end solution for the media industry positioning Avid to have a much more strategic role. And I think for investors also they will benefit. Clear financials are emerging due to the end of the revenue adjustments. Improved predictability and visibility with increased recurring revenue and revenue backlog, consistent adjusted free cash flow growth. And more importantly, a platform for long-term growth, which we're hoping to begin to see in the second half of 2017.

If you turn to the next slide, you'll see the success that we've had and the progress. You've seen before in upper left, the platform adoption. This is really large media organizations adopting an enterprise-wide operating system to drive down cost and then they buy applications that we try and cross-sell and upsell, and increase in lifetime value over time.

Upper right is the other side of the spectrum. Individuals and small teams with subscriptions and digital sales both surging, and it's really those subscriptions as opposed to the digital sales, and the platform adoption, which have been flipping over to mostly multiyear enterprise deals, which is driving this huge shift to recurring revenue bookings. It started at a nascent level, as you guys have heard a couple of years ago. And now is at the 42% this last quarter. Remember, we started at about 13% before we started the transformation. And that's what's driving this pretty significant increase in contractually committed backlog. And that would both include, the off-balance sheet contractually committed as well deferred revenue, pretty significant investments in both cases. I mean, increases in both cases driving increased visibility. If you go to the next page, you'll see some examples of some of the traction. As I mentioned early on, I know you guys remember Sinclair or probably remember Sinclair, which was the early canary in the coal mine about what was to come. We now have had a couple of quarters of pretty steady stream enterprise agreements. And our pipeline continues to build. Most of these agreements have these typical characteristics multiyear agreements, enterprise pricing models against multiple applications sitting on top of MediaCentral Platform. And then we usually bundle in products and services and they want operating models that are spread over multiple years. Drives down savings and efficiencies, while delivering the best individual tools at the workflow and saves our money. And for us, it increases our total revenue and makes it a recurring revenue element. Meredith is a good example. Meredith Corporation is one of America's leading media and marketing enterprises. In Q2, we signed a double-digit in millions multiyear agreement for the full MediaCentral Platform and several applications, an example of what we're continuing to see in this area. If you look to the other side with individuals. What we've been able to do with the platform is deploy these individual applications at a much more cost-effective way. We've listed the first products, the free versions here. And you can see the freemium model, and what this has done was allowing us to attract professional users that couldn't afford to participate in our ecosystem. What's happening it's become powerful low-cost acquisition tool with very high conversion rates. And that's what's leading to the cloud-enabled subscriptions, which have now reached 78,000 in Q2. This is a 91% increase year-over-year in subscribers, the majority are net new customers. And the great thing about it is the Avid digital ecosystem allows those individual customers to purchase additional cloud services, plug-in hardware, plug-in software, to increase the lifetime value. So those are some examples about how -- the kind of strategy you're seeing us follow. Leading to my last slide on strategies, which is what's next. So we've ended up with a platform that has a common shared services bus, multiple applications sharing a common user experience. And those are the applications, those 3 levels in the upper left. In the blue on the right, is the ecosystem of partners, which we've certified, which all work on the same platform. Of course, you can deploy this on-premise, private cloud or public cloud. So what's next? We've had a couple of applications in the cloud. We need to put the whole platform in the cloud, which we're doing with Microsoft. And then you'll see us move to expand services offerings, like things that used to be on-premise, like data management services and employees as they move to the cloud. Avid will be able to participate in some of those revenue streams. And of course, we'll continue to add products as well. So what's next for Avid? Focus on cloudifying the entire platform and all the applications. Making everything that we have built just work better. To make it more obvious, this is a better way to operate in the media ecosystem. And to get more people to use it and that's what you'll see Avid focused on. And so as I wrap up here, we started this transformation with a pretty amazing brand and market-changing heritage products. However, we were operating in a slow growth and increasingly commoditized area that didn't address the larger business needs of the industry. By creating an operating system for the media industry, the MediaCentral Platform, we were able to allow our heritage products to operate at a lower cost with greater flexibility and we were able to add new products and services to address the more significant business issues, while driving down the unit economics to be a part of the industry and allowing us to participate in higher growth areas with higher recurring revenues.

At the core, we've been shifting to the recurring revenue model, which you've seen driven by both subscriptions on the individuals and maintenance and also, adding new services along with the enterprise customers embracing this strategy, which are increasingly looking for multiyear most cost-effective subscription models. With the initial creative products in the cloud, our announcement with Microsoft to move the entire stack to the cloud, the most comprehensive in the industry, we feel we're poised to continue our momentum. Now that we've exited Avid's transformation phase, we can focus our efforts on taking advantage of expanded market opportunities and the Avid Everywhere strategy overall. And with that, I'd like to turn over to Brian to review our more detailed financial results. Brian?

