Avid Technology Inc (AVID) 2017 Q3 法說會逐字稿

Good day, and welcome to the Avid Third Quarter 2017 Earnings Release Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Dean Ridlon, Head of Investor Relations. Please go ahead.

Thank you, Matt, and good evening, everyone. I'm Dean Ridlon, Vice President of Investor Relations at Avid Technology. Welcome you to our Q3 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 in 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 issued today, as well as the Risk Factors and Forward-looking Statements sections of our 2016 annual report on Form 10-K available with 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 two 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.

Before we begin, I would like to invite you to attend our Investor Day on December 5th beginning at 10 A.M. We'll be holding the day at the Palace Hotel in New York and also providing a tour of NBC's facilities at Rockefeller Center. If you would like to attend, please RSVP to me.

And now, I'd like to turn the call over to our Chairman and Chief Executive Officer, Louis Hernandez, Jr.

Thank you, Dean. Hello, everyone. Thank you for joining us today.

I'm going to turn to slide 7 of the presentation. I'm pleased to report that we met or exceeded guidance for all of our key metrics this quarter. Bookings and operational revenue exceeded our guidance while we performed inline with guidance for constant currency bookings, non-GAAP operating expenses, adjusted EBITA and adjusted free cash flow.

Excluding Greater China, our bookings grew 21% year-over-year and 5% sequentially. Operational revenue, which excludes the historical impact of the pre-2011 amortization and the elimination of the implied PCS revenue grew 3% year-over-year and sequentially. And all that growth was organic.

Our core operational model continues to strengthen and the impact on profitability and cash flow is becoming significantly more pronounced. Operationally adjusted EBITDA more than doubled from a year ago and increased 34% sequentially. And we were encouraged by the cash flow characteristic of that EBITDA. This is our fourth consecutive quarter of positive adjusted free cash flow. Year-to-date we've generated $13.5 million of adjusted free cash, an improvement of $55.7 million from last year, representing a 44% conversion of operational adjusted EBITDA to cash flow.

Underpinning our financial performance this quarter was the continued achievement of our strategic objective focused on enterprise and individual customers. Enterprise customers continued to embrace MediaCentral as the industry's only cloud enabled enterprise platform for media. This quarter we signed several large enterprise deals, further validating our strategy. The MediaCentral enterprise deals are typically bundled with a handful of applications and over time our account management team works to increase the lifetime value of these accounts by cross selling additional modules and services.

In the individual market, we're seeing broad adoption of our cloud enabled creative tools offering with accessible pricing. This quarter we saw a surge in paid subscriptions and digital sales. This is driven by increased digital marketing effort, the hundreds of thousands of aspiring artists that have taken advantage of our introductory first offerings, which have been converting to paid sales and the artist community, a cloud based LinkedIn meets Facebook type of offering, which allows professionals to connect, create and share their created professional, driving demand for our cloud enabled creative tools.

Our cloud alliance with Microsoft continues to progress well and we remain very excited about the long-term possibilities of this relationship. And finally, our transition to a more recurring business with a leaner, more direct cost structure is yielding more stable and predictable revenue and earnings model. And it also positions us well for future profitable growth. In fact, our bookings mix continues to reinforce this shift to a more recurring business model. Recurring revenue bookings this quarter were 41% of total bookings and grew 15% from a year ago. And this is contributing meaningfully to the improved visibility going into a quarter. In fact, we have visibility in the range of between 70% and 80% of revenue going into a given quarter.

Let's turn now to slide 8. Our strategy is driving growth and visibility in our financial model. If you turn to the upper left of this chart, you can see continued strong growth in the MediaCentral platform. This is the adoption by large media enterprises of this enterprise wide operating system, that allows them to drive down costs while accessing the best free tools at each step of the value chain. We've grown this space to over 50,000 licensed users, representing 27% growth from a year ago.

New technologies like 4K graphic, augmented reality, et cetera, they create a new decision point for these clients. And we can accommodate these technologies much more efficiently than the legacy way of combining individual proprietary technologies that are much more expensive and complicated to maintain. And this also provides a good environment for our account managers to then go cross sell additional products and services, thereby increasing lifetime value of these relationships.

