Avid Technology Inc (AVID) 2017 Q4 法說會逐字稿

Good day, and welcome to the Avid Q4 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Dean Ridlon. Please go ahead.

Thank you, Gwen, and good evening, everyone. I'm Dean Ridlon, Vice President of Investor Relations at Avid Technology. Welcome to our Q4 2017 earnings call. With me today are Jeff Rosica, our Avid CEO and President; 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 and 2017 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 useful.

We will be recording today's call, which will be available as a replay for a limited time. 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'd like to turn the call over to Jeff.

Thanks for getting us started, Dean. So hello, everyone, and thanks for joining us. As we recap our 2017 results and discuss how we're driving toward delivery further improved results in 2018, we'll move along briskly with our prepared remarks as we'll be covering a lot of ground today. And then we'll allow for plenty of time to answer your questions, and we'll do that right after my closing remarks.

Firstly, I'm very enthusiastic about Avid and the underlying value and nature of our opportunity. One of the goals I've set for myself as CEO is to communicate with the shareholders about this more simply and in a more straightforward manner. Today's call is built around that concept.

Now if we talk about the management transition, which was a very recent and important news for Avid, I wanted to take a few moments on this call to talk about it here today. The first thing I want to note is that I'm surrounded by a deep bench of management talent across the company. This executive leadership team we have in place today is a team that shaped Avid's strategy and drove the company's transformation to a successful conclusion in 2017, and is now keeping our organization focused and aligned to our customers' needs in order that we can capture the market opportunity. These are individuals who have rich experience in media and entertainment, technology and our customer's operations. They understand well how to prepare Avid so that we can help our customers get to where they want to go next and how we can capitalize on that opportunity and convert that into positive financial results.

Together we've set the annual operating plan for 2018 that is both aggressive and achievable. Our whole organization today is aligned to and focused on executing that plan.

For my own part, I've been in the media and technology for 3 decades. I've grown up in this business, I know the industry and I know our customers very well. And I don't think there is any technology supplier in a more exciting position to lead this industry. I've learned a lot about Avid's business inside and out since joining the company in 2013, starting initially as Head of Sales and then progressing to also managing the marketing and services groups. And then becoming President, and now a CEO. And during this time, I've been intimately involved in all aspects of Avid's business so the management transition was an easy and a natural progression for the company and, to be honest, for me.

I continue to see the trust we've earned from for our customers over the many years. We can see the possibilities in our media platform, the cloud and other ways we've been innovating. Quite frankly, I've also been overwhelmed and humbled by the hundreds of positive messages I received directly from our global customer community, immediately after being named CEO, and I'm eager to tighten our bond with them even further.

This company has been through a lot at all levels. We've got the right talent in place now and a team that can and will win, both for our customers and our investors. I'm acutely aware that Avid has been a disappointing investment for many of our investors. I want to be clear that my top priority is to change this.

In the course of Avid's leadership transition last month, we also took the opportunity to separate the CEO and the Board Chair roles, which supports better corporate governance and accountability to our shareholders. I personally enjoyed tremendous confidence working in partnership with our new Chair, Nancy Hawthorne, and the entire Board of Directors, who all bring a great depth of financial business and media industry experience to help us in guiding our company.

We're also pleased that our board gained more depth and experience with the addition of Dan Silvers as an independent director. His extensive board experience will enhance Avid's ability to create shareholder value. Dan joins Peter Westley as an additional shareholder representative on our board. I'm also pleased to have been elected to Avid's Board, and I look forward to serving our shareholders in that capacity.

Now looking back on our fourth quarter in 2017, we're pleased to have had a relatively strong quarter, although we still have some work to do with improving our gross margins and generating more cash. Additionally, in China, we corrected course during Q4 by establishing a much stronger partnership structure to stay on track to achieve our goals in that important market. Our strategy to establish more enterprise deals saw further success in the quarter as we brought in a number of major customer wins and multiyear commercial agreements. We also showed strong revenue contribution from Avid's strategy to help individual creative professionals and aspiring pros leverage our tools and solutions. In Q4, digital sales for this segment increased 24% year-over-year, and software subscriptions grew 54% year-over-year. Today, we're approaching nearly 100,000 active cloud-enabled subscriptions with these users, many of which are new to Avid.

Now if we turn our attention to the full year 2017 results, Avid turned in a solid performance overall when contrasted to prior years. An advancement of a number of key strategic goals throughout the year. We delivered 4 consecutive quarters of generating positive adjusted free cash flow as well as delivering improved operating results.