Thank you, Louis, and good afternoon, everyone. We have a strong second quarter meeting or exceeding our guidance on all metrics. In particular, adjusted free cash flow was favorable to our guidance. Bookings, revenue, non-GAAP operating expenses and adjusted EBITDA fell within the guidance range. Let's move to Slide 15 to discuss the Q2 results in more detail. We were pleased with our performance this quarter. Excluding Greater China, bookings on a constant currency basis were $104.3 million, an increase of 3% year-over-year and flat sequentially. On a reported basis, bookings excluding Greater China, were $98 million, an increase of 1% year-over-year and 2% sequentially, including storage which was up 19.8% and digital which was up 24% year-over-year.

Non-GAAP revenue was $102.4 million for the second quarter, down 2% sequentially and 24% year-over-year. Excluding the impact of the pre-2011 revenue amortization and the elimination of the implied post contract support or PCS, revenue was flat sequentially. A positive indicator that revenue is stabilizing. We note a $22.6 million year-over-year decrease related to the impact of pre-2011 revenue amortization and the elimination of PCS. We are pleased to see these adjustments are moving to immaterial levels providing a clear financial picture, and also a better conversion of adjusted EBITDA to adjusted free cash flow.

Non-GAAP gross margin as a percentage of revenue was 60.7%. As you normalize for the impact of pre-2011 revenue amortization and the elimination of PCS, our gross margin as a percentage of revenue was 60.5%, down 2 percentage points sequentially and flat year-over-year.

Non-GAAP operating expenses for the quarter were $56.6 million. Our non-GAAP operating expenses decreased $8 million year-over-year or 12% and increased $0.5 million sequentially or 1%. This small sequential increase is primarily due to an increase in seasonal marketing spend related to our customer conference.

In addition, in the quarter -- in the current quarter, we experienced $1.8 million of expense related to unrealized foreign currency loss from revaluation of our balance sheet. Adjusted EBITDA is $8.5 million for the quarter, excluding the impacts of the pre-2011 revenue amortization and the elimination of implied PCS, was up 33% year-over-year and down 22% sequentially.

Adjusted EBITDA margin as a percentage of revenue was 8.7%. We were pleased to see a strong adjusted EBITDA conversion rate to adjusted free cash flow. We note a year-on-year improvement of $36.4 million of adjusted free cash flow. As we turn to the next slide, we see the breakout of Greater China and Rest of World bookings by quarter. We are pleased with Rest of World bookings growth on a sequential and year-over-year basis. I should also note Jetsen, our Greater China business, met their Q2 commitments. We continue to be positive on the commercial arrangement which is now in its third quarter of operations. From an operational perspective, the additional $30 million efficiency program savings in 2017 -- excuse me, we continue to execute 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. We are on track with this 2017 initiative. Of course, this is in addition to the original $76 million annualized savings goal achieved last year.

Now on to Slide 18. At June 30, 2017, we had total liquidity of $52.4 million, including $47.4 million of cash and a $5 million undrawn revolver. Our accounts receivable balance was $34.4 million, a substantial reduction sequentially in year-over-year. Days sales outstanding or DSO was 31 days at the end of the quarter. Inventory was down by $7.9 million to $41.2 million sequentially with an inventory turn ratio of 3.9x. Long term debt at the end of Q2 was $189.9 million. As outlined at the beginning of the year, our amended agreement with servers provided more favorable leverage ratio requirements for future periods beginning the quarter ending June 30, 2017. This quarter, we saw the ratio improve to 4.2x from the original ratio of 3.5x.

Next quarter, the leverage ratio moves to 4.8x. Total revenue backlog at June 30, 2017 was $488 million. We continue to see year-over-year growth in total revenue backlog excluding pre-2011 and elimination of PCS of $53.3 million. We continue to have mix changes between deferred revenue and off-balance sheet backlog. The off-balance sheet backlog, which is contractually committed revenue, increased $86.2 million year-over-year. More of our quarterly recognized revenue is coming directly from off-balance sheet backlog.

