Avid Technology Inc (AVID) 2022 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Avid Technologies Second Quarter 2022 Earnings Conference Call for the period ended June 30, 2022. My name is Whit Rappole, Avid's Vice President, Corporate Development and Investor Relations. Please note that this call is being recorded today, August 2, 2022, at 5:30 p.m. Eastern Time.

With me this afternoon are Jeff Rosica, our Chief Executive Officer and President; and Ken Gayron, our Chief Financial Officer and EVP. In their prepared remarks, Jeff will provide an overview of our business, and then Ken will provide a detailed review of our financial and operating results, followed by time for questions. We issued our earnings release earlier this afternoon, and we have prepared a slide presentation that we will refer to on this call. The press release and presentation are currently available on the Events and Presentations page of our Investor Relations website at ir.avid.com, and shortly following the conclusion of the call, a replay will be available on our IR website for a limited time.

During today's call, management will reference certain non-GAAP financial metrics and operational metrics. In accordance with Regulation G, both the appendix to our earnings release today and our investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational metrics used on this call and in the presentation. Unless otherwise noted, all figures discussed by management during the call are non-GAAP figures, except for revenue, which is always GAAP.

In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are based on our current beliefs and information available as of today, actual future results or occurrences may differ materially from these forward-looking statements. For more information, including a discussion of some of the key risks and uncertainties associated with these forward-looking statements, please see our press release issued today and our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.

With that, let me turn the call over to our CEO and President, Jeff Rosica, for his remarks.

Thanks, Whit, and my thanks to everyone joining us today to review Avid's second quarter results. So let me dive right in. Let's start with the 3 main takeaways for Avid's performance during the quarter. First, we delivered strong subscription growth, including another good quarter for enterprise adoption where we added 3,800 MediaCentral Flex subscriptions in Q2. And we continue to deliver sustained growth with another solid quarterly performance from our Creative Tools subscriptions. Next, we continue to experience strong overall market conditions and healthy customer demand for our software and integrated solutions. However, as expected, the global supply chain constraints that impacted our first quarter continued through the second quarter, and we were not able to ship a significant portion of the customer orders that we received for integrated solutions in the first half.

And finally, even with these limitations, we still delivered year-over-year total revenue growth and expanding gross margin and adjusted EBITDA margin, which together drove continued year-over-year improvement in profitability. Overall, we ended the quarter seeing continued strong market demand for our solutions, and we have a higher-than-normal level of unshipped orders for integrated solutions, which together give us confidence in our trajectory as we enter the second half.

Now let me dig in a bit more and provide some specifics on each of these areas. With sustained growth -- excuse me, with sustained strong adoption of our subscriptions by both new and existing customers for both our creative tools and enterprise offerings, we saw strong growth in our overall subscription business in the second quarter. We realized net adds of 18,500 subscriptions and delivered year-over-year growth of 22% in the number of overall subscriptions. We continue to expand our portfolio of higher-value enterprise subscription offerings, which are contributing to revenue growth. We launched NEXIS Flex with our virtual file system software as a subscription and saw initial success with dozens of customers in the second quarter. The NEXIS virtual file system is a software solution that runs on either our NEXIS storage appliances or on our NEXIS cloud storage to deliver the same media storage performance, whether using on-premises or cloud-based storage or both.

We also launched the F-Series upgrade to our NEXIS appliances in July. And our proceeds pricing continues to improve as the higher-priced enterprise subscriptions becomes a larger portion of the business. Our creative tools remain an essential piece of our subscription growth. And during the second quarter, which is historically our seasonally weakest quarter for this part of our business, we had good net adds across all 3 of the creative tool product lines. We continue to innovate and further grow this business to attract more next-generation creatives.

In late April, we introduced Pro Tools Artist, a new lower-priced tier directed at the music creation community. Initial results from Pro Tools Artist are encouraging, and we look forward to continued growth from this new tier. Together, these factors all resulted in 58.7% year-over-year subscription revenue growth.

Now during the second quarter, healthy demand from our customers and strong commercial activity continued across our businesses, resulting in year-over-year revenue growth in the quarter. Business activity with our enterprise customers remain strong and we continue to see healthy uplift when we convert customers to subscription. We closed 19 new enterprise subscription agreements, including with such notable brands as ITV News and Warner Bros. Discovery.

Due to the ongoing global supply chain constraints that I mentioned earlier and as we discussed on our previous earnings call, we realized a year-over-year 10.6% decline in integrated solutions revenue in Q2 as we continue to face challenges in delivering customer orders for certain parts of our integrated solutions portfolio. While we continue to see strong demand for our products, the expected supply chain constraints that we're facing are impacting production levels and our ability to meet this healthy demand.

As a result of the lower shipments in the first half of the year due to these constraints, unfulfilled contractually committed orders for integrated solutions were more than $20 million above typical levels of unfulfilled orders at the end of the second quarter. We are making progress in working to resolve these issues. And based on what we're seeing today from suppliers, combined with the great work of our teams, we anticipate the impacts of the global supply challenges on our business will be gradually resolved over the next several quarters starting during the second half of 2022.