I'm pleased with our growth and bookings, excluding Greater China. We achieved sequential bookings growth throughout all 4 quarters of 2017. And each quarter's bookings and the year were higher year-over-year than the comparable quarters in 2016.

We should point out that our bookings performance reflected strong contribution from all of Avid's geographies and customer tiers. Our significant growth in large strategic enterprise commercial agreements contribute to the growth and backlog for the current year. We're also realizing a meaningful and growing contribution to our results from our digital go-to-market and software subscription strategies. And we're encouraged by the strides we made throughout the year in product development, marketing and sales to establish the cloud partnership that we began with Microsoft in the first half of the year.

Right now, our 2007 (sic) [2017] results, I think, showed that we have a solid strategy. I think we're progressing well on improving business performance, and we've built a good foundation to have an even stronger 2018. We'll be making some minor adjustments to our strategic priorities, but not to our overall strategic plan for achieving growth, increasing our profitability and generating better free cash flow. I look forward to communicating further specifics on these adjustments throughout the coming quarters, but here are my initial points of emphasis I want to share with you.

First of all, in line with continuing our two-pronged approach to grow enterprise and individual customers, you'll continue to see Avid sharpen execution on the MediaCentral platform and our product strategy through continued innovation and an enterprise-wide -- enterprise level customer delivery. We're also going to augment our marketing efforts and our product development to drive even more uptake among individual creative users for our tools and solutions.

During the past year, we've also made important progress and well ahead of our peers in delivering cloud-ready platform that can meet the needs of our customers and users today, and to be honest, to prepare them for the future. Our adjustments will focus on achieving optimal platform performance with the prioritization of our projects that offer near- to medium-term returns on those related investments.

We're also taking the needed steps to dramatically improve on our hardware strategy and to optimize our global supply chain so we can deliver greater speed and flexibility, reduce costs and improved product quality. Additionally, we've -- just 3 months in to our new strategic go-to-market alliances with Hong Kong-based DMT and NDT, and these are 2 organizations that have each got 20 years of experience reselling Avid. I would tell you that the initial execution and the results from these expanded partnerships are encouraging.

Overall, for 2018 and beyond, operational optimization for greater efficiencies and speed of the organization will continue to be a major focus for us. Ultimately, leading to continued improvements in business performance and cash generation.

Now let me turn it over to our CFO, Brian Agle, who will step you through the important details of our financial performance and our outlook, then I'll come back to you with some brief closing remarks before we take your questions. So Brian?

Thank you, Jeff, and good afternoon, everyone. Let's turn to Slide 12. We were pleased that the fourth quarter met or exceeded our guidance. Bookings and adjusted free cash flow were favorable to guidance. Revenue, operating expenses and adjusted EBITDA were within our range. Please note when we issued the Q4 guidance for operating expenses, we anticipated a $4 million to $5 million expense benefit related to the Harmonic settlement.

Turning to Slide 13. We were happy with our strong bookings performance and the second particular quarter of revenue growth. We also had improvement in adjusted free cash flow, both year-over-year and sequentially.

Excluding Greater China, bookings were $140.8 million, an increase of 15% year-over-year and 37%, sequentially. Bookings growth was driven in part by closing large multiyear commercial agreements. The continued strong growth of digital sales, up 24% year-over-year, and subscriptions, up 54% year-over-year, contributed to our bookings performance.

Non-GAAP revenue was $107 million -- $107.3 million for the fourth quarter, up 2% sequentially. Excluding the impact of the pre-2011 revenue amortization and the elimination of implied post-contract support or PCS, revenue grew 2% both year-over-year and sequentially. The non-GAAP gross margin percentage adjusted for the impact of pre-2011 and elimination of PCS was 56%. We were disappointed with this result, which was impacted primarily by product mix and low margin professional services deals. In addition to those -- to these 2 specific areas, we're looking at everything, including our cost of goods sold, suppliers, pricing, shipping cost and fulfillment supply chain. We expect gross margin to improve in the coming quarters.

Non-GAAP operating expenses for the quarter were $48.2 million. Our non-GAAP operating expenses decreased $1.9 million year-over-year or 4% and decreased $5.7 million sequentially or 11%. Excluding the Harmonic expense benefit of $5 million, sequential operating expenses would be flat and year-on-year expenses -- operating expenses would be up 6%.