In Q2, 80% of our recognized revenue came from March 31, 2017 deferred revenue and off-balance sheet backlog. We -- as we have completed the transformation, we highlight the move to a recurring revenue model driven by our mix of bookings and specifically, illustrate the growth of off-balance sheet backlog. Since December 31, 2013, our off-balance sheet backlog has grown from $92 million to $284 million as of June 30, 2017. This is an increase of $192 million over this period. Off-balance sheet backlog is contractually committed bookings representing future billings, revenue, EBITDA and cash. This is a valuable and material asset for us as we look forward.

Now on to Slide 20. Turning to our adjusted free cash flow generation for the quarter. Adjusted free cash flow increased $36.4 million year-over-year to $6.2 million. Please note in Q2, 2016, a $9.1 million employee bonus was paid. In the current year, the bonus payout has been deferred to later this year. We are pleased that this is the third consecutive quarter of positive adjusted free cash flow and the second quarter of positive free cash flow. The increase was driven by continued execution of the efficiency program and working capital optimization. Consistent with last quarter, we have provided details of free cash flow and adjusted free cash flow. In the current quarter, our free cash flow of $1.2 million improved $37.8 million over last year. The Q2 2017 nonrecurring items were higher-than-expected due to higher restructuring payments. We expect these nonrecurring items to be materially lower in the next 2 quarters.

On Slide 22 we present our Q3 2017 financial guidance. For the third quarter, we expect bookings on a constant currency basis to be between $95 million to $109 million and on as reported basis, to between $87 million to $101 million. Please note that these guidance ranges exclude bookings for Greater China, which represented $4.3 million of bookings in the third quarter of 2016. We are guiding GAAP revenue for Q3 to be in the range of $94 million to $104 million and non-GAAP operating expenses to be in the range of $52 million to $56 million.

Adjusted EBITDA is expected to be in the range of $8 million to $14 million, adjusted free cash flow to be in the range of negative $7 million to positive $1 million. We are reaffirming our guidance for the full year of 2017, as we communicated to you on our earnings call on March 23, 2017. Let me summarize, our Q2 financial performance. We met or exceeded our guidance. Cash and liquidity is steady and strengthening. Backlog continues its growth trajectory. And we're pleased to reaffirm our 2017 guidance.

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

Thank you, Brian. Now I'd like to wrap things up, if you want to turn to Slide 25. We met or beat guidance on all metrics and performance drove an improvement in our liquidity position. These areas continue to be a top priority for Avid. Our key metrics for platform adoption, subscriptions, digital recurring and efficiencies demonstrate that Avid Everywhere strategy for enterprises and individuals is working. Q2 results and our reaffirmed 2017 guidance reveal a financial core model emerging that is clear, has greater visibility and is profitable with improved cash flow conversion. With the transformation complete, Avid is actively positioning itself for growth and profitability by offering the only cloud-enabled enterprise software platform specifically for media. As more and more customers look for new and innovative ways to [emerge] their needs to leverage the cloud, Avid's comprehensive platform delivers long-term value and improves total cost of ownership for both enterprises and the individuals especially, when compared to point solution providers. And I look forward to sharing our accomplishments for the second half of the year. Before we go, we'd like to invite you to attend our presentation at the Canaccord Genuity Growth Conference, next Thursday, August 10, at 10:30 a.m. And with that, operator, we'd like to open it up for questions.

(Operator Instructions) We'll go first to Matthew Galinko with Sidoti.

Louis, you touched on, I think, your words were just making the platform easier to use with more obvious benefits to the user. I'm just wondering if you could fill that in a little bit more, in terms of -- does that relate to feedback from early adopters or just kind of your internal road map? And then how do you weigh that, in terms of -- how important is that to getting more enterprise deals done?