Our third takeaway is our business fundamentals and profitability remains strong. Our subscription and maintenance revenue grew 19% year-over-year in the quarter to $62 million, based on strong subscription growth across our businesses. As expected and as we have previously discussed, our success in converting enterprise customers to subscription is resulting in a reduction in maintenance revenue. However, the significant growth in our total subscription revenue continued to drive double-digit subscription and maintenance revenue growth and also resulted in strong 14% year-over-year growth in ARR and 46% year-over-year growth in subscription ARR.

We continued our focus on proactively managing our costs, while also investing in technology innovation and digital transformation to fuel our strategic growth plan. The revenue growth, combined with year-over-year improvement in gross margin and sequentially stable operating expenses enabled us to deliver adjusted EBITDA margin of 17% for the quarter, and we delivered non-GAAP EPS growth of 4% year-over-year.

Now let's talk about where we see things going forward from a business perspective. We've seen the healthy demand for our products and solutions continue into the third quarter and we expect for this trend to continue based on the market signals we're seeing. We had several customer events recently that have reinforced this view. In July, we had an additional voice of the customer event in the U.K. with dozens of European members of the Avid Community Association. These discussions help us inform us on our customers' priorities and ensure that our product road maps will meet our customers' needs and investment priorities.

In addition, during these recent meetings, we were happy to hear from our customers that they expect to continue to invest in the technology and solutions that they need to help deliver the increasing volume of high-quality content that consumers are expecting and to drive their own strategic priorities, including greater content supply chain efficiencies, which our solutions help clients address.

Earlier today, we announced an important agreement between Amazon Studios and Avid to help advance Amazon's content production in the cloud and to enable their editors and other content contributors to use Media Composer, NEXIS storage and the MediaCentral platform in a globally scalable studio in a cloud solution running on AWS.

In the news release, Amazon Studios' Spokesperson stated that they see Avid as a central component of their studio in the Cloud Vision to provide a fully cloud-based tool set to their creative teams across the globe. We're really excited about this new agreement with Amazon Studios as we believe that it further demonstrates our unique position and the market leadership in helping move the media and entertainment industry to the cloud.

We will continue to innovate with new technologies, develop new solutions and forge partnerships that will contribute towards our growth plan. I'm encouraged by the additional new products and key product enhancements in our development pipeline to meet the market and customer demands that we see and to help drive our growth. As always, we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on the past few years, while we will also continue to make strategic investments in new innovative solutions as well as our digital transformation in support of our long-term growth plan.

As I said earlier, we currently expect that the global supply chain conditions that have been impacting our integrated solution shipments will moderate over time. And in fact, we are expecting to significantly increase production and shipments of integrated solutions in the second half compared to the first half. However, based on the current healthy demand overall for our solutions, we don't expect to fully catch up this year and we expect to end the year with some elevated amount of unfulfilled orders. That said, this expectation is fully factored into our 2022 guidance.

Our experienced supply chain operations and hardware design teams continue to work to mitigate the effects of the global supply chain situation on our business, and we will continue to be diligent in managing ongoing risk present from the macro supply chain environment and to maximize our business performance in 2022.

Through all of this, for the full year 2022, we expect to deliver continued revenue growth and healthy profitability. We expect continued strong performance from our growing subscription business. And as such, we are maintaining our full year 2022 guidance targets for subscription and maintenance revenue. However, while on the one hand, we are also seeing healthy market conditions and strong overall demand for integrated solutions, the impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full year 2022 business plans. As a result, we are prudently widening our range for our full year 2022 revenue guidance while keeping the same midpoint to better reflect the range of possible outcomes for the year. We are adjusting our full year guidance for adjusted EBITDA and non-GAAP EPS to reflect this wider revenue range.

We are also adjusting our free cash flow guidance for full year 2022 as a result of several factors. First, we're seeing more rapid adoption of enterprise subscriptions globally, which are strategically important for the company and are positive for our long-term model, but they have different near-term cash conversion characteristics than our individual creative subscription business. Second, the expected timing of the integrated solutions manufacturing recovery happening later in the second half will likely lead to some cash collections from these shipments falling into early 2023. And third, to the extent we can, our plan is to temporarily build up our inventories to a level that will provide a sufficient buffer and greater flexibility to better navigate the variability in anticipated supply chain conditions over the next several quarters and most importantly, to better meet the stronger demand that we're seeing.

With that, let me now turn the call over to Ken to review more of the financial details. Take away, Ken.

Thank you, Jeff, and good afternoon, everyone. In the second quarter, we continued our profitable growth driven by robust performance in our subscription business and our growing ARR. Our focus for the second half of 2022 will be to further build our high-margin subscription revenue and continue to stay on track with our long-term model. We expect these efforts to result in continued improvement in our key financial metrics. With that, let us now turn to the details of our second quarter financial results.