Excluding the impact of the pre-2011 revenue amortization and the elimination of implied PCS, operational adjusted EBITDA at $14.9 million for the quarter was up 31% sequentially and flat year-over-year. Of course, we did experience the benefit from the one-time Harmonic settlement. Adjusted EBITDA margin as a percentage of revenue was 14%. Adjusted free cash flow was $4.8 million for Q4, up $2.8 million year-over-year and $4.2 million sequentially. Including nonrecurring spending, free cash flow was $1 million in Q4.

Now to Slide 14. Let's review the full year 2017. Bookings, excluding Greater China, were up 12%, while revenue excluding pre-2011 elimination of PCS declined 4% for the full year 2017, the second half of the year saw growth of 3% from a year ago. Gross margin of 59% was impacted by the Q4 decline. As we saw -- as we enter 2018, we expect full year non-GAAP operating expenses, excluding the $5 million benefit related to the Harmonic settlement to remain flat. Operational adjusted EBITDA was $46 million for the year, up 19%. Adjusted free cash flow for the year was $18 million, an improvement of $58.5 million year-over-year.

Turning to Slide 15. Similar to what we have shared in the past, we've provided the breakout of Greater China and the rest of world bookings by quarter and the totals for the year. In January, we announced that we had signed 5-year agreements with 2 new partners that have exclusive distribution rights in their respective end markets for all of Greater China. The new agreements include performance guarantees with a minimum of between 6% to 10% growth per annum. As part of these new announcements, we booked $19 million for the Greater China in Q4 2017. This reflects the debooking of the $66 million remaining value of the Jetsen contract netted against the $85 million bookings commitment with our 2 new China partners.

Moving to the balance sheet on Slide 16. At December 31, 2017, we had cash of $57.2 million, which included net proceeds of $14 million from the expansion of our credit facility, of which $2 million was used to retire convertible debt. We also have a $10 million undrawn revolver for total liquidity of $67.2 million. Our accounts receivable balance was $40.1 million. Inventory was down by $12.3 million year-over-year and $2.7 million sequentially to $38.4 million.

At the end of Q4, long-term debt was $204.5 million. We were compliant with our covenant leverage ratio as of Q4. At 12/31/17, total revenue backlog was $536.1 million, which includes deferred revenue of $194.6 million, an amount that we estimate will be reduced by approximately $105 million due to the adoption of revenue recognition standard, ASC 606. I will discuss this in further detail later.

Our total revenue backlog also includes $341.5 million of contractually committed unbilled backlog, representing future billings revenue, EBITDA and cash. This backlog has grown by $138 million over the past year and includes a net benefit of the new China agreements. This places us in a strong position for growth as we have entered 2018.

Now to Slide 17. Adjusted free cash flow in Q4 increased $2.8 million year-over-year to $4.8 million. This is the fifth consecutive quarter of positive adjusted free cash flow.

Now to Slide 18. As you will recall from our providing guidance for Q4, we said that 2016 bonus of $9.3 million would be paid in October. This chart shows the quarterly free cash flow, as well as a normalized view for the 2016 bonus payment made in Q4 2017. In 2018, free cash flow will be our primary reported cash flow metric. The normalized view, as shown by the dotted boxes, will be more indicative of the 2018 seasonal free cash flow trending as we will pay our 2017 bonus in Q2 2018.

Now to Slide 19. As in the past, we have provided details of free cash flow and adjusted free cash flow. In Q4, for the full year 2017, our adjusted free cash flow was $4.8 million and $18.2 million, respectively. Our free cash flow for the full year 2017 was $1 million, which included $17 million of restructuring efficiency and other cash payments. We expect these nonrecurring payments to be approximately $7 million in 2018. Overall, we were pleased that free cash flow improved by $61 million from 2016 to 2017.

Now to Slide 20. I'd like to briefly talk about a couple of updates related to the business. We will be transitioning from one of our large hardware suppliers during 2018. This transition is expected to be completed by the end of the year. The products impacted by this transition are primarily audio and does not include our storage products. Due to the transition, we will be making additional investments in inventory during 2018, which will adversely impact free cash flow by approximately $5 million. We expect to recoup this investment no later than 2019. During the first quarter of 2018, an $8.5 million letter of credit was issued to the supplier to ensure a smooth transition.

Now to Slide 21. Second, I'm pleased to report that our 10-K shows that we have successfully remediated our material control weakness. As you may recall, at the end of 2016, we identified a material weaknesses. We worked hard during 2017 to remediate the weakness and successfully -- and have successfully done so.