First, Matt, thanks for calling in. The enterprise pipeline is growing rather dramatically. Absolutely, we're learning a lot from the initial installations that we've done and I think we have a pretty steady stream now of enterprise deals coming in. If you remember early on, it was hard for us to predict. And what I would say is, the reason I wanted to point that out is there is no more huge heavy lifting left. The NEXIS software-defined was a big step because you can be hardware-independent and we certified, as you know with our own, but it can also be put in the cloud. And putting everything in the cloud is the next big thing but there is no big infrastructure elements that we have to build. And so we're going to turn our attention to just making everything better. And what I mean is, the balance between an individual application. Let's say, graphics or storage or Media Composer, and the question we have to ask ourselves is it better to make that individual application work better for the user? Is it better to make an investment to show that it works in concert with the platform or make everything just simpler to use in a more integrated way? And those are the kind of questions that we're now focused on as opposed to heavy component parts being built. So if you look at, for instance, the Cloud UX, which we demonstrated at NAB. If you walk around any major media enterprise and you walk into their newsroom and then you go to the editorial suite, and then you go over to their studio or graphics, and then you go over to their storage area, you'll see different applications and different providers. With the common UX on the platform, it all looks the same whether or not it's Avid's products or in the future anybody else's. And today they're all integrated. So that's an example where we want to make that integrated, simplistic experience better and more efficient because training costs go down and it's all integrated. So that's what I meant by that. The way you onboard a new customer, certified vendor, we want to make that simpler; the deployment model, the usability and we have to balance that, Matt, with still making sure our individual applications remain very competitive. So certainly, got a lot of great feedback from clients. We want to get more people to use it. It seems like the market is ready to help us get more people. But, of course, we're learning a lot about the things we need to change. The last thing I would mention is, as you know, and we talk about moving to these enterprise deployments. We used to, let's say, install a 153, 100 Media Composer you go to -- and that was an enterprise deployment. You go to a big client, you turn them all on. They work and you basically left because if something happened, it didn't impact the rest of the workflow because they were individual components that the client put together. In our model now, how we deploy is quite different. Because we're deploying not only an end-to-end enterprise system, multiple applications at once, and every one connects to the other parts. Makes it more efficient but it also makes it a more complicated deployment. So our training of our professional services, our project planning, the kind of people we have, the way we deliver our service, how long we're at that client, is all changing and we're learning a lot from these early installations. So that's what we meant, Matt.

We will take our next question from Vahid Khorsand with BWS Financial.

First question, you were just talking about free cash flow and the relationship with deferred bonuses. When do you expect to pay out those bonuses?

We plan to pay those bonuses later in the year. So we -- we're comfortable with where we are and we have a plan to pay between now and, of course, the end of the year.

Okay. And so going forward, is that something that is going to be toward the end of the year instead of the beginning of the year then?

This year in particular is more of an exception.

On your revenue guidance. What is driving that number? Is it -- can you give some kind of background on what the drivers are?

The core drivers are, we have good visibility into our deferred revenue. We know when our back -- off balance sheet backlog is scheduled to roll into revenue. And we also have reasonably good visibility to not only our bookings forecast, but also the conversion rate to revenue. Those are the 3 pieces that make up our revenue forecast and projection.

I would say, Vahid, that one thing that's happening that's not yet a majority, but you've seen the growth in our contractually committed backlog and that gives us more visibility into the coming quarters. So the good news is, as we enter a quarter, we know more about the percentage of revenue that's coming in. The bad news is, we have less of a chance to impact the current quarter because it less converts in the quarter for what we're booking. And so the good news is, that visibility gives us a little more comfort into any successive quarter. And as you can see, the revenue has stabilized, while we're shifting to this recurring and have greater visibility. So that's one of the things that gives us the confidence in reaffirming the full year.

Okay. And -- so with the restructuring complete, and it seems like most of the, as you were saying, heavy lifting is out of the way. When should we expect to see more meaningful impacts on the free cash flow line?

So we -- as you look at our guidance for the year, clearly, the Q3 guidance as well as the implied Q4 guidance gives you a view of where that is. And we'll provide more information as we go into '18. But we're really pleased with our year-over-year progress.

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

I'd like to revisit this bonus payment deferral issue. Could you give us an idea of how much that was? And again, why late in the year, I know one -- in the prior year it was pushed from Q1 to Q2. What made you push it further than that?

Steve, this is Brian. The amount for -- of the bonus that will be paid later in the year, is just over $10 million. We have -- we decided to pay it later in the year to be very focused on our cash and want to make sure that we're being responsible as we pay those bonuses. We've communicated that and that's the path that we're taking.

So let's define being responsible. That means, if I'm an employee, that payment -- is that payment at risk, if you don't hit your targets between now and the end of the year?

It is not at risk.

Okay. And can we go and bridge your free cash flow guidance for Q3 and the year from the adjusted basis that you're giving to GAAP free cash flow?

So, if you do that, I would suggest that for the nonrecurring items, because that's the large reconciling item. What's left in the second half of the year for nonrecurring will end up -- that will end up being $5 million to $6 million of nonrecurring in Q3 and Q4.

And how much of that is in Q3?

It's about half-half.

Right. And that's the only difference between adjusted and GAAP? Or you said there are other things? Again, are there other things in there? Before, you said there were $15 million of adjustments for the year in your prior guide. Is that still right?

