Avid Technology, Inc. (AVID) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen and welcome to the Avid Technology's First Quarter 2021 Earnings Conference Call. Today’s conference call is being recorded. Now let me turn the call over to your host for today’s call, Whit Rappole, VP of Investor Relations.
Whit Rappole: Thank you, operator. Good afternoon, everyone. And thank you for joining us today for Avid Technology's first quarter 2021 earnings call for the period ending March 31, 2021. My name is Whit Rappole, Avid's Vice President for Corporate Development and Investor Relations. 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 your questions.
Jeff Rosica: Thanks, Whit. And thanks to everyone for joining us to review Avid’s first quarter results. Overall, we are quite pleased with our progress during the first quarter of 2021, where we return to year-over-year revenue growth and generated strong improvement in recurring revenue, earnings and free cash flow. At this point, we remain optimistic in our outlook for 2021. Last week, in fact, we spent time with the Strategic Advisory Board of our customer association, where we got to hear the many ways that our customers continue to adapt their business priorities and workflows in the current environment to a new normal. These valuable conversations and our first quarter performance reinforced our belief that the gradual market recovery that started in the third quarter of last year will continue into 2021. The discussions with our customers also suggest that many enterprises will be looking to move to subscription and SaaS solutions or cloud-based workflows over the next few years.
Ken Gayron: Thank you, Jeff. And good afternoon, everyone. Overall, we are very pleased with our business and financial results in the first quarter of 2020. Our return to growth, driven by robust performance in our subscription business and our growing recurring revenue, plus our improving margins and cost structure has resulted in stronger profitability. Our focus for the remainder of 2021, will be to drive higher quality recurring revenue and improve the non-recurring portions of the business related to our integrated solutions, as our end markets continue to gradually recover. We expect these efforts, results and continued improvement in our key financial metrics, including stronger profitability and free cash flow through 2021.
Whit Rappole: Thank you, Jeff and Ken. This concludes our prepared remarks. We are now happy to take your questions. Operator, please go ahead.
Operator: Thank you. We'll take our first question from Josh Nichols with B. Riley FBR.
Josh Nichols: Yes. Thanks for taking my question and great to see such strong results, particularly from the subscription business. Anything you do to help frame kind of the subscription longer-term opportunity as far as potential subs that you could be going after on the pro summer versus the enterprise market. And if we were to kind of break that down a little bit between audio, audio subscription versus video editing subscription, and how would you kind of frame the opportunity on both of those fronts?
Jeff Rosica: Thanks. I appreciate the question and appreciate the time. So this is Jeff. I'll start off and then I'll turn it over to Ken to talk more what details he wants to share. But look, I think in general, there's kind of, as you kind of in your question, I think had that loaded in there is we have our creative individuals subscription business, and now we have, as Ken and I referred to before, it's kind of second leg of the growth engine with the enterprise side. We're continuing to see very strong creative individuals. This is everything from aspiring pros, what you call prosumers all the way up to independent people working in the music or the video space. We're continuing to see that market perform very well for us in that sector to perform well. I would say that, our teams continuing to innovate around the product set that we have in that area to make those products more accessible and more desirable by our wider market opportunities. So that work continues as a company. Number two, our go to market efforts will continue to be very aggressive, both from an e-commerce. And as I said, in my comments around our digitally enabled channel and really going after more of that market and I talked about our digital transformation initiative was an investment we're making to really everything around customer experience and everything around our digital acquisition and digital execution around these customers is all very important for us. So we see this as a continued strong growth engine for us. And so we'll continue to focus in there and keep going after that opportunity as you've seen from us for several quarters. And then, on top of that is the creative and enterprise – the creative tools and the platform tools that we sell to enterprise customers on subscription. So there's kind of two pieces of our growth there. Does that answer your question? As far as percentage, Ken, if we're good, how much we're giving or explain right now.