Turning to Slide 22. Now to the topic of new revenue recognition standard, ASC 606. As most of you know, effective in 2018, all public companies have shifted to this new revenue recognition standard. The standard brings GAAP and IFRS closer together. Importantly, this does not change cash, bookings nor billings. The new standard causes us to reduce the deferred revenue on our balance sheet. You may remember that as of 12/31/16 deferred revenue balance, we estimated that the 606 reduction in deferred revenue would be approximately $65 million. After another year of sales in 2017, we now estimate the reduction to the 12/31/17 deferred revenue balance to be approximately $105 million.

On the plus side, the new standard also accelerates revenue recognition for software products and professional services. When you net out the haircut against acceleration of revenue, we estimate the adoption of the new standard will unfavorably impact recognized revenue during 2018 by $11 million. While this adjustment will impact our reported results, I'd like to remind you that the November 2017 term loan amendment changed the EBITDA definition for covenant purposes to include the ASC 606 haircut as an add-back.

Now let me turn to Slide 23 to illustrate the impact of 606. On this table, we have shown how the $105 million of ASC 606 adjustment reduced our deferred revenue from $195 million at 12/31/17 to $90 million at January 1, 2018. This adjustment is isolated to the balance sheet and flows down to equity. The deferred revenue haircut will not flow through revenue line on the income statement.

As you can see on the right side of the slide, the full amount of the ASC 606 haircut in 2018 is $42 million, a part of the total $105 million deferred revenue haircut. However, in 2018, $31 million of estimated revenue recognition will be accelerated due to the revenue recognition standard under ASC 606. So the net impact is estimated to be a reduction to 2018 revenue of $11 million.

Next, I'll talk about full year 2018 guidance. For 2018, we are going to use a simplified set of metrics that can be forecast and managed. This year, we will be guiding to 3 key measures for how the business is performing: Revenue, adjusted EBITDA and free cash flow. For the quarters, we will be guiding revenue and adjusted EBITDA.

For 2018, we expect revenue to be in the range of $404 million to $434 million, and adjusted EBITDA to be in the range of $39 million to $51 million. For comparison purposes, after adding back the $11 million haircut related to ASC 606, 2018 revenue under ASC 605 would have been $415 million to $445 million, and adjusted EBITDA would have been $50 million to $62 million. Keeping in mind that ASC 606 does not impact cash, free cash flow -- excuse me, not impact cash, free cash flow 2018 is expected to be in the range of $2 million to $14 million.

Now let me turn to Slide 25 to talk about our Q1 2018 guidance. For Q1 2018, we expect revenue to be in the range of $95 million to $105 million. Adjusted EBITDA is expected to be in the range of $3 million to $9 million. For comparison purposes, after adding back the $2 million haircut related to ASC 606, Q1 2018 revenue under ASC 605 would have been $97 million to $107 million, and adjusted EBITDA would have been $5 million to $11 million.

With that, I'd like to turn the call back to Jeff for a few closing remarks before we go to Q&A.

All right. Thanks, Brian. So in closing, and on behalf of the Avid leadership team, I want to be clear that we're going to be working hard to ensure that the opportunity and Avid's position becomes increasingly clear in our results. With our better-aligned structure and faster product innovation, Avid is in a much more advantageous position to date than we were just a year ago. The team is more confident than ever about Avid's capacity to deliver new shareholder value.

The team has a lot more work to do to improve our performance, but we're pleased with our turnaround, especially when you consider what we -- that we went from a negative $60 million free cash flow during 2016 and moved to slightly positive cash flow of $1 million in 2017. This is a result of a lot of hard work across our team, focused on cost, but also focused on repositioning our business to be able to capitalize on the market opportunity and to drive top line growth.

Going forward, we're going to place an intense focus on leveraging our mission-critical position that we've earned with so many media enterprises around the globe and expanding on the important role Avid plays for creative industry individuals across film, TV and music. We enjoy a great leadership status in the market that we serve, and now our job, to be frank, is we've got to translate that incredible value of our franchise into clearly evident financial results. We're keeping our focus on achieving key strategic objectives to drive profitable growth, to improve revenue visibility and, of course, cash flow. And to becoming even better-positioned in what we're doing to help our customers and the company capitalize on emerging technologies, including the cloud.

So overall, our outlook and our 2018 guidance reflects our confidence and our strategy and our expectation for improved business performance. And so with that, we'll hand it back to the operator so we can start taking your questions.