We are encouraged by the continued growth of our paid subscription base. Our total subscription count reached approximately 450,000 at the end of the second quarter, an increase of 22% year-over-year. Growth in both enterprise subscriptions and creative tools continue to be healthy and solid. MediaCentral subscriptions grew to approximately 23,100, an increase of about 3,800 during the second quarter, representing a year-over-year growth rate of 209%. The increase in enterprise subscriptions furthers our confidence in the transition of our existing customer base to subscription. Subscriptions for our creative tools performed as expected in the traditionally seasonally weaker second quarter, increasing by approximately 14,600. Subscription growth was solid for our creative tools with year-over-year growth of 18%.

Now moving to the composition of our revenues. The consistent growth in the number of paid subscriptions drove continued growth in subscription revenue during the second quarter, which reached $34.1 million, an increase of 59% year-over-year. The shift to enterprise subscription customers continues to increase our per seat revenue, a trend we expect to continue. In addition, the launch of the new NEXIS Flex subscription that Jeff discussed, contribute a small portion of the subscription revenue growth.

Maintenance continues to be a solid part of the business. During the second quarter, maintenance revenue was $27.8 million, down 9% year-over-year as we continue to successfully convert our enterprise customers to subscription offerings at a healthy uplift in excess of 140%. We are seeing a reduction in the related software maintenance revenue from those customers. In addition, hardware maintenance was up 4% year-over-year, mainly due to price increases even as the lower integrated solutions revenue in the first half also reduced the associated first year maintenance revenue.

Total subscription and maintenance revenue increased year-over-year by 19% in the second quarter. Subscription and maintenance saw a 15% growth for the first half of the year, in line with our 2022 financial model and long-term plan.

Total combined integrated solutions, perpetual and professional services revenue was $35.8 million in the second quarter, driven by lower integrated solutions and the continued transition away from perpetual software licenses.

Integrated solutions revenue was $28 million in the second quarter, a decrease of 11% year-over-year. As was the case in the first quarter, despite continued robust market demand, several integrated solutions products were impacted by the global supply chain challenges, limiting our production capacity and our ability to meet customer demand at the end of the quarter.

We ended the second quarter with approximately $20 million more than normal of unfilled contractually committed orders for integrated solutions. The unfilled orders are primarily related to availability of certain ships and power supplies for our Pro Tools Hardware, audio control surfaces and live sound consoles.

We expect to deliver significantly more integrated solutions revenue in the second half, but given the strong demand we're seeing, we don't expect to fully catch up on the production in shipments before the end of the year. And as a result, we expect to have an elevated level of contractually committed orders at the end of 2022.

As we also indicated during our first quarter earnings call, risk remain from macro supply chain headwinds, so the recovery could be uneven, and we have factored these risks as we understand them today into our Q3 and full year 2022 guidance.

Perpetual licenses revenue was $2.7 million, a decrease of 53% year-over-year as we continue to deemphasize perpetual licenses and focus on strategic subscription revenue. Even with the decline in perpetual revenue, total software revenue from subscription and perpetual licenses increased year-over-year by 35% in the second quarter, as the subscription revenue growth significantly exceeded the perpetual revenue decline.

Now moving to annual recurring revenue, LTM recurring revenue and annual contract value from long-term agreements. As our business model continues to rapidly move towards subscription, we introduced annual recurring revenue as a new key metric at our Investor Day in May. Annual recurring revenue based on the annualization of subscription and maintenance bookings was $231 million in the second quarter, an increase of $28.4 million or 14.1% year-over-year. Growth in ARR was due to subscription ARR growth of 46% as we continue to drive a favorable conversion of maintenance revenue to subscription revenue, plus adding new customers to our subscription business.

As expected, subscription revenue growth is not always going to track subscription ARR growth based on a few factors. First, subscription revenue growth for a quarter can vary based on the size and number of enterprise subscription deals and we had a favorable comparison this quarter as the second quarter of 2021 had weaker subscription revenue on the Enterprise segment. Second, as we discussed at our recent Investor Day, the revenue recognition of multiyear enterprise subscription deals under ASC 606 impacts the timing of the subscription revenue and create some unevenness that affects comparisons with ARR.

Also the lower integrated solutions shipments in the first half negatively impacted the maintenance ARR at June 30th as the unshipped orders would have contributed about $2 million to maintenance ARR from the first year of maintenance that is bundled with the product sale, impacting 100 basis points of the ARR growth.

Our focus on growing our recurring revenue continues to drive healthier gross margin and greater predictability in our business. As of the second quarter, LTM recurring revenue was 80% of total revenue, up from 76% a year ago and in line with our long-term model. The annual contract value from our long-term agreement was $96 million at the end of the second quarter, up 13% year-over-year, excluding the subscription and maintenance portion, which is already captured in ARR. This growth is a result of increased ACV from strategic purchase agreements with our channel partners. With the addition of ARR, we are going to deemphasize the total ACV metric moving forward, but we have included it in the appendix for reference.

