Avid Technology, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Avid Technologies third quarter 2020 earnings call. Today's call is being recorded. Let me turn the call over to Whit Rappel, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Keith. Good afternoon, everyone, and thank you for joining us today for Avid Technologies third quarter 2020 earnings call for the period ending September 30th, 2020. My name is Whit Rappel, 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. 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 our investor relations website at ir.avid.com, and a replay of this call will be available on our 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 noted by management during the call are non-GAAP figures. 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. 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.

Thank you, Whit, and thanks to everyone for joining us to review AVID's third quarter results that we released today. We're certainly pleased with our Q3 results. Specifically, we're encouraged by the start of the turnaround in demand that we encountered in our non-recurring business during the quarter, and also with the continued strength of the recurring revenue elements of our business, driven by both the growth of our creative software subscription business and initial rollout of our enterprise subscription offerings. COVID-19 did continue to have some temporary impact on customer demand on some parts of our non-recurring product business, but we expect Vann to continue the recovery that started in the third quarter. We have adjusted our strategy and investments to quickly respond to the changes in the market we're seeing, focusing even more sharply on the parts of the business that we believe will drive more profitable growth. We also remain focused on ensuring we have the right cost structure moving forward, to make sure Avid enters 2021 as a stronger and more profitable company. Today, along with our CFO, Ken Gayron, we will review Avid's Q3 results, our resilience to the ongoing effects of the global pandemic, and how we remain hard at work delivering product innovations to better position Avid and our customers for the future. In addition, we'll discuss our long-term strategy to continue to grow recurring revenue streams and increase our efficiency and effectiveness in the way we work and serve our customers. Before we dive into our third quarter results, I want to take a moment to reflect on the strategic priorities we outlined at our November 2019 Investor Day and the progress we have made toward these priorities. I am pleased to say that we have stayed focused on execution in spite of the obvious distractions from the COVID-19 situation and that we achieved significant results against these priorities we laid out for 2020. Our first priority is to grow recurring revenue from subscriptions, maintenance, and long-term agreements. Despite the challenging market conditions for most of this year, we have continued to make progress in this area by focusing our sales and marketing efforts on subscription business models. As of Q3, our LTM recurring revenue has increased year-over-year on a dollar basis, driven by the success of growing our cloud-enabled software subscriptions. The total number of paid subscriptions, in particular, is up approximately 81,000, or 43% since the beginning of the year, despite the impact of the global pandemic. Our second priority is to deliver more consistent growth, enhanced profitability, and free cash flow. While COVID-19 is having an obvious impact during 2020 on the non-recurring elements of the business, we have continued to deliver solid growth in our subscription and overall software sales. We have also focused on controlling operating expenses and non-material cogs, which altogether have contributed to our improving profitability and strong free cash flow. We are free cash flow positive year to date as of the end of Q3, for the first time in many years. And I'm especially proud that we've accomplished this while strengthening our balance sheet as we're in a strong position going into the fourth quarter, historically our strongest quarter for free cash flow generation. Our third priority is to improve business operations and expense control while making the needed R&D investments to support growth. We've adjusted our strategy and investments to quickly respond to the changes in the market, focusing even more sharply on the parts of the business that we believe will drive more profitable growth. We also remain focused on ensuring we have the right cost structure as moving to 2021 to ensure that we can continue to deliver improved profitability. We've also adjusted our product roadmaps and R&D spending to focus on the product and solution areas that will address our customers' changing needs and will help to drive growth for the company, another one of our important priorities. We have continued innovating, listening, and delivering new product offerings. I will talk about some of those innovations shortly But suffice to say that we have released numerous new solutions this year and have even more planned for Q4 and throughout 2021. And our final priority is to create innovative cloud and SaaS solutions for media enterprises to enable secure, flexible, and powerful media creation workflows. During the past year, we've expanded our SaaS offerings and added several early adopters of cloud-based solutions at large media companies, studios, broadcasters, and post-production facilities across the globe. Now, let me jump into the discussion of our third quarter results. During the quarter, we saw a strong sequential recovery in our non-recurring revenues from our integrated solutions, including our Nexus media storage systems, which turned in a strong performance aided by our newest release during the quarter, Nexus 2020. Likewise, our pro audio solutions category had another strong quarter, even though the pandemic is having an ongoing impact on the live sound portion of the industry. This non-recurring revenue recovery also reflects improved demand for perpetual software licenses of Avid's creative tools and the media central platform. During Q3 on the recurring revenue side of our business, we saw ongoing growth in software subscriptions for our creative tools, as well as for growth in annual contract