Ken Gayron: Yes. So I would say in terms of the opportunity, Josh, your question as well. We see tens of millions of users on the creative side and kind of the audio area as a potential market opportunity in tens of millions in video. Especially as we go more to the middle market. When we look at the creative individuals, we're pleased with the performance we've had with 300,000 plus subs, but we still think we're in the early stages. And we still feel like there's a lot of room to move on the creative subscription product offerings that we have. And as Jeff pointed out, we're going to continue to drive functionality in the products to gain more users in certain areas in the video look at areas to expand our TAM. And then on the enterprises, we talked about early growth last year. We're pleased with the performance. It is our second stage of growth, which you see in our numbers. But again, we believe we're very early. We're actually probably at home – at this point. And we're kind of in that position where, we see a lot of opportunity as there's thousands of enterprise customers that our sales team is targeting to drive. And it's – they're obviously a media enterprise, but we're also getting interest from industries outside of media and enterprise. And our sales team is very incentivized to drive those types of those transactions. So again, we have a lot of opportunity to move. We're going to be speaking a lot of this, about this in our Investor Day. And we hope that will help provide additional clarity on the points.
Josh Nichols: Yes. Thanks for the additional detail around that and look forward to attending the Investor Day in the coming weeks. Also I believe, the company has had a pretty good track record over the last couple of years, right? For rolling out some of the new products, whether it's software or integrated solutions, anything coming up in the pipeline that could be a potential needle mover, and then thoughts on pricing, the ability to flex pricing or improve margin on that front. I believe there have been some price increases historically that the company has taken occasionally.
Jeff Rosica: Yes. So it's a good question, Josh. So I'd say this, I mean, yes, I'm not ready to – we're not ready to announce any specific products on this call, but I would say we'll probably talk more about this as each of our business leaders. We'll about their strategy. But there'll be a continuous innovation all year long every year, for the years ahead around software, obviously areas how we're going to expand our software. And quite frankly, not just create functionality or features that are important to monetize our markets, but also to look at how we attract greater users and greater customers in that space. As I mentioned – Ken just mentioned about, obviously we're trying to go into the broader markets, both on audio and music and video, and also for more of the enterprise type customers. There's a lot of opportunities outside of the M&E space that are more recent offerings with the Adobe integration and with the SaaS offering, as on demand has started to show our teams that there's a lot of opportunity to get Avid, let's say outside of some of its core markets into some other adjacent markets. So we see a lot of opportunity for the company in that space. And you'll see us not just innovate in our core markets around M&E, but what we will be innovating in ways to attract new users and new customers. So I would say expect to continuous train of innovation in that regard.
Josh Nichols: Thanks. And then last question for me, and then I passed the torch here. I mean, the business clearly doing quite well, I mean the one piece of the businesses integrated solutions, which is still at pre-pandemic levels. I don't expect any specific answer, but if you could kind of maybe opine on it for a little bit for, how long it may take before you get back to some proximity of pre-pandemic levels, at least adjusted for some of this the emphasis of this integrated hardware, lower margin offerings.
Jeff Rosica: Yes. That's a good point you made in the second part is and we'll definitely share more of what we're doing precisely when we get to Investor Day. But I think if you remember – the things that we're deemphasizing and we've already been deemphasizing them. So they are going to be a bit of headwind on the year-on-year compares. But the stuff that we’re emphasizing is very low margin and or no margin products that really don't generate, really much at all from an earnings or cash flow perspective. So we really done kind of a pivot in the last several months to make sure that we're deemphasizing those products, because we also want the dollars we're investing to go towards things that are going to give us a better growth and the better profitability, I think, largely what's put life sound because that is a part of our integrate solution. But life sound to aside for a moment, most of the other products are really around well, music we've already seen as Ken said in more detail in his remarks, the music space around integrated stations is already back to growth. So we're seeing that already showing some real good signs. The audio and video post-production markets are definitely improving. And we saw improvement last quarter. We think that we'll continue to that gradual recovery trend that we talked about that will go into the second half. I think we'll see that continue. And we are seeing some improvement from the broadcast sector too. I will say though that a lot of – one of the nice things is that even if the integrated solutions, which is more of a hardware based business is still a bit of a pressure year-on-year. If you look at the software numbers, we've seen really not just subscription, but the overall software numbers have grew substantially in the quarter. So the good thing is we are seeing the enterprise customers spend dollars with us. They're just right now, maybe putting more of those dollars in software investments and not as much in the hardware investments, but we do see that we'll continue to get better on the hardware side. Again, as people get back into their facilities, get back into full production and can really start, doing those kinds of investments. But yes, I'd say my answer would be the same as it was probably last quarter is a trend that Ken and I talked about, which is a gradual recovery going through the first half. And probably by the second half, we believe we'll be in a place that I would maybe call it pre-pandemic levels.