On the upper right, you can see the growth of paying cloud enabled subscribers in digital books. Up 69% and 35% respectively. This growth validates our strategy for individual creatives and small work groups. We believe we have significant market penetration ahead of us in this segment.

The bottom half of the slide you can see our strategy is contributing to the financial model where there's more recurring and we have greater visibility. Bottom left, you can see the increase we've had in the shift in recurring bookings. Recurring revenue bookings were 41% of the total bookings for the quarter and over 50% of total bookings on an LTM basis. This is a significant increase over where we started before the transformation of about 13% and is attributable to the successful transition in which our enterprise customers are moving to multi-year enterprise agreements and individuals to subscription based purchases.

Bottom right you can see the total revenue backlog we've amassed of $488 million, of which $293 million is contractually committed backlog. This backlog is providing a significantly higher degree of visibility into our future results and creating a more predictable revenue model as move to our next phase of growth.

I'm going to turn to page 9 now, Slide 9, and I'll just provide a little bit more color before I turn it over to Brian on the momentum of our strategy on both the enterprise and individual.

Since the beginning of the year, we have signed several large multi-year enterprise deals. This quarter, we continue that momentum, including deals with NHK, Japanese public broadcaster and a global leader and Viacom, one of the world's largest media companies operating in 170 networks that reach of 700 million subscribers worldwide. With NHK, our agreement includes the first official 4K UHD production workflows and the agreement includes MediaCentral, Media Composer, DNxIQ with high spec workstation systems, NEXIS with significant storage needs for that 4K workflow, as well as bundled services. With Viacom, we signed a five-year enterprise agreement with several applications designed to reduce their total cost of ownership.

By offering MediaCentral bundled with these market leading applications, we leverage the enterprise pricing models and we feel are very uniquely positioned to expand our heritage customer base to more of these more expansive long-term higher value arrangements. These transactions allow clients to get the best tools at every step of the media value chain, all integrated more efficiently and to a common services platform. These applications can be from Avid or from one of the over 2,000 certified third party apps that are currently available.

In the individual market, customers are eager to use the industry's most powerful and recognized tools at a price point that is accessible to them. Our Media Composer first and our Pro Tools first product are proving to be very powerful and low-cost acquisition tools for this market. The initial launch of Pro Tools First resulted in hundreds of thousands of downloads. We then launched Media Composer first on the video side, just a few months ago, and already have had over 100,000 downloads.

The conversion rates to digital purchases and subscriptions from these three premium versions have been strong. This, along with the artist community, which I mentioned earlier, have helped fuel the continued growth of paid cloud enabled subscription base. And like enterprise sales, once individuals are on the platform, we cross sell additional applications and plug ins via our app store.

So now that I've highlighted our results and our strategy, let me turn it over to Brian to review our more detailed financial results. Brian?

Thank you, Louis, and good afternoon, everyone. Let's turn to slide 11.

We were pleased with our third quarter, having met or exceeded our guidance on all metrics. In particular, bookings and revenue were favorable to our guidance. Constant currency bookings, non-GAAP operating expense, adjusted EBITDA and adjusted free cash flow all fell within the guidance range.

Let's move to slide 12 to discuss the Q3 results in more detail. We were happy to see top line and bottom line growth this quarter. Excluding Greater China, bookings on a constant currency basis were $107.9 million, an increase of 19% year-over-year and 3% sequentially. Excluding Greater China, bookings were $102.8 million, an increase of 21% year-over-year and 5% sequentially.

Non-GAAP revenue was $105.3 million for the third quarter, up 3% sequentially. Excluding the impact of the pre-2011 revenue amortization and the elimination of implied post contract support or PCS, revenue grew 3% both year-over-year and sequentially. The impact of pre-2011 revenue amortization and the elimination of PCS was immaterial, giving a simpler view into our financial results this quarter and going forward.

Non-GAAP gross margin percentage, adjusted for the impact of pre-2011 and elimination of PCS, as 59.2%. This is flat on a year-over-year basis. We had strong product shipments in the quarter that have a higher hardware content, including products related to our Pro Tools HDX family, as well as console and control surfaces product families.