(Operator Instructions) And we'll go first to Steven Frankel with Dougherty & Company.

So Jeff, let's start with gross margins. And they really have gone down precipitously throughout the year. For a company that talks a lot about their software content, that doesn't make a lot of sense to me. So maybe it is the hardware side that's doing it. What are you doing to improve those margins? And how long before we start to see that decline stabilize and start to move back up the other way?

Okay. It's good question, Steve. Obviously, I'm personally disappointed in the margin result for Q4. This is area that we're putting focus on immediately to make sure we can change it. Now there is a lot of one-time hits that we took in Q4. But even with that, I still think we've got to put extreme focus on our margins. And we're looking at everything from our cost of goods, looking at all costs are hitting, quite frankly, COGS. We we're looking carefully at our pricing strategy. And we're looking at areas like professional services where we really need to improve our margin profile. I think our core business, the margins are performing quite well. I think we just have to address some of these other areas that are impacting the net result. I don't know, Brian, if you want to add any color and clarity to that.

No, I would agree. I think the mix of hardware in Q4 and, to your point, some of those one-time charges along with professional services, this is an area that we're focusing on. Certainly, in the future, we're looking to more and more move our mix to software where we'll have greater margins. Part of the hardware supplier transition will move us more and more to a more efficient hardware supply chain and position us better for software growth.

Yes. And I think I would just say, Steve, in closing, just -- we -- that I'm confident that we're going to bring the margins back around to, first of all, where they should be, but more importantly, grow them over time. I think we've got a great opportunity to grow the margins, and we've got to stay very, very focused on that this year.

And where should they be? Should it be a 50% product gross margin business?

I'm not sure if 3 weeks in, I would tell you that today. I'm happy to share that maybe in the future quarters, but we're doing a lot of analysis right now. As soon as we start to see whether the results are coming in for Q4, we didn't like that we lost a couple of points there. So that's when we looked at what the issues where. I'd say this. I'll commit to you that we're looking closely at the issue. We're going to dig in deep, and we're going to identify our targets and move actions forward. We're already moving some actions forward, but it's obvious we're working on that.

Yes, I'll add.

Go ahead.

I'll just simply add that with 606 coming in 2018, we'll see a more direct revenue impact connected with our sales of hardware. It'll just be clear, and it should be a more pure margin versus a lot of what we've seen, especially with some of the PCS that's gone through in the prior years.

Yes, true.

Let me try to dissect that. So 606, I understand the PCS going away. But does 606 have any impact on the reported gross margin, just kind of apples-to-apples? Does that help your gross margin because you recognized more revenue up front on some of these deals?

Well, certainly on software, despite losing some of the deferred revenue on software, it'll be more immediate so it'll be more direct.

Okay. And it looks like maintenance and subscription was down 10% year-on-year, and you talked about the strong growth on the subscriptions side. So has something changed that's lessened your attach rate for subscription? There was a big move on over the last couple of years to increase that maintenance stream. Did something reverse this year or in Q4?

So I think I would start with some of the headwinds related to the pre-2011 and implied PCS revenue. That was one item. And then we're seeing that our operational maintenance was down 3% year-over-year and 5%, sequentially, even though subscription was up 76% year-on-year, but down slightly, sequentially 14%.

And do you have a theory as to why it's down? Again, I thought that the customers were starting to see the value of staying on maintenance at Avid?

No, I think there -- let me say this. I -- they are -- we're not really seeing a lot of churn. In fact, we're seeing very, very low churn. So that hasn't changed at all, Steve. But I think what's happened is that as product price points come down on some of our traditional support maintenance, that actually does have an impact on the amount that we generate from that. So I think we'll see probably, hopefully, some improvement in that over the course of this next year or 2. But I don't believe there's an underlying issue on this side.

And going back -- circling back to gross margins, again, and you mentioned this in your remarks. Do you think the company's maybe been too aggressive in pricing over the last year, and maybe that's part of the gross margin pressure?

I wouldn't say that. I mean, we're still digging in to that to look at it pretty carefully. In some cases, there are some of the enterprise deals that we do, do have a lower price point, but they go after more share of the customer. But I think, overall, the mix looks pretty good. I think we just have to look more carefully at the pricing strategy to make sure that we're aligned, especially if cost of goods on certain devices are changing. And as we get to end-of-life, I think we also are going to always see, when we're near the end of life of our products on the hardware side, you can get a lower margin. And when newer products come out, they're higher after the initial run. So I think it's also a little bit of timing on the hardware. But I think a lot of what we have to do here is really about our hardware strategy and make sure we've got the right margin profile on those products.