value. Sales of individual subscriptions for creative tools continued their upward trajectory. And in the quarter, we also saw initial success with subscription sales to our enterprise customers for Media Central, as well as our creative tools. In the quarter, we signed subscription agreements with several large organizations in broadcast, post-production, and higher education. We're very pleased that enterprise customers of all types are starting to take advantage of this new flexible way of working with us to ensure their production tools and other Avid-based resources are always available to their teams. As we were in the early days of this planned expansion of our software subscription offerings for enterprise customers, We see this as an additional growth engine for our overall subscription business. Also during the third quarter, we saw ongoing benefits from the operational and fiscal discipline that we embarked on two years ago, as well as the additional cost savings measures we established very quickly in April as it became clear that COVID-19 would likely materially impact our operating plans this year. This discipline significantly contributed to our higher gross margin and lower operating expenses. Combined with the accelerating growth in our high-quality revenue streams and solid performance of the strategic elements of our business, all of this contributed to significantly improved profitability and free cash flow. Now, let's review a number of key metrics and indicators highlighting Avid's overall performance and the success of our ongoing strategy. As I mentioned earlier, Avid delivered continued strength in recurring revenues and benefited from recovery in the sales of non-recurring integrated solutions and perpetual licenses which together contributed to substantially improved results in the third quarter. Subscription revenue was up nearly 74% year over year. Paid subscriptions for creative tools continued to deliver strong growth, aided by a number of major new product leases and enhancements. Growth in subscription revenue in Q3 also reflects the introduction of enterprise subscription for our media central platform and initial sales to enterprise customers, as I had mentioned earlier. Our maintenance revenue increased slightly on a sequential basis in the third quarter, and along with a strong subscription revenue growth, we saw the combined subscription plus maintenance revenue growth of 11.6% year over year. Our e-commerce business continued to deliver strong growth, increasing 41% year over year. This part of our business, which is an increasingly valuable route to market, continues to perform well as a profitable commercial engine for our creative software tools. And we're supporting the growth of our e-commerce web store with focused digital marketing efforts to generate additional demand through this channel. Adjusted EBITDA was up over 50% year-over-year in the third quarter, as GAAP revenue almost returned to the level of last year's Q3, while gross margin is significantly higher year-over-year, and operating expenses are significantly down year-over-year. Our continued cost discipline, operational rigor, and the overall profitability contributed to very strong free cash flow of $15.5 million in the quarter, which gives us positive free cash flow for the first nine months of 2020 and positions us well heading into what is typically our seasonally strongest free cash flow quarter. Through all the market challenges we faced during 2020, our product and engineering teams stayed focused on developing innovative solutions to address our customers' evolving needs. leading to several notable product releases in the latter part of Q3, which we expect will contribute to growth in Q4 and beyond. First, we introduced several new innovations to enhance our Media Central platform for media enterprises. This included the new Media Central Collaborate application that streamlines production workflows and enables better collaboration across disparate teams, including remote journalists and production teams wherever they're working. We surprised the market also by announcing our joint efforts with Adobe to develop and market the Media Central connector for Adobe Premiere Pro, which improves on the interoperability between Adobe and Avid environments, opening up new market opportunities for Avid solutions, including the Media Central platform and Nexus storage. We also delivered an important update to Media Central subscription licensing, which expands our subscription offerings to address the end-to-end requirements of our enterprise customers. In addition, we have continued to innovate around our creative tools to improve support for remote and cloud-based workflows. We introduced the new Media Central Reporter mobile app, enabling remote journalists to capture and edit content right on their mobile devices and send it back to Media Central. We also released several important updates in Q3 for Avid Edit on Demand, a pure SaaS solution for cloud-based editing, which is currently in an early access program that has been made available to dozens of Avid's key enterprise customers They've been putting a solution through its paces prior to our general release, which is planned for early 2021. In addition to these major releases, we delivered many more upgrades, including continued improvements in our creative software tools in support of our subscription business. While we are really happy with the amount of innovation we delivered to help address the challenges of our customers and what they're facing today, we still have several major releases planned for the fourth quarter. including trailblazing innovation that we'll announce very soon, which we believe musicians and audio producers will be quite excited about. In closing, coming off of a strong performance in Q3, I believe this team has done a great job navigating the current market environment, and we're well positioned to take advantage of the opportunities available as end markets continue their recovery, given our focus on operational improvements and structural cost adjustments, along with the many innovations that we're bringing to market. I have to say I'm truly excited about the opportunities in front of us. Now I will hand the call over to Ken, who will offer some more details behind our Q3 2020 performance. Over to you, Ken.