Non-GAAP operating expenses for the quarter were $53.9 million. Our non-GAAP operating expenses decreased $4.5 million year-over-year or 8% and decreased $2.7 million sequentially or 5%. Q3 expenses included a $1.6 million non-cash expense charge related to foreign exchange revaluation and higher legal expenses related to our lawsuit with Harmonic, which we have not settled. Operational adjusted EBITDA of $11.4 million for the quarter was up 34% sequentially. Excluding the impact of the pre-2011 revenue amortization and the elimination of implied PCS, adjusted EBITDA was up 107% year-over-year. Adjusted EBITDA margin as a percentage of revenue was 11%. We note a year-on-year improvement of $3.2 million on adjusted free cash flow. I'll talk more about the progress we're making with adjusted free cash flow in a bit.

Now to Slide 13. Similar to what we have shared in the past, we provide the breakout of Greater China and rest of world bookings by quarter. We are very pleased with bookings growth of 21% on a year-over-year basis.

Moving to Slide 14. We have completed the 2017 efficiency program allowing an additional $30 million of savings on top of the already $76 million savings we achieved last year. We have done this by leveraging the development platform, enabling more opportunities for talent alignment and related facilities rationalization.

Moving to the balance sheet on Slide 15. At September 30, 2017, we had cash of $44.1 million and a $5 million undrawn revolver for total liquidity of $49.1 million. Our accounts receivable balance was $40.9 million, inventory was down $14.4 million year-over-year to $41.2 million and flat sequentially with an inventory turn ratio of 4 times.

At the end of Q3, long-term debt was $191.3 million. As outlined at the beginning of the year, our amended agreement with Server has provided more favorable leverage ratio requirement for future periods beginning last quarter. We were well within our covenant leverage ratio as of Q3.

At September 30, 2017, total revenue backlog was $488 million. Total revenue backlog excluding pre-2011 and elimination of PCS grew $63.8 million year-over-year and was flat sequentially. More of our quarterly recognized revenue is coming directly from contractually committed backlog.

Overall, in Q3 72% of our recognized revenue came from June 30, 2017 deferred revenue and contractually committed backlog.

Now to slide 16. As I mentioned, we had strong visibility into Q3 revenue at the beginning of the quarter. This visibility, which is now between 70% and 80% of revenue, is in a given quarter, includes the conversion of deferred revenue, which are orders that had been booked and invoiced and contractually committed backlog, which are orders that have already been booked, but not yet built or shipped. The remaining 20% to 30% of revenue comes from current order bookings, in which the revenue conversion can vary based on volume and mix of those bookings.

Now to slide 17. Adjusted free cash flow increased $3.2 million year-over-year to $537,000. We are pleased this is the fourth quarter of consecutive positive adjusted free cash flow. The increase was driven by continued business execution, as well as our efficiency program and working capital optimization.

A few points to note. The 2016 bonus payment of $9 million has been paid early in Q4 and is reflected in the Q4 guidance. When we provided Q3 guidance, we anticipated an October payout for the 2016 bonus. Separately, while Jetsen met their minimum Q3 cash payment, it was delayed into the first week of Q4. Therefore, the Q3 cash flow does not include Jetsen's Q3 cash remittance.

Please turn to Slide 18. If you look at the year-to-date adjusted free cash flow, the improvement of $55.7 million year-over-year is even more dramatic.

Now to slide 19. Consistent with prior quarters, we provided details of free cash flow and adjusted free cash flow. In the current quarter, our free cash flow improved $3.2 million over last year. Q3 2017 non-recurring items were higher than expected due to higher restructuring payment. We expect these non-recurring items to be lower in Q4 2017.

Capital expenditure levels in Q3 are more consistent with our historical spending patterns. We invest in capital as needs arise, however balance that with tight cash controls.

Turning to slide 20. I'd like to briefly discuss the Harmonic litigation settlement and provide an update on Jetsen. We recently settled our patent infringement litigation with Harmonic. As part of the settlement, we will receive payments totaling $6 million from Harmonic. The first payment of $2.5 million was received on October 24th. The balance will be paid in two installments of $1.5 million in 2019 and $2 million in 2020. We expect the majority of this settlement to impact our Q4 2017 financials. We are pleased to have favorably resolved this litigation.