Now let's look at the operating results for the second quarter of 2022. Total revenue in the second quarter was $97.7 million, up 3% year-over-year. We saw continued robust market demand, but total revenue was constrained during the quarter as we ended the quarter with unfilled contractually committed orders for integrated solutions that were approximately $20 million more than normal. If we had shipped all of these integrated solution orders, total revenue would have been in excess of $115 million for the second quarter.

Non-GAAP gross margin was 65.5% for the second quarter, up 160 basis points year-over-year. Our high-margin subscription business made up a large share of revenue, resulting in the improved gross margin. We expect improving gross margin in our long-term model as we continue to drive robust growth in our subscription business. Non-GAAP operating expenses were $49.6 million in the second quarter, a $2.5 million increase year-over-year, due mainly to investments to support product innovation to drive our long-term business.

Adjusted EBITDA was $16.5 million in the second quarter, up 4% or $700,000 year-over-year, driven by the improvement in both revenue and non-GAAP gross margin. Adjusted EBITDA margin was 16.9% in the second quarter, an increase of 20 basis points compared to the prior year period. Finally, non-GAAP earnings per share was $0.26 for the first quarter, up $0.01 year-over-year.

Now let us look at the rest of our results for the second quarter of 2022. Our strategy of investing in innovation to drive higher quality recurring revenue, together with the effect of cost controls and reduced interest expense has resulted in a sustained trend of continued profitable growth. Free cash flow was $3.2 million in the quarter, down $2.4 million year-over-year, due to a $3.1 million increase in capital expenditures associated with our digital transformation and innovation investments as well as the pressure of lower product deliveries, which resulted in lower collections.

During the second quarter, we repurchased approximately 560,000 shares for $14.1 million, bringing total repurchases to 1.8 million shares for $50 million under the $115 million authorization announced in September 2021. We will continue to deploy capital prudently in the most responsible way to drive long-term shareholder value. We ended the quarter with a strong financial position with net debt-to-EBITDA of 1.8x and a healthy liquidity profile of $95 million, consisting of our cash balances and unused borrowings under our revolving credit facility.

Finally, let's now turn to guidance. As Jeff said, we are confident in the underlying strength in our business, including the healthy market conditions and strong market demand for our solutions that we are seeing. We expect continued growth in subscription revenue from expected strong performance in enterprise subscription and solid performance from our creative tools. We expect contribution from recent new subscription product introductions including the first full quarter of Pro Tools Artists plus our new NEXIS subscription offerings.

For the third quarter of 2022, our total revenue guidance is $100 million to $112 million, a similar size range as was provided for our second quarter of 2022, solely related to the supply chain risk to integrated solutions revenue we discussed earlier. Our guidance for third quarter 2022 subscription and maintenance revenue is $67 million to $70 million, representing at the midpoint, 16.7% year-over-year growth in the third quarter. Our guidance for third quarter 2022 non-GAAP earnings per share is $0.27 to $0.39, assuming 45 million shares outstanding. Our guidance for third quarter 2022 adjusted EBITDA is $17.5 million to $23.5 million.

At this time, we are also reaffirming our full year 2022 guidance for subscription and maintenance revenue based on the strong demand we are seeing for these solutions. While we are seeing -- also seeing healthy demand -- healthy market conditions and strong demand for our integrated solutions, the impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full year 2022 business plans. As a result, we are keeping the same midpoint, but widening the range for our full year '22 revenue guidance to better reflect the range of possible outcomes for the year.

Our guidance for 2022 total revenue is now $425 million to $455 million. Our guidance for 2022 subscription and maintenance revenue remains $266 million to $274 million, a range which represents year-over-year growth of 17% at the midpoint. Our guidance for 2022 non-GAAP earnings per share is now $1.37 to $1.53, assuming 45.2 million shares outstanding, reflecting the wider revenue range.

Our guidance for 2022 adjusted EBITDA is now $83 million to $95 million, reflecting the wider revenue range. We are adjusting our guidance for 2022 free cash flow to $45 million to $59 million due to the factors that Jeff mentioned previously, which include: first, we're seeing more rapid adoption of enterprise subscriptions across our global customer base. While enterprise subscription is strategically important for the company and is a positive for our long-term model, it does have different near-term cash conversion characteristics than our individual creative subscription business.

Next, given that we expect the recovery in our integrated solutions to be later in the second half, we currently expect that some of the cash collections from these shipments to fall into early 2023. And third, where we can, we plan to temporarily build up inventories to add buffer stock and provide us greater flexibility to better navigate the variability in anticipated supply chain conditions over the next several quarters and most importantly, to better meet the strong demand that we're seeing for our products.

With that, I would like to turn the call back to Whit.

Thank you, Jeff. Thank you, Ken. That concludes our prepared remarks, and we are now happy to take your questions.