Ken Gayron: And I think Josh the other point that talks about the mix that we're – that Jeff talked about earlier in terms of driving the right revenue streams, obviously more investing in software. We are pivoting around some of the products integrated solutions. You can see the improvements in the gross margin line, which are clear proof points of that. And although we had a decline on integrated solutions, just because of the better mix and the audio products. Gross margin on integrated solutions was up 460 basis points year-on-year, despite lower volumes. So, we're pleased with the decisions we're making on that. We still have more room to go and as the market gradually recovers, we're going to continue to see further gross profit improvement on integrated solutions and top line.
Josh Nichols: Thanks guys. That's all for me.
Jeff Rosica: Thanks, Josh.
Ken Gayron: Thanks, Josh.
Operator: Thank you. We'll take our next question from Jack Vander Aarde with Maxim Group.
Jack Vander Aarde: Yes, great. Congrats on the solid results guys. Nice to see you turned to positive year-over-year revenue growth thanks for taking my questions. A lot of them actually have been addressed, but something I wanted to get back to the question that I asked last call just, I think it'd be interesting for an update may for Jeff just regarding the overall change of tone and sentiment from your end customer discussions and some of those non-recurring product categories or that have been most impacted from COVID. Now, I think you just touched on a lot of those things. And I wanted to be redundant here, but I do recall, I think video services from what Ken was saying were up year-over-year and storage graphics have been kind of flattish, but that's not anymore. So that's good. And a lot of events is still under pressure, but just anything you're hearing, I guess, like in overall discussions, then the amount of discussions you're having, the visibility of the timing of, or new things that are being talked about maybe they're getting creative of how they are thinking about putting on festivals and live events and planning for that. Just, I don't know, I'd be interested to hear your thoughts on that.
Jeff Rosica: It's a good question. And I like kind of Jack, I talked about a little bit in my opening remarks about our customer, Avid customer association. We do annual voice of the customer session this year. We did it virtual, obviously because of the pandemic. And we had about 70 customers and users that we really, we go through under NDA, all of our roadmaps, all of our strategic plans. We talked to them a lot about what they're doing and what their priorities are. And so we get together a lot. Now it is a sample, but it's a pretty reliable sample. We've been – we've gotten quite good at sampling the customer base precisely. And the feedback we're getting is, as I said, first of all, there is a lot of focus around, moving to more subscription-based models from a software perspective, moving to SaaS in many cases. In fact, that's accelerating the talk around cloud and SaaS-based environments. But in general, I would say that the mood is definitely getting better. I mean, I think that the people we're seeing a lot of projects get . Now we're seeing investments flow obviously much better than they were just a few months ago. And so we are seeing a good pattern there. Again, I wouldn't call it all the way back to “pre-pandemic levels” quite yet, but it is heading in that direction. And I'd say, as I said, in my remarks and I admitted is that, even Q1 was a bit better than we thought. It did go a little better than we had originally expected from the customer take up an investment cycle. So I'd say, look, I think it's performing as we expected, maybe a little bit better, and we think that will continue. But I think it will be, I think Q2 environment will be a little better than Q1 and Q3 will be better than Q2. And it'll keep progressively, I think getting warmer, we got to remember the U.S. market, UK market. Those markets are coming back a little faster now. Other markets, I mean, Europe is still in a bit of coming out of the pandemic. And so it really on a global scale, it'll take a little more time for every major market that we're in to come back as we're seeing already the UK and U.S. markets are coming back.