Turning to Jetsen. The climate in China continues to be challenging, particularly after the recent elections. In Q3, Jetsen met their minimum delivery commitment, although as I mentioned, the minimum cash payment was not received until early Q4 due to a Chinese national holiday. We do not anticipate Jetsen will meet its 27 annual minimums. Additionally, we do not expect Jetsen's equity investment in 2017.

Turning to Slide 21. We are pleased to announce we have expanded our debt facility with an additional $20 million of liquidity, $15 million in cash and $5 million in additional line of credit. This additional cash and liquidity is a less expensive source of cash compared to the Jetsen equity investment. We have also amended the leverage ratio requirement in order to add back the expected deferred revenue haircut related to our adoption of ASC606 in 2018.

Turning to Slide 22. For the fourth quarter, we expect bookings on a constant currency basis to be $118 million to $132 million and on an as reported basis to be $112 million to $126 million. Please note that these guidance ranges exclude bookings for Greater China, which represented $3.2 million of bookings in the fourth quarter of 2016. We are guiding GAAP revenue for Q4 to be in the range of $103 million to $113 million and non-GAAP operating expenses to be in the range of $48 million to $52 million.

Adjusted EBTIDA is expected to be in the range of $14 million to $20 million, adjusted free cash flow to be in the range of negative $4 million to positive $4 million. The Q4 guidance provides a tightened range of annual guidance previously communicated.

Turning to Slide 23. In summary, our financials are now more simple and easy to understand, our operational revenue is growing and expenses are decreasing, we are consistently generating positive adjusted free cash flow. We have put ourselves in a position to further increase profit and generate additional cash.

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

Thank you, Brian. Now I'll wrap things up. You've heard me talk in the past about the significant transformation we undertook to position Avid to succeed in the future. Took our brands, put them on a counted platform, added new applications in higher growth areas. You've heard all about the dramatic changes to the employee base, cost structure, patent portfolio, code base, 65% new employees are in the transformation, 37 new patents, 70% change in office location. It was significant. And there was also a dramatic shift in the economics and composition of the revenues between 2013 and Q2 of '17, the end of the transformation. With all that now behind us, we are well positioned, we feel, to accelerate revenue, scale profitably, and drive higher cash flow.

The driver of this of course is MediaCentral platform, the most significant piece of technology that we have built in the last few years. Enterprise and individuals alike are taking advantage of this unique cloud enabled platform that we've built and operating system for the entire media workflow and the benefits that offer flexible deployment and pricing options for all customers and it makes an ideal way to participate in the media value chain.

And through this single cloud user experience, clients can pick and choose the best applications for every step of the workflow, all on an integrated and efficient platform. And thereby allowing our community to solve the most significant challenges as they navigate the digital transformation. For many, this offers a very unique way for their journey to the cloud in a much more flexible way with a trusted partner.

I'm going to turn to Slide 27 now and our strategy going forward is to make everything we built work better, invest in areas that make the benefits of our approach more obvious to the market and to get as many people on the platform as possible, truly shifting to a focus on growth and execution.

We get enterprises on the platform with the initial set of applications. They see their total cost of ownership improve as they switch from CapEx to an OpEx model. We increased our wallet share as they expand the suite, purchasing new products and replacing competitors. In this model, customers save money, have more visibility into their future IT spend, streamline operations and can efficiently add new applications and services as their business evolved. For Avid, it results in a more predictable and scaleable recurring revenue stream as the platform at Enterprise pricing drive retention and optimized value.

Individuals are excited about our subscription prices and entry level premium model that they provide even more opportunities to feed new parts of the market. Our customers are on the platform with subscription applications and we can expand wallet share with additional complementary plug-ins and apps. The growth of our artist community in app store are also helping drive activity.

Turning to Slide 28. We started this journey with an unbelievable brand in distribution in our heritage market. Through MediaCentral, we were able to allow our heritage products to operate at a low cost with greater flexibility and we were able to add new products and services to address the more significant business issues of our customers. And allow Avid to participate in higher growth areas and be part of the larger media value chain.