Our first question is from Jack Vander Aarde from Maxim to be followed by Josh Nichols. Our next question will be from Josh Nichols from B. Riley to be followed by Jack, if we can get them. Josh, please go ahead.

Yes, thanks. You can hear me okay?

Yes, we can. Thanks, Josh.

Look, it seems like the subscription business is doing as good or better than people kind of thought, right, just some lingering headwinds on the supply chain side. But before we dive into that, I just wanted to know if you could provide a little bit more color on the company's SaaS business. I know it's relatively small, but it's been growing. I think you said at the Investor Day, it was around like $7 million on a trailing 12-month basis. How is that growing so far? And what's the opportunity to build that up over the next 12 months is like a third leg of growth for the subscription SaaS piece?

Josh, this is Jeff. It's a good question. I don't think we're going to unveil any more numbers than Ken already estimated at the Investor Day, but I'll say this, if you saw today's announcement, you saw -- you might have -- some happened it came out earlier today. That we've signed a multiyear agreement with Amazon Studios, that is not in our numbers yet. That's where we won't be turning that system on until late this year. But -- so I think we're still -- as you know, we're on the early cusp of this third leg of growth for us. We see some pretty robust growth in this part of our business over the next 3 years. And so we're very happy with where it's going, and we're pretty excited about the agreement with Amazon Studios today because that's going to be a pretty -- I think it's a pretty big deal in the eyes of Hollywood and the entertainment community.

Yes. And just to add to that, obviously, the growth algorithm we put publicly related to our cloud business as well as our subscription business. The growth algorithm for our Creative business, our Enterprise business and our Cloud business is still hold. And as Jeff pointed out, the Amazon announcement will likely accelerate the cloud evolution. So we're obviously pleased with the performance of that high-margin subscription business.

And I was going to follow up about the Amazon deal. Congratulations. Great to see a win like that multifaceted. Are you able to provide any bit more detail and the color as far as like there's some the sizing, the breakdown right of the revenue of that? Or if not, do you think the deal is really more emblematic of opportunities to grow across other platforms, given how dominant it's become over the last few years as far as a media and entertainment company and a production company?

Yes. Well, that's a good question. I think look, we're not revealing with Amazon, the size of the project or the size of the deal. I will say it's substantial. It's not just symbolic. It actually is a meaningful agreement that we have with them directly because what we're doing is actually helping them outfit their own production capabilities to be deployed globally for a lot of their productions they're doing for Prime video. It is going to be, I think, a fuel to help -- fuel the Hollywood transition. Obviously, it's a big piece of news that Amazon Studios has made. It also -- obviously, it's Amazon. So we are going to deploy it on the AWS environment.

We're working together with Amazon to do that deployment. They actually are helping invest in that cost of that deployment. So we're in the midst of working on that now that development has been going on for several months. And -- but now we've publicly announced that this has been going on. And later this year, as I said, and this release said, our plan is to start to bring that system live for Amazon Studios. But it is a multi -- it's a sizable multiyear agreement that we've signed with them.

And then last question, honing in on the guidance a little bit, again, wider range, understandable given what's going on in the supply chain for the hardware piece of the business, at least, could you help quantify like what's the delta as far as that you're kind of factoring in for potential hardware range for the second -- for the third quarter? And do you have a lot of visibility into how long it will take to get this rightsized or at least largely rightsized because historically, you've done a lot more hardware business like late in the fourth quarter. And is that kind of still the expectation for this year? It's likely going to be even more heavily fourth quarter weighted.

I would say that at this time, our seasonal pattern that the fourth quarter is strongest for the company will continue. We also have much stronger integrated solutions and hardware revenue in that quarter just given the seasonal pattern. We did widen the range on revenue given the current supply chain conditions. We do expect a gradual recovery. And I would say that the recovery is more weighted towards the second half of the year, hence, the change in the guidance. We still feel strong about the market demand for our solutions, but we need to temporarily bring up some inventories, if we can to meet that demand, which, along with the timing of the recovery on integrated solutions, plus the growth that we're seeing in enterprise, which has slightly different shorter cash characteristics is the reason why we're changing their cash flow guidance.

Again, we feel good about the long term -- our long-term model. We're right. We want to be in terms of our subscription and maintenance business, and we feel good about the long-term cash flow of the company in terms of the conversion rate.

Maybe if I can just add, Josh. You asked a question about the timing. We are always fourth quarter loaded for a lot of reasons. We will see that this year for sure. And we're not necessarily laying out exactly what the numbers are, the variability we see. I think you can see by the implied change in guidance what the variability is that we see in the business. You can kind of see that in numbers pretty clearly.

The team is making good progress. We are seeing some great results, and we're seeing some good plans for the second half. But we're going to be careful. Again, this is not -- I want to say this is not about our suppliers in our factories. Our factory production capacities are there, what we need. It really is about getting the ample chip supply and other component supply that we need to meet the demand we're seeing. And we are -- to be clear, we are seeing healthier demand than we originally expected this year.