Okay. And Brian, just to clarify that operating expenses will be flat. So you mean I should -- that flat implying about $220 million because I'm adding back about $5 million from Harmonic?

That's correct.

Okay. And what's different about these China partners that gives you more confidence than the Jetsen deal? Because certainly, Jetsen was spawned as a high-profile partner that had deep roots in the business that would do well for you. And what kind of incentives or sticks do you have to make sure that this agreement ramps the way it's supposed to?

Well, I think a couple of things, Steve. This is Jeff. So first of all, Jetsen, obviously, we were very encouraged by their initial work and where they -- our initial plan with them. I think we started to get concerned on their execution throughout the year. And to be honest, we monitored it very, very closely and work with them very, very closely to turn things in the right direction. And so we had to work on that quite a bit. I think for them, they may have bit off too much, and we thought they could take on a wider role. I think they bit off too much on what they did. I think with the new partners, we have 2 very known quantities, that's if you remember in the release that we did, we specialized these partners for that very reason. One is a very proven distributor in the Greater China market on our audio side. And the other one is a very experienced systems integrator and distributor on the video or the more broadcasting media side. So I think we're confident, first of all, in that this split may be is the right approach for this. And maybe one could argue it should have been the right approach from the beginning. I think also that in another execution over these first few months, it's been quite good. So I think we're just seeing their execution. And the way this transition's gone, it's going very, very smoothly. They're executing very well, they're moving pretty fast and they're performing as we expected. So, so far, I'd say it we haven't had anything but glowing green lights for our transition.

And do they have quarterly minimums that they have to meet?

They do. I think a couple of different things we did. So in the learning some lessons, we were a little more careful in the minimums for the year. So that we've got a growth profile we think they can meet and hopefully exceed. It is still strong growth, but it's a little bit less than expected from Jetsen. But we also created a more linear or what I'd say, more natural seasonality for the markets. So we've set their targets. So it's not a huge ramp in Q4. It's actually a set as we saw in China. And we've modeled that performance by quarter to them. So we've said it in what we would expect. That way we don't have any risk in the latter part of the agreement. And as they performed, we've seen them keep pace of that very well so far. Now again, we're early in, but I think everything we've seen so far is quite good. But yes, they have the minimum commitments targets, and we have a lot of teeth if they don't meet the minimum.

Okay. And then the last question, if expenses are going to be flat to flattish, let's say, it kind of says we've won through most of the cost cutting over the last couple of years, yet the company, if you take the midpoint of your guidance, isn't going to generate very much cash given the level of revenue, what needs to change? Or how do you change the dynamic given your debt load and the refinancing deadlines that you're facing to generate enough cash to make that an easy process?

So we'll see the extra cash generation. So of course -- so with OpEx being flat, we'll count on seeing that improvement in gross margin. But more specifically, seeing some growth on revenue. We think that we can get enough leverage out of that growth on revenue with effectively flat expenses that will continue to make progress on our cash flow and on our profit. To date, I think with our performance over the last 5 quarters, I think we have strengthened our balance sheet. We've strengthened our credit profile that -- which is evident from November when we did the extra debt with Cerberus. And so we think we're in a good position. We certainly are aware of the deadlines or the maturity dates of our debt, and we continue to strengthen ourselves and put ourselves in a position where we can do something as those deadlines approach.

And I think if I might just add to that is also, while we're talking about operating expenses here, we still have opportunity as we talked about with our hardware transition and supply chain transition as an example to go after costs in that supply chain. As we change to the supply chain and change our approach, we see opportunities. So we still will be looking at, as I said before, going after our COGS to help in the effort and to bring the margins up to where they should be.

And we'll go next to Hamed Khorsand with BWS Financial.

Jeff, I wanted to start off by asking you, what is your strategy regarding sales and the focus there?