Jack Vander Aarde: Terrific. It’s very helpful color. Yes, absolutely. You touched on everything I wanted there. That's great. And then maybe just a question for Ken, just regarding the annual paid up front subscription. Subscription business as a whole remains very strong, very bright spot here. But the annual paid up front subscriptions it seems like those just continue to climb is this I'm reading in the presentation, I believe 28% total subscriptions now. Where is this mix heading and what does this – how does this impact the next couple quarters from – I don't know, from a revenue growth trajectory and then also from a – maybe a margin trajectory as well.
Ken Gayron: Yes. No. We're obviously pleased with the move that we're making an annual paid up front subscriptions. Our last Investor Day probably 18 months ago is probably 12%. It's now 28%. I see this becoming 50% of the business in the next, probably 18 months, just given the trajectory that we're on. We believe those are better quality, obviously customers for us than a monthly subscription. And we're going to continue to drive that. So, I think that's going to be a big part of the revenue streams where the growth will be, it does help with cashflow obviously. And it's a better quality, customer, and there's an opportunity to actually upsell them as we lock them in versus a monthly customer. So, we feel like that's the direction that the business will continue to head, and that provides us an ability to raise, to go drive ARPU as we do upsells and drive more growth on that subscription line with bigger LTV Lifetime Value for that subscriber.
Jack Vander Aarde: Yes, that's helpful. And then maybe just one last question and maybe it's more of a sneak peak question before your Investor Day. Just in terms of the level of the content and the granularity of what you are going to unveil, is it similar to how in-depth and how, I guess, granular your last Investor Day was with like a three-year operating model on all sorts of line items and key metrics? And I'm just wondering if it's going to be something similar to that kind of granular level?
Jeff Rosica: Yes, you should expect something similar. And what I'm excited about is you are going to see more pieces of our business areas. And then our CTO will also provide some commentary as well as our commercial leaders. So, we're excited for the Investor Day and there'll be a long-term model that backs up the strategy that we're driving. And obviously we think it's positive to put out that model as we think it's important for us as a company and for our shareholders to see the direction of our business.
Jack Vander Aarde: Okay, great. Fantastic. Well, I look forward to that. Excellent results again, guys. That's it from me.
Jeff Rosica: Thank you, Jeff.
Ken Gayron: Thank you, Jeff.
Operator: Thank you. We'll take our next question from Nehal Chokshi with Northland Capital Markets.
Nehal Chokshi: Yes, thank you. Nice strong feet and nice raise here, especially with the free cash flow. Very happy to see that.
Jeff Rosica: Hi Nehal.
Nehal Chokshi: I do want to drill in on that a little bit here. So, I would argue that subscription maintenance is the key metric here. I think you guys agree with that as well. And I think all investors agree with that as well. You beat your midpoint guidance by $3 million. And the raise for the full year, I think, is about $3.5 million at midpoint. So, I guess basically, are we talking about no change in the year-over-year trajectory for business for a balance of the year relative to what you were thinking 90 days ago?
Ken Gayron: Yes, we’ve seen an improvement in the business, obviously. And especially in the subscription and maintenance line with the – I would say the strong growth that we're seeing on the enterprise subscription and the core growth that we're seeing in the creatives. We're definitely in a second stage of growth. We believe our maintenance business is very stable. Sure, our software maintenance as we move customers to subscription there will be a slight headwind, but we're seeing higher renewal rates on the maintenance from a hardware perspective and we believe we'll have improving product sales. We believe our guidance is appropriate, but it is conservative. And our goal is to drive past that as a team. But we feel good about the direction of our business at this point.
Nehal Chokshi: Okay. That's great. And I'm sorry, you may have said this at the very beginning of the call, did you guys provide explicit detail on the enterprise subscription revenue during the quarter?