And that does provide some, but just to maybe simplify my question. If you have a $20 million backlog, right, or above normal at the end of 2Q. Is your expectation that at the end of the year, that's more like a $5 million backlog or a $10 million backlog or any type of estimate that you have built into your guidance for here just to get an idea for how much of that may flow through?

Well, I wouldn't say that we would necessarily give that that number, Josh, because it really depends on bookings. Our commercial team can book more than we expected, and we could take a bigger, even bigger backlog into 2023. What we have modeled is our expectation for increased production that's going to happen in the second half. That increased production will be a lot more closer to our normal levels of production. It will be heavily weighted to Q4, but there will be improvements in the second half from a total production at the end of the semester. But the combination of just catching up to what our normal production levels are is not enough. We've got to try to go beyond that because supply or the demand is running even higher than our original expectation for supply requirements.

All right. Next we have Nehal Chokshi from Northland Securities to be followed by Paul Chung.

Thank you, guys, and nice strong subscription revenue growth as well as ARR growth, both of them accelerated, that's awesome. And it sounds like it's an enterprise subscription that's driving that. And that's -- a little bit surprising given what you guys have described in the past, typically seasonally weak conversions from maintenance to subscription during the (inaudible) quarters for enterprise and then also a weakening macro backdrop. So given these negative tailwinds, what's driving these really strong enterprise results?

Yes. Well, I think, first of all, I think the offering we've put together and by the way, this is, Jeff. The offering we've put together is very competitive, and I think it's really helping solve a lot of business problems and operational problems that our customers have. When you say the macro, obviously, we can all read the news and see the opinions on the macroeconomic conditions. We're not seeing anything yet ourselves in the customers' buying patterns that is weakening across the enterprise customers. We're seeing still continued strength with them. And I think the offering that we've put forth on our enterprise subscription offering is very attractive for enterprise customers because they've got their own challenges of trying to be more efficient with their content supply chains, how they're going to produce more content for basically not the same amount of money or sometimes less for same amount of money. So they've got their own strategic priorities that they're dealing with in the -- as the malls are shifting.

I think we have a very attractive tool set that has got a very attractive offering for them. And our commercial team is, I would say that our commercial team has built a really great engine on how to take customers to subscription. And I think it's all shown up to be a great success for us.

I think you're right, typically, maintenance to subscription conversions are best in Q4 and Q1 period. But I think for all the reasons I just said, we are seeing strength throughout the year lately. And that's, again, for all the reasons I laid out for you.

Great. Okay. A separate question. The supply chain disruptions extended different product lines within integrated solutions?

Well, it's -- so the situation has been hitting across the board. I can't say that there isn't -- our team is dealing with issues across almost every product we make. Some of those issues are able to be mitigated quickly and resolved quickly. Others are tougher to solve for. So I don't want to leave you with -- our team is dealing with issues across the board. But again, some are slower to recover from or more difficult to recover from.

I see. And what was actually the unfilled or level above normal levels for the March quarter?

Well, if you remember, we said it was in excess of 10, when we left Q1 and when we left Q2, we're making clear that it's well over $20 million today.

Our next question is from Paul Chung at JPMorgan to be followed by Steve Frankel.

So just on the enterprise ads, is there any kind of seasonality that impacts ads here? I assume they can be lumpy at times, but how do you think about that pace as to second half going to -- and kind of respective impact on pricing? I know it's still a small percentage today, but any insight on enterprise trends as we move into '23?

Well, I think -- yes, Paul, good question. I think I would say from a business perspective, I'll let Ken maybe speak to more of the financial element. But from a business perspective, traditionally, for customers, we're converting from maintenance to subscription, Q4 and Q1 are traditionally the strongest quarters that we seasonally have to convert them to that model. What the team is finding is that because customers are looking at their business and looking at their strategic priorities, we're finding that we're getting customers to move anywhere in the year. And our team has been very, very good at coming to them with offers that can expand our footprint in these customers. So there'll always be seasonal strength in Q4 and Q1, but I think we're seeing some good news across the year.

I mean Q2 was great. We saw great conversion. I think as we look forward, we see strength in this part of our business for sure. And Paul, we're also expanding the offering. It originally started with MediaCentral. We have expanded to now allow -- we can add to that MediaCentral subscription around NEXIS. We're going to be soon adding graphics products into that offering. So we're continuing to expand that offering as we go.

And then can you expand on the cash impact? What kind of determines the different cash timing, I guess, do certain enterprises pay during certain quarters and how does that evolve? How does that pay?

Yes. So we typically obviously build, if it's, let's say, a 2-year deal, 1 year, we build the first year and there will be a second -- on the second year. So for example, on a 2-year deal. So we're getting the cash over 2 years versus accretive, which we may be built on an annual basis where they're paying upfront annually. So as strategically, we moved to the enterprise, which is important from a strategic element because it's stickier revenue, higher ARPU. As we build the business, there's the near-term cash characteristics are longer than a creative individual that is signed in the year and then you typically has paid upfront in the year. So that's what we're seeing in the cash.