Building on that core, we've been shifting to a recurring revenue model, driven by enterprise deals and subscriptions, adding new services and opportunities, establishing a model for growth. Our alliance with Microsoft is accelerating our push into the cloud as we lead the industry through this important transition. We started with just a few initial creative products, which were announced at IBC just a couple of months ago and are now working with Microsoft to move the entire stack to the cloud.

Working with the Avid customer association, which by the way is 20,000 members strong, and represents the largest media companies and the most recognized industry professionals working arm-in-arm on ways to further exploit what we've built, which is helping drive adoption.

And with that, I'd like to now ask the operator to open the line for questions. Operator.

(Operator Instructions) Steven Frankel, Dougherty.

I'd like to start with Jetsen. And one of the appeals when you did this deal was the revenue visibility in that they had guaranteed minimums. And if they're not going to hit the minimum in Q4, what, if anything can you do? And how much revenue will you get from them in Q4? And do you renegotiate the deal at this point?

First of all, they did hit their minimum from the Q3. We believe because of the environment they'll have trouble in Q4. That creates a bunch of options for us. So first of all, interestingly, as you know, we did not lower our guidance and I think that shows that we're feeling confident about the core business and the core operational cash flows that we're seeing. And if you add both the bonus payment in Q4 of $9 million, which we've already made, and this possible shortfall of Jetsen, it shows you how we're feeling about the base business with those enterprise deals and subscriptions.

In terms of Jetsen, we're working collaboratively with them now on how to improve the outlook for Greater China. And we're confident we'll be able to find a comfortable resolution for improving that region.

Was it my understanding that Q4 represented a significant part of their commitment in the first year, right? There was a big hockey stick. So this is a material shortfall relative to where they were supposed to be for the full year.

Q4 relative to that contract you're right. Q4 was certainly -- it will be the largest quarter with Jetsen, but it won't quite hit the contractual minimum and so as Louis said, we're working on that with them. A, to try to do their very best and also evaluate what that means from a contract standpoint.

What's your expectation as you go into '18? Do you expect that you might have to reduce your expectations for this business in '18 as well?

We don't believe we'll have to reduce our expectations for the Greater China region. We'll evaluate what role Jetsen will play in that.

I would remind you that this was an RFP that Jetsen responded to. It was the competitive bid to be the exclusive provider for that region. There are, still just like Microsoft on the cloud side the other could providers are very eager to deepen the attraction that we're seeing with our enterprise deal.

Louis, you talked a lot about this move to subscription in the tier 3 business. What should we think about for ARPU? Is this a $5 a month business? A $10 a month business?

I'm glad you asked that. For 2018 when we give guidance, we'll likely be introducing a series of more recurring revenue type metric, like ARR and possibly MRR and ACV and ARPU. And we have not given those statistics yet. What I will tell you is if you look online, you can see that the pricing averages between $30 for Pro Tools per month, just for the application. And around $50 per month for Media Composer. If you want the cloud collaboration component, or you bought purchasings through the app store, there's additional fees, as well as storage, which on the free versions you have to use the cloud based storage. And so you could add up some of those numbers and get close to what you would expect on a per subscription basis.

And we're anxious to provide you more detail and we'll likely be rolling that in '18 as more than half of our revenues. And as you know, the visibility when you add up the deferred and the backlog, a significant amount is visible and we want to share that visibility with you.

As you know, the bigger piece is the enterprise shift. And so lifetime value, ACV on those will be also important. And those are on average increasing meaningfully. If you look at the average deal size that we used to refer to, which were a bunch of Media Composers and Pro Tools, compared to what we're selling now, that has gone up in multiples in terms of the average deal size and it's simply moving to enterprise pricing and replacing competitors as we become more prominent within each of our accounts. And that's why a deal like Viacom is so important because Viacom, our relationship there wasn't as strong as we would have liked it to be. They had been moving away from Avid over the years and this was a big statement that they're going to be moving onto the platform and we'll have an opportunity I think to demonstrate our value through additional application.

So both of those I think, Steve, we're going to want to share more details with you and be able to disclose ARPU, ACV, ARR type metrics.

And you mentioned 606 a couple of times and given the large amount of deferred revenue you have on the balance sheet, I wonder if you might share with us some early thoughts on what 606 is likely to do to that deferred revenue balance.