Ken Gayron: No, we did it in our earlier remarks. It was a few million dollars for the quarter and continues to be an important piece of the business as our second stage of growth. So, I think, that's – we see that as part of our growth drivers moving forward, that piece of the customer about positioned and moving to subscription.
Nehal Chokshi: If I recall correctly last quarter, you qualitatively described enterprise subscription as a few million as well. So, does that mean that was basically flat QoQ?
Ken Gayron: It actually was down slightly because of the strong growth that we're seeing on the creative slide. Q4 was slightly more revenue than Q1. And if you think about it, Nehal, we have more customers that renew maintenance in Q4. So that there's more opportunity to move them to subscription. In Q1 although it's a good quarter for renewing maintenance, it was down slightly versus Q4.
Nehal Chokshi: Okay. Just run us through real quickly, the accounting on subscription bookings to how that flows through to revenue and given quarters of booking happens and then subsequent quarters on how that plays out from a balance sheet?
Ken Gayron: Yes, so obviously if it's annual, we recognize that over the term under ASC606, though there is some if it's not a SaaS subscription, there is some upfront recognition. We are moving if we have a multi-year to have the revenue be recognized annually based on certain terms we're putting in the agreements. So, we don't have – we have kind of a consistent, predictable enterprise subscription revenue that we believe is best for our shareholders. That said, in the first quarter – both in the fourth quarter and in the first quarter, there was probably about $1.5 million of, I would say, revenue that was, I would say, accelerated under ASC606, just the way that the revenue treatment works from those enterprise deals. But we are, as I said before, putting terms in the contract, that we have annual recognition on a multi-year deal going forward.
Nehal Chokshi: Okay. And I see that there's a divergence between the 6% year-over-year growth for the March quarter relative to the number of subscriptions. That makes sense, given the enterprise subscription starting to become material here. But explain to me why we didn't see that divergence in the December quarter?
Ken Gayron: We had very strong growth in our creatives. And obviously that helped drive the overall sequential improvement. I would say we outperformed our initial expectation. I would say in the second quarter, enterprise subscription can be a little lumpier. Enterprise deals can be different sizes. So, there could be, in our guidance suite, as we've been conservative, there could be a slight decline. So that's what you are seeing in the guidance. But we do believe that the core creative market will continue to be strong.
Nehal Chokshi: Okay, great. Thank you very much.
Ken Gayron: Thank you, Nehal.
Operator: Thank you. We'll take our next question from Samad Samana with Jefferies.
Samad Samana: Hi, good evening. And thanks for taking my questions. And good to see that strong subscription revenue growth continue. Maybe Jeff I'll ask a slightly differently you've given the mix in the past of Pro Tools, versus Media Composer and Sibelius, and the kind of the contribution of subscription. Any noticeable differences in 1Q versus past quarters, are you seeing more interested in one versus the other? And then I have a couple of follow-ups.
Jeff Rosica: No, I don't think there was a really, . So there has not been a real big change. I think the trajectory has been about the same on the mix. You do get a little bit of difference when we get into education season where students and staff are bringing their subscriptions on and so you’ll get, like you will get a nice burst of Pro Tools in Sibelius during those periods. But generally, I would say, the mix has been holding up quite well. The year-over-year growth we're seeing on all three products as Ken noted in his remarks have been rather strong. And again, each quarter a little bit different than paying on the seasonality of a given market segment that we're going after. But I think we're continuing – we're happy with what we've seen, and we're continuing to see the pattern and we want to see on all three products.
Samad Samana: Great. And then, maybe as, I think, about just to go forward Ken, when you're looking at the cohort of customers that were signing up for subscriptions in kind of quarters of 2020, as we start to come up for renewals, are you seeing any changes in renewal trends on those cohorts versus historical cohorts?