Well, okay. So I -- as a person that came from sales and led that organization over time, I think I'm still pretty clear on what that strategy is. I think that we'll continue to be very, very aggressive on the enterprise side to really go after more market share and more wallet share in that space with each of our customers. We have actually a very strong leader of sales. He was actually -- has been in place in the company for a number of years. He actually turned around our European business and then was promoted to the Head of Worldwide. And I'll tell you that he's done a good job with the new leadership team in Americas to improve the Americas business. So I think we'll keep going on that strategy, a very aggressive strategy. And when I say aggressive, I don't mean price point. I mean, very aggressive tactics in what we're going to do from the enterprise side. And then we'll continue to work very hard to optimize our channel performance. And we're putting a lot of focus on that. And we're also putting a lot of focus on the digital go-to-market. We've seen significant, as you saw from the results, especially not just in Q4, but over the course of the year, we've seen terrific results with our digital go-to-market strategy, and we're going to continue to lean into that very, very heavily and put a new team in place in that group during the quarter, during Q4. And we think we've really got the right team there to drive the growth in that area. And that part of our business is becoming a pretty meaningful part of our earnings.

Okay. Now with the digital strategy, is that all because of being aggressive on price with the renewals as well?

No, no, no. It's not. In fact, our digital strategy is often -- though we do occasional promos on the websites, most of that business is done actually at list price. We -- now our digital strategy is really about our e-commerce strategy. It's about our in-app experience where people can actually acquire or buy options or upgrades or even the renewals in the app. It's also things in our marketplace, where we are able to market not just Avid solutions, but third-party plug-ins and software modules et cetera. So it's all part of that cohesive strategy. And I should also say -- that go-to-market is actually a pretty efficient go-to-market. The cost base on that is quite good. So it's a very solid generator of -- like I said, it's a meaningful contributor to our earnings.

It's -- you've mentioned earlier about the hardware product refresh. Is that coming this year? And what kind of impact does that have on the income statement?

Well, I wouldn't say -- so what I meant by the comments before is, first of all, we're always in the midst of a hardware refresh. I mean, we just -- a hardware refresh. The next is storage product line, and we'll continue to add products as necessary in that product family. We also, as announced just earlier, like late 2017, we're changing over from our AirSpeed product to -- which is our video server. We don't mean -- I don't mean CPU server. I mean, more video server for ingest and playback. And we're changing that over to the new faster line, which was a complete hardware refresh that we're in the middle of executing on this year. I would say we have more plans for 2018 and beyond, but I think what I was interfering to, more importantly, before is we're looking carefully at our whole hardware strategy because we think we've got more opportunity there if we execute right. And we've got to change our global supply chain to really effectively do that.

And why did you guys move away from giving quarterly free cash flow guidance?

So as you can see, we've really narrowed to what we think are most important, the revenue and EBITDA. You may also know that from last year, this is a reasonably -- other than the moving of the bonus, it's a reasonably predictable cash flow. For us, it just does allow us to focus on generating cash flow for the year and to focus on delivering results on revenue and EBITDA by the quarter.

Okay. I guess, to save some investors some time, what is it that the board thinks that the executives should get paid this year -- this past year? I mean, the stock hasn't done anything. And you guys have just treaded along on the free cash flow line. So I'm just trying to figure out what the compensation bonus is going to be like.

So I think there has been some progress made given that on free cash flow, we've improved, $61 million. So I think that's good. I think we've seen growth. As I've mentioned, second half of the year, we saw revenue growth. We've seen EBITDA growth. So we're making progress. And I think the key is just to continue to make that progress.

We'll take our next question from Matthew Galinko with Sidoti.

Can you disclose what the mix of recurring type orders were at this quarter?

Yes. Happy to do that. So this quarter, in Q4, recurring revenue bookings, 51%.

Got you. And just so I have the top line, what was that compared to the prior quarter and year, if you have it?

Give me 1 minute here. So prior quarter was 41 -- excuse me, call it, 45%. Prior year was 46.8%.

Got you. Okay. So was there any -- or can you quantify if there was any margin headwind as a result of the greater mix of recurrent orders or if there was any?

No. I think really, the headwinds were just more the hardware and more -- a little more of some of the more challenging professional services deals that we're dealing, that we're engaged with.

Okay. Also historically, you've named some of the MediaCentral deals. I think you mentioned you've signed a few this quarter, but is it a shift in policy that you're not going to kind of name the wins? Or can we still expect to hear some specifics going forward?

That's a good question, Matt. I actually knew that question was coming. That's actually a change in policy for me, Jeff. It -- we will name the deals at the appropriate time, but I'm not going to rush them into naming them at the earnings calls because often, we're working through with that customer, the timing and when we're going to deploy. But more importantly, I don't want to tip my hand to my competition. I'm sure there are competitors on this call. We will tip our hand to what we've secured when we think it's the right time to announce it.

Got you.