As you may recall, in our 2016 NA we did disclose our estimate of the December 31, 2016 deferred revenue that would be haircutted or lost as we move into 606 effective January 1st. We said it would be $65 million of that December 31, 2016 deferred revenue balance. Of course when we get the December 31, 2017, it will be north of that $65 million. So the next time we have this call, we will have provided tremendous amount of detail, footnotes, waterfalls on what that is, but that's something we'll disclose in our next call. But again, we have given historical data point relative to deferred revenue at December 31, 2016.

Could you bridge for me your adjusted free cash flow guidance in Q4 to GAAP?

There again I think it's going to be very similar where the delta will be the non-recurring will be closer to about $2.5 million.

So $2.5 million non-recurring in your guidance.

That's right.

And then maybe comment a little bit on linearity. What was the linearity like in Q3 and how do you anticipate that playing out in Q4? And do you expect a year-end budget flush from the North American broadcasters as you've seen in some past years?

That's a good question. So on linearity, again we feel like we're standing on some very solid foundation with that 70% to 80%.

I guess I was referring to bookings. Yes, obviously you have, because of [points] the deferred revenue. And you have good revenue visibility, but in terms of booking.

Thanks for the clarification. So on bookings, you know that in general our business is more at the end of the quarter. But I can also say that as you look at our bookings forecast for this quarter, we feel like we have a strong bookings guidance. And so we're bullish and we're hopeful. As you mentioned, the North America broadcasters, that budget flush, we certainly like to see that again. And I think our bookings right now is based on historical trends and certain what we have great visibility to in the pipeline.

I would say the slight change that's starting to occur, Steve, is that these larger enterprise deals have a longer sales cycle. So our forecast for Q4, which is a transition we're going through, probably includes less reliance on deals that will come up and close in the quarter, as opposed to a pipeline of enterprise type deals that we've been working on for a few quarters that are scheduled to close usually align with the budget cycles that have been approved.

When you move to enterprise deals and you're signing multi-million dollar, and the couple that we highlighted for instance, $5 million plus in each case type of deals, they typically will go through a different approval process, which will have had to be qualified before we get into the scoping because it's a true enterprise deal.

We will still see a budget flush on point solution, but more of our clients are buying these enterprise deals. So on the enterprise deals, they're less tied to kind of the rush at the end of the quarter to get discounts to close out and more ties to a strategic longer sales environment where we're predicting the type of close. And because the delivery requires much more effort, the pricing is usually tied to delivery. So in other words, if we qualified you in quarter one to close in Q4, we would have had to qualify your budget because to kick off your project in Q1, we have to set aside a certain amount of people to deliver because it's not like the old days where we deliver some Media Composers, plug them in, make sure they work and we leave. This is a true enterprise piece of software that requires a fairly significant amount of integration. So the sales cycle I think in that way is more predictable for us because we've been developing it more collaboratively.

There still is point solutions that are going to be purchased at the end of the quarter and we will take advantage of any excess capital flush that occurs towards the end of the year. And I do expect that that would happen.

We also have new tech like 4K or some of our graphics that are AR where a lot of people want to get their hands on those pretty quickly and we're seeing a kind of a micro burst there on some of the point solutions, along with NEXIS. NEXIS is doing very well for us.

Matthew Galinko, Sidoti.

Can you opine on where you see recurring bookings -- what you see recurring bookings looking like in the mix in 2018?

We haven't provided necessarily guidance on 2018, but I do think that the trends that you've seen I think we're looking for consistent trends. We don't see anything dramatic. The trend line will continue.

I mentioned, Matt, in Steve's question about the lengthening sales cycle and you remember early in the enterprise it made it hardest for us to predict when deals will close. You'll notice that we have a handful, maybe 5 to 15 deals closing every quarter now. I would not expect that to change and based on the visibility we have, we would expect that you would see a steady increase in the percentage of recurring bookings. And that would come from both -- largely from enterprise, but also the individual market, which is starting to become a meaningful number when you add up the digital sales in subscriptions.