Once you start to get some visibility into the multiyear agreement with Amazon, I mean, the impact on revenues and margin sounds pretty material and provide some nice kind of upside to sales and margins and cash flows, I assume. So does this start to accelerate in Q4 or early next year?

I wouldn't say that. I mean, obviously, Q4 is always a strong quarter for us. But it's -- when you say material, we look it's a sizable contract, I think like many of our enterprise customers, they are sizable contracts. It's similar to some of the other bigger agreements that we have for the enterprise subscription business. This will be a similar to that. Again, we're not stating numbers, but it's an important contract. I think also, it's another example that I think it's going to help move the industry -- help motivate the industry to move faster. What I've seen just today from the response I'm getting myself even on e-mail or text from customers, it resonated in a big way today across the entertainment business.

That's awesome. Lastly, any FX impact in the quarter and for the year?

Yes. So FX was a headwind of $1.5 million in the quarter for this quarter in terms of revenue. And at this point, it is impacting us negatively in Q3 as well. So it is a headwind on revenue. I would say we do get the benefit on OpEx on FX, but from an EBITDA net income perspective, it is negative.

Our next question is from Steve Frankel at Rosenblatt Securities to be followed by Samad Samana.

If you have on the hardware backlog, are you missing or losing some opportunities or market share from customers that need this equipment around advance?

No, not yet, Steve. I think it's your question. We -- the team has done a great job. First of all, this problem is hitting a lot of -- you're talking about the event business, you're talking about like live sound and some of the event business, all of the suppliers are facing issues across the board on this. So I think it's kind of an even situation with the big suppliers. I'd say that we are starting to see some movement of production on the life sound as an example for events business for the summer. And so we're starting to move some of that. We see more of that moving in Q3. But so far, I'd say we've seen really strong demand. The demand continues. We're building a pretty significant contractually contracted backlog for immediate delivery as soon as we can build. So far we're comfortable with it. And as I've talked to our Head of Commercial, if they're losing business, it's miniscule. There's nothing major they're losing at this point.

Okay. And then on the perpetual business, which dropped much faster than at least I had modeled, is that the new normal and that reflects these enterprise conversions? Or was there something else going on in the quarter that caused a significant sequential drop in perpetual?

Yes. So I would say that on the perpetual business, in terms of moving forward, I would say that the level that we have there is probably likely in that range within $1 million per quarter. $0.5 million per quarter in terms of that range. We would be looking to optimize price and perpetual to move fuel to subscription. There was one, I would say, product area that we did end the perpetual that had a little bit of a headwind this quarter. We don't expect any big end of life or the perpetual in the next couple of quarters. So that's why I think this area, you're going to see within $0.5 million to $1 million.

Okay. And then to just drill down on the creative net adds were the smallest number in quite a while. Are you confident that, that's the bottom? And do you have marketing programs and other things in the works to help make sure that snaps back in Q3 and Q4?

Yes. So first, I think on the creative net adds, there -- if you go back several years, I'm going back to even 2019, Q2 is typically a downturn in terms of the net adds versus Q1, and that relates to the education cycle. We actually saw in Q2 the lowest sequential drop when you look back 3 years. And so I just want to put that in perspective. That said, we are looking at driving -- I would say, we did a retiring on Pro Tools that we mentioned. We're optimizing our go-to-market to drive better performance. And I do expect that the creative net adds will improve in the second half of the year versus the Q2 performance.

Next we have Samad Samana from Jefferies to be followed by Jack Vander Aarde. Samad, please go ahead.

Great. Thank you, and it's good to hear from you, Jeff and Ken. I hope you're doing well. Maybe first, on the Amazon deal, I totally hear you on the timing as far as how it impacts your business. But maybe is there anything else under the hood there in terms of will Avid be using AWS for your own hosting? Are you already using it? Is there a potential gross margin tailwind that we did see as part of this. I don't know if there's anything else involved beyond just the Amazon Studio side of the deal?

Yes. No, this is just a deal between Amazon Studios and Avid. We are deploying the Avid technology stack in the AWS environment. As you know, today, Microsoft Azure is our strategic partner. They continue to be our partner -- our preferred partner. They're our partner for all of our SaaS offerings like add on demand run from the user environment, but certain customers are going to want to deploy in an AWS environment. Obviously, Amazon Studios want to deploy in an AWS environment, no question there.

So we were working with them to get these systems that they want to deploy, which are basically our core production environment, whether it's Media Composer or MediaCentral or NEXIS, that's all being -- as you know, NEXIS was being -- is running -- NEXIS file system is running in the Azure system. When we're done here with Amazon Studios, the NEXIS file system and the MediaCentral platform will be running natively in the AWS environment for Amazon Studios. There'll be other customers that want to deploy an AWS environment. But no, it doesn't change our strategic partnership with Azure, which Azure is who post all of our enterprise environment runs in Azure.