Jeff Rosica: Now, I would say in general, we've been very pleased with the renewal trends, in terms of the retention. I would say that we had some really strong new ads last year. As those come up for renewal, I think, in general, they are generally in line with our prior renewal rates. So, we feel really good about that. Additionally, we are adding more, I would say, talent to the customer experience area to help with the renewal rates. So, we feel good, we're adding the right investment in the right areas to continue to drive that. And the other important thing is we move people to paid annual subscriptions besides, I think, in general, there's just a higher quality customer base, and there's a big improvement in renewal rate for that piece. So as the whole pie moves, we were at 12% annual paid upfront 18 months ago, we're now 28%, that gets the 50%, that becomes – that's a game changer for our renewal base. And as our Chief Revenue Officer, Tom Cordiner, is driving this huge enterprise subscription transitions, those are very, very high-quality customers. So, the retention rate should all improve. So, we feel like we're moving in the right direction on those areas.
Ken Gayron : And I think also, I would say Ken, Samad if you look at Q1, remember Q1 last year was the really big quarter for creative licenses because the second half of March, we had a really big uptake because of when COVID hit. We've gone through Q1 and we've seen basically the pattern has held from a renewal standpoint. So, so far what we're seeing is encouraging obviously.
Samad Samana: Great. And may be one last one from me. And I'm going to go ahead and apologize if this is a dumb question. But we've gotten it from investors and we weren't sure of the answer, but with COVID and with a lot of people working from home, especially with kind of a big part of their base being this individual creative professional, have you guys – has that benefited subscriptions, where somebody let's say is either working on the studio project and has access to a subscription there, would they still have to pay for their own individual one as well? Maybe, how does that work in terms of access log-ins? Was there any type of uplift to subscriptions over the last call it 12 to 24 months from that?
Jeff Rosica: Well, I think, look, obviously there was uplift in COVID from let’s call it March all the way through probably, the summertime. Because I think we saw and probably even one of the fall a little bit, but we obviously saw additional subscribers, one, people who make music. People who were at home, they had a lot more time on their hands, so they went and subscribed to more music tools. But really for us what the benefit was, was a customer acquisition, right. We were able to acquire customers and bring them, attract them to our tools during that environment. I think for the people who are professionals that work for organizations, whether they work for them independently, or they work for them as an employee, we did obviously see some benefit both on the enterprise customer side, but on the individual side where they probably got an additional license to make sure they had another seat to work on from home. But as I said earlier, we didn't see any real change in turn or in renewal rates in this first, because we were already in the comparative period versus last year. So, as we talked about in Q1, things held very well. So, I think, we'll see how it goes long-term. There was some benefit. But I think the COVID benefits ended a long time ago. And as you've seen the last couple of quarters in our last three quarters now, we've still had the 20, 27, 28 kind of a number. I mean, this is our third quarter now where we've been hovering around 27,000 28,000 net subscription ads. And that's all happened, probably post the COVID benefits.
Samad Samana: Understood. Thanks again for taking my questions. And great to see the start to the year. And see you at the Analyst Day.
Jeff Rosica: Yes, great.
Ken Gayron: Thank you, Samad.
Jeff Rosica: See you.
Operator: Thank you. And with no further questions, then I'll turn it back to the company for closing remarks.
Jeff Rosica: Great. Thank you, operator. So, in closing, I want to say, we look forward to engaging with you again during Avid’s 2021 Investor Day, which we'll be hosting virtually on May 19. Today we only touch briefly on the widening horizon of Avid’s total market opportunity that we see. We will continue to explore this in detail during that event. So, I hope you can join us. Details and registration are available on the Events and Presentations page of our Investor Relations website at irr.avid.com. If you need additional information, you can also reach out to Whit directly. So, on behalf of everyone here at Avid, I extend our best wishes for the continued safety and health of everyone who follows and collaborates with us. We are deeply grateful for your continued support. So, thanks. And goodbye for now. We'll see you all, hopefully on the 19.
Operator: Thank you, ladies and gentlemen. This concludes today's call. You may now disconnect.