You may see. So I'll this -- I'll say, you may see a little gap because I'm slowing down when we announced it. But you will see a cadence pick up, and you'll see them continue on. It'll just -- I'm going to put little bit of delay of naming them just so we're not tipping our hand.

Got you. Can you, I guess, qualitatively describe whether the size of the orders as generally increasing? Or maybe point towards what's triggering the increase in cadence? Is there are particular strategies or workflows that customers are upgrading and then getting pulled in on? Or just what's -- any more specifics on what's going on there that you could talk about?

Yes. I sure can. And I will make it clear. One thing that's important to note is that it wasn't one big order that moved the needle on the non-China results that we showed there on bookings. It's actually a large quantity of orders, and they range from $1 million orders to a few million dollars. And so I think -- and I think -- so there is a very -- a large number of the deals that we closed in Q4. I think what's happening is that the strategy we started to deploy make those all the way to the deal that I was personally involved in with Sinclair. But I think the pace is picking up because more and more customers are understanding the results. And what they can get from that strategy, and I think our sales team is getting better at executing on that. And I think you just see a general momentum because once you sell a few, then you use those customers as references when you can go public, and then those have used probably a sales team to get more customers to consider it. So I think it's just a building momentum that we're seeing in the strategy.

Got you. Appreciate it.

I'll say this, too, we're very happy with the number of deals that we've got because it wasn't 1 or 2 lumpy. It was a quite a few deals that made up the upside in bookings.

Got you. And is it fair to assume that the sales cycle is shortening relative to kind of your first couple of big ones?

Yes. I think the sales cycle, from customer standpoint, is still similar. I think our team is able to execute on it faster is really what it is. And I think we've gotten -- our sales leader, he's a -- I always joke around our company. I was a good sales leader. Tom Cordiner is a great sales leader. And I think he's done really good job to train the team and get the team really focused around this effort. So I think we're just seeing the building of that. Also, don't forget, end of the year is a good time when you can get customers to sign up to these things, when they're planning their budgets for the following year. So I think we'll generally, I would see -- typically, we would probably see a lot of strength in the latter part of the year on those kind of deals.

And we'll go next to David Cohen with Midwood Capital.

I just want to clarify the treatment of the Harmonic litigation payment. And was it $5 million that was reducing operating expenses, therefore, increasing op income? Or non-GAAP op income, adjusted EBITDA and adjusted free cash?

So the full -- the cash payment that we received was less than $5 million. But the actual expense, the recognition of the benefit of the current cash, as well as future cash flow, was $5 million. So we got a contra expense benefit for $5 million and a cash payment in Q4 of $2.5 million.

Okay. So $5 flowed through into adjusted EBITDA, but $2.5 million, the cash portion, into adjusted free cash flow? Is that accurate?

That's correct.

And so given -- but I guess, more philosophically, given the fact that there are future cash payments, but having recognized the income and it being nonrecurring, why is that not treated the same way as a nonrecurring benefit, the same way your efficiency program expenses, your restructuring expenses, your integration expenses are backed out of all of these metrics? So nonrecurring benefit isn't backed out.

Yes. So one thing you have to realize is we were -- we vigorously pursued this lawsuit. And so we also included a reasonable amount of legal expenses. And so effectively, it's an offset. And so if anything, I think as we go forward, we may have -- we'll be fine because we'll get more cash come 2019, and we don't have to worry about the incurrence of these legal fees.

And never have you backed out the legal expenses along the way?

We have not. They've shown up in OpEx.

That concludes our question and the answer session today. I'd like to turn the conference back over to Mr. Ridlon for any additional or closing remarks.

Thank you, Gwen, and thank you all for joining us. But before we sign off today, I would like to extend an invitation to the investor community to visit with us, since the beginning of April, during 2 of our largest annual trade events. First Avid and the Avid Customer Association will convene for the fifth annual Avid Connect conference. Our agenda is larger than ever, and we'll focus on helping attendees to interact and learn directly from their creative, technical and business peers, who are at the forefront of industry innovation and transformation. Immediately following that is -- following Avid Connect, Avid will kick off its NAB Show activities, where we'll demonstrate our latest wave of new products, which have been influenced through our deep commitment to the Avid's global customer and user community. You can easily register on our website for Avid Connect and contact me to book time to meet with us at the NAB Show, and we hope to see you there.

So with that, thank you all for joining us today. We look forward to speaking with you again when we release our Q1 results in May. Have a good night.

Thank you.

Thanks.

Thank you, everyone. That does conclude today's conference. We thank you for your participation. You may now disconnect.