Still the case. I would point you -- we provide it in some of the press release, but more specifically on Page 21 of the presentation, it's laid out, where we show the total nonrecurring. And what you said the guidance we've given you previously does hold, yes, for the nonrecurring.

Okay. And gross margins were down sequentially. Where do you think they bottom? Or what does it take to start to make them ramp up from here?

So gross margin, as you know, I think the important thing to do, as you have highlighted, you know this Steve, is to possibly parse out the pre-2011 elimination of PCS. So at the moment, we're just slightly north of 60%. I think it's probably fair to say, this is probably where we bottom out. It's probably steady, and hopefully, we'll see some improvement from here.

Okay. And do you think from a product engineering standpoint, have you gotten the COGS down enough, so that if volumes ramp, you can get better gross margins?

Yes, I think -- this is Louis. One of our opportunities is deciding that we don't have any of these huge building blocks. We have a big cloud release with Microsoft coming up at IBC, another one at NAB and last one at NAB, I mean, IBC the following year will be the storage piece. That will be the last piece. But those development efforts are largely funded by Microsoft. And so we have an opportunity to decide whether or not we want to gain more efficiencies or develop new growth areas and that's one of the things we're going to be considering for the second half of the year. But you can imagine, we've had some incredible work done by some fantastic employees building what we've had. But there is no big project left. So there is a whole bunch of little things we're deciding between. I think we have an opportunity. That's one of the reasons we invested so much in this platform to decide whether or not -- at what level do we want to continue to innovate as opposed to just getting more people to use what we have and make it work better. So I doubt there would be upward pressure given the current plan on our R&D lines.

And this IBC announcement with Microsoft, is this more around the development? Or actual product that will be available this year?

It will be 3 -- I'm trying to repeat what we said with Microsoft. So let me make sure I use the words correctly. If you look at the Avid Everywhere suite of MediaCentral platform, we want to make the entire thing available in the cloud. And that will happen on key main -- 3 key milestones. A big piece will be just IBC, which will mean it's available and announced. There will be a big piece at NAB and the final piece is planned to be announced at IBC. And at that point, we should have the entire suite. Obviously, now we're selling enterprise deals now, and we have a couple of applications in the cloud that's driving our subscriptions. But as you know Steve, the big shift is our large media companies shifting to this recurring model. And they're doing that now, and many times, they want to make sure they have the option to shift to the cloud with their license agreements and with the type of terms that we're signing. But there will be a big chunk at NAB -- at IBC. There will be a big chunk at NAB and a smaller, but important chunk at IBC in '18.

Okay. And Brian, going back to cash flow. What's the kind of bare-bones maintenance CapEx that you have to do this year?

So I think we previously said that $10 million is pretty bare-bones, but candidly, at the moment, I think we're even doing a little better than that. So we've been very judicious in terms of how much we spend.

Yes. So I guess -- I look at the first 2 quarters and say, are you being judicious? Or are you kind of starving the business just because where you are from a cash generation capability today?

No. I think Steve, I think we're being judicious. We know that we have to do, and we're making those investments but we're just having some tight discipline. So I would not use the term starving. I would simply say that, I think there is a business, we're very discreet when we look at the requests.

Okay. And then in terms of inventory, was there anything in particular that drove such a sharp reduction in inventory in the quarter?

I think likewise, we put a lot of focus on inventory levels. And -- as well as getting inventory out the door to fulfill to our customers. So I think it's really a combination of both, purchases and outflows.

I think that's right. The 2 things I would add to that, Steve, is culturally, first of all, we've been -- you saw those statistics, massive changes going on. As things settled down and we realize what we build, we start tightening up all our processes internally. Also storage was a big piece and we've done an excellent job of storage rebounding completely. And that -- in anticipation of storage and actually there was a buildup. And I would expect that the kind of working capital discipline that Brian and the team, Rashid and his team have enacted is probably what you'll see going forward. So we probably were a little -- allowing a little bit of a buildup in anticipation of sales. Also, I think because we're so busy with everything else maybe didn't have the kind of discipline we would want. Or I think as things have settled down and acted a little more disciplined, new products are taking off, probably going to see this kind of discipline going forward. I wouldn't expect anything other than the same kind of working capital management that you are seeing now.

And that does conclude today's question-and-answer session. I'd like to turn it back to Louis Hernandez, Jr. for closing remarks.

Okay. Thank you, everybody, for joining us. Good afternoon.

Thank you.

This does conclude today's call. Thank you for your participation. You may now disconnect.