And I mentioned for the first time I think the artist community, something that's been in the public market for some time. But that (inaudible) be grown fairly significant. It's 30,000 people now are on this community where you meet other artists and to collaborate with them, like if I like something you've done before, I introduce you to a session using one of our creative tools. To do that, you actually have to have our creative tool.

And so that's proven a way to generate interest because you want to interact with the other person, we give you a free -- that's where the downloads come in to use it, and then what happens is people start to convert over to the paid. So t hat little ecosystem of cloud based collaboration, the artist community where you can meet other people and free tools is proving to be a very effective low cost acquisition tool for paid subscribers. So we think that both of those will continue to drive up that percentage of bookings that are recurring in nature.

You mentioned ultra HD workflows as being part of the, I think an HK enterprise deal. Do you expect ultra HD to be more of a driver in 2018?

Yes. I think what I love about this, if you think about this for a second. And you think about a workflow, and if you drew six circles on your piece of paper from left to right, and each of those circles represents another vendor, so you're going to need your editorial suite to be 4K, you're going to use your mixing suite, your MAM system, your production asset, your play out.

The nice thing about Avid, and I think why we won this deal with NHK, is instead of having each vendor do a 4K enabled piece, they can go to one vendor sitting on a common platform and we have to think about the integration between them all because we have all those applications. And that's what really drove NHK, which as you probably know, was a leader in 4K. They developed systems internally. We are going to be their first externally developed 4K workflow provider and it's a fairly significant contract, which will of course lead to 8K down the road.

But NHK I think is a precursor, especially with the Tokyo Olympics coming, and all the broadcasters, they're all going to have to get ready before then. At least the ones who have licensing rights because it's a requirement. And so the nice thing about it is when you have micro burst application like 4K that are going to drive buying behavior, you cause a new decision for somebody like NHK. And when they see the option we have where you can do it this way more efficiently, I think we're in a very good place to see an acceleration for those enterprise deals.

So this contract started with a 4K discussion on the editorial suite. It ended up in a large enterprise deal across many applications and we're hoping that things like graphics, which is surging, augmented in virtual reality, 4K is top of mind to a lot of people, along with cloud. Those create new decisions and we want to get in there and say we can meet your short-term need, but we can also do it in a more efficient way because we have this operating system underneath the whole thing.

Hamed Khorsand; BWS Financial.

Just a few questions here. First off, can you provide some details as to what the benefits have been so far, if any, from the Microsoft partnership?

This is Louis again. Thanks for calling, Hamed. As you remember, we did an RFP, so most of the major providers formally bid. We had interest from Huawei and Ollie and all the Chinese vendors as well. Ultimately we selected Microsoft as our preferred vendor. Remember it's an open system, so all vendors will be certified eventually. But we selected -- and AWS and Google had some very fine attributes, as did Huawei and Tencent also has the very strong features.

The reason we liked Microsoft is they had the largest commitment to the cloud overall. You probably know they're larger than -- in terms of datacenters and capabilities than both AWS and Google. They had the largest team in media and entertainment. And they had a path that was already priced out to move from private through public cloud, including hybrid. And they already had the pricing model.

So for most of our large media enterprises, the appeal of reducing your total cost of ownership on the cloud is muddied by the concerns over packet sizes, security and the total cost. And instead of flipping right to public, which most pure play providers will force you to do, Microsoft had already thought through a way to extend the Microsoft licenses to include Azure. You can run it on top of your active X directory, which means for you from a security basis it looked just like you're running it today, but you're running the cloud environment. You can then stick our application right on top and then start to migrate components when you're ready. Services, then the assets, et cetera.

And so we felt like they were in a better position to help very large media enterprises move over time to the cloud when they're ready as opposed to being forced to either add another service stack through VM or go pure play public and have a bunch of questions.

Now the reason this was so interesting to everybody is Avid has almost 600 petabytes of storage on prem. It's massive. And if you think about half of the total Internet volume, right now is through Netflix just streaming. If you were to move the production of those assets, it would increase dramatically the total cloud volume.

So Avid has a very, very large footprint because of the nature of our clients are huge. And if you start moving production to the cloud, these cloud guys got very, very excited. And that excitement was reflected in the degree of aggressiveness that Microsoft responded to our RFP. And that is in the form of training, subsidy dollars for development efforts, investment in proof of concept with large media enterprises, integrating our NEXIS and other products into their Azure platform where we'll get a piece of that revenue in the future.