Great. And then maybe, Ken, I wanted to double-click on that FX question. I know you gave the consolidated amount. Can you just for -- our focus tends to be on the subscription line most. And so as I think about where that FX exposure actually hits you, how much of that is maybe isolated to subscription, like maybe what's the geomix there versus the overall revenue mix as -- which we know from the filings?

Yes. So $1.5 million is the total of subscription is likely in the $400,000 range of that $1.5 million -- $350,000 to $400,000 range.

Okay. Great. And then maybe just one more and then I'll pass the baton. But just, Jeff, when I think about the changes to the freemium model, and I'm curious what you're seeing. Now we've had enough time. Is there a change to maybe the top of the funnel, that's worth calling out? Is there a change in maybe the retention of who you are converting? Just anything that you can share now that we've had enough time to maybe see some patterns there?

I'd say convert numbers -- the conversion numbers are still looking very good for us, and they're quite good. And I'd say retention is still what we expect in the business. On the freemium model, it is an acquisition tool, and we have been leaning into trial. I would say, Samad, what I can say publicly is we're looking at all that very carefully to understand what our strategy is on the freemium level. I would just say stay tuned. Maybe some more news coming on that.

Next we will come back to Jack Vander Aarde. Jack, are you there?

Jack here. Can you hear me okay?

We can. Thank you.

All right. Great. Sorry for plucking the microphone earlier, but thanks for the update. So maybe just a quick question for clarity on integrated solutions stack orders. Those are about, I guess, $20 million at the end of the quarter. And I think I recall a similar dynamic last quarter, I think, about $10 million of backlog. So just an apples-to-apples compared -- did this accumulate -- did you recognize some of that $10 million during the second quarter? Or is this sort of -- was that $10 million of orders building up?

Yes, it's building up, but it's -- remember, it's kind of like a bucket where you've got water coming in 1 side and water going out the other. Obviously, a lot of what we carried over from Q1, some of that was resolved during Q2, but we also got a lot of new orders in Q2. So the demand -- the best way to think about it is the demand is moving faster than our ability to move the supply up. That's why it went from $10 million aggregate to $20 million. It built over the course of Q2 because the demand for the product is coming in faster than we could ship. And so that's good news and that demand is very high. Obviously, we don't like carrying over $20 million in unfulfilled contractually obligated orders that -- these are customers who want immediate delivery. This is not backlog for future deliveries. This is stuff that traditionally, Jack, we carry about $1 million or $2 million that we can't fulfill in 1 quarter to another. That's about our traditional pattern. This is obviously significantly more than that because of the production levels.

Okay. Got you. That's helpful. You know what, since I plugged the microphone to start, a lot of my questions were already asked, so I'm going to try more of a fun question or a bigger picture topic. Given your creative focus, so NFT blockchain web 3.0, I'm not sure if you've given the idea, any meaningful thought or seen the obvious compelling opportunities that would make sense. But just like to hear your perspective because in a vacuum or at least on paper, I think the idea is like considering the core competencies of damage, technology and product offerings and your target customer base are particularly creative. Is there a place for NFTs or web 3.0 design with your business and given your young creative base at Pro Tools users, maybe they want to create an NFT to market themselves. Just wondering if that is a place in your product portfolio?

Well, I wouldn't say -- I wouldn't necessarily address that directly. I'd say this. Our teams are looking at all of these things, including -- I mean, the [NFT fake] subject, AI. I mean there are so many subjects we're working on including things like web 3.0, et cetera. But I think that, that's -- those are innovation plans our team is looking at what our role is and what -- how we could leverage those technologies. But I think a lot of those workflows are still being kind of figured out as an industry. We're in that, looking at what our role is. I wouldn't give you a direct answer today. But I would say it's an interesting space in that there's so many developments technologically that give us some opportunity out there.

Got it. And then just maybe 1 more, just to be crystal clear. The long-term plan from your May Investor Day recently, that is completely unchanged. You're still on track and this Amazon announcement has not baked into that at all. Is that correct?

No. The Amazon, say not baked into it. We consider a lot of things when we look at -- when we look at the forecast and where the business is going. Amazon, a lot of customers are considered in our forecasting of things. Look, we've known about Amazon as a company for several months. We've been doing the R&D with them for over 6 months. So we've known about this a while. This is really just more public information that is now finally coming out.

And that concludes the Q&A session. I'll now turn it back to Jeff for concluding remarks.

All right, Whit. Thank you for your participation and your questions. In closing, I do want to reiterate that we believe we will continue to see strong demand across the end markets of our solutions, including our growing subscription business. And we are managing through this temporary supply chain headwinds to enable Avid to continue to achieve our company strategy and our long-term growth plan and profitability targets as we move forward through 2022 and beyond. And with that, I just want to say, I hope everyone has a nice evening. Thanks again.

Thank you. You may all now disconnect.