And so they were the most attractive, we felt, operationally. They were the most aggressive economically and we felt they had the most flexibility for our clients. So that's what Microsoft offered. Scott Guthrie there, who runs Azure. Sacha has been involved and their M&A team, Bob Hagan, they've been great and they've been wonderful partners so far and almost anxious to help us accelerate this effort. So I couldn't say more positive about the type of partner that they've been.

And then switching gears. Since Viacom was added in the quarter, how much of their group of employees do they bring on or add licenses to, given that they weren't using you on a full basis?

Yes, that's the interesting thing. So let me give you two examples. You have Sinclair, who tried us on a few station groups, went to all station groups and then basically top down said you will all standardize on Avid on these applications. And every time they buy somebody new, we have a quick discussion with their pricing and they step up to new tables and pay us more and add more efficiency. So that's the Sinclair model.

The Viacom model is more like what we normally face. So you have a team there that wants to drive down cost, but they don't want to force each of their individual properties. They don't want to mandate a common tool set. So what they liked about us is they can have everybody on the platform and then they want us to go into each of the group and convince them to buy more application. Now one thing that was interesting for them is they had become a big Adobe shop over time. The fact that Adobe can run concurrently with Media Composer on MediaCentral was kind of a stunning shock to them. But it allowed them to not have this religious discussion about which one to use.

Now Media Composer is important to us, but it's a small percentage of the total suite. If we can get your storage and your archive and your MAM system and everything else, happy to have you continue to use Adobe. The interesting thing that happened, once that got us in the door, it's like you don't have to replace Adobe. We can work concurrently. That allowed us to have this bigger conversation. So what they're starting with is MediaCentral basically and they're now allowing us to go into each of the groups and convince the groups to standardize application. And they explained internally that you don't have to replace your editorial suite if you want to stick to it. And that has actually allowed us to expand our footprint on Media Composer.

I just went last week to the first presentation of one of the standalone large groups and I think it was very well received that corporate, quote/unquote, purchased the licenses for MediaCentral and are making them available to the individual groups and we're now going group by group and plan on expanding our relationship.

So that's how Viacom is working and I think the way each of these works it really depends on the culture and the economic pressure, which dictates how much these companies are dictating a common footprint like we have or are working with us to evolve into it over time.

I think in the case of Viacom, I would consider this multi-million dollar, multi-year agreement as a small beginning of what's possible. We can really help them and we're really excited about what this could mean long-term.

Was the cash flow recognized in Q3? And if that's the case, how long will it take before the next recognition of the cash flow?

Are you talking about Viacom specifically as an example?

Yes.

That's a multi-year deal and I think so in Q3 it was not reflected.

Steven Frankel, Dougherty.

What changes were made to the service agreement? In other words, did you have to pay a higher rate or anything to get this additional borrowing capacity?

At the same terms, same interest rate, we had to do a one time fee. I think at the Q we call it out at $700K between the incremental $15 million on the term and then the extra $5 million on the line of credit. So $700K.

And you talked in the release about buying back some bonds. Is that something that you're likely to do or that's something that you're contractually able to do? Were you comfortable enough parting with $15 million in cash?

We've actually been encouraged by various shareholders and just in general to go consider buying some bonds. And in our conversation with servers we realized that we needed to open up a basket to create the option to purchase the convertibles. At the moment, the good news is now we have the ability to go do that. But we'll watch the market and do the right thing, as well as watch our cash flow.

And I think what we would say on that, Steve, is we felt this is a very low cost way to add some cushion and liquidity -- incremental liquidity. We don't think we'll need any of it in the given quarter. And that's why we wanted to have this basket so if we can opportunistically take advantage of the bonds, then we would. And we'll just evaluate that on an ongoing basis and make a decision as we progress through the quarter.

We'll conclude the Q&A session. At this time I'll turn it back to management for any additional closing remarks.

We have nothing further. Thank you all for joining us today and we look forward to speaking to you after our Q4 results.

Once again, that does conclude today's conference call.