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.

Thank you, Jeff, and good afternoon, everyone. As noted above, Jeff and I are referring to non-GAAP figures, unless otherwise noted. Overall, we are very pleased with our business and financial results for the third quarter. Our recurring revenue sources, including subscription, and maintenance revenues have remained healthy and we significantly improved profitability and generated our strongest third quarter free cash flow since 2007. Additionally, the non-recurring portions of the business related to perpetual licenses and integrated solutions started to recover in the quarter. As we exit the third quarter, we are seeing a clearer path to sustained improvement in profitability and higher levels of free cash flow that should result in a strong finish for fiscal year 2020. With that, let's now turn to the details of our third quarter financial results. GAAP revenue was $90.4 million during the third quarter, down 3.2% year over year, but up 14.1% sequentially. Recurring revenue was strong, as combined subscription and maintenance revenue was $48.7 million, up 11.6% year-over-year, while non-recurring revenue from integrated solutions, perpetual licenses, and professional services was up 29.5% sequentially, although down year-over-year due to the continued impact of the COVID-19 pandemic on this portion of the business. At constant currency, our third quarter 2020 revenue was down 3.8% year-over-year, as the relatively stronger Euro compared to the US dollar negatively impacted revenue by 60 basis points. Gross margin was 64.9% for the quarter, up 280 basis points year over year. The increase was due to a more favorable revenue mix of higher margin subscription and maintenance revenue, as well as the impact of our cost savings initiatives on non-material cost of goods sold. Non-GAAP operating expenses for the quarter were $41.4 million, a $5.9 million decrease year over year, and a $900,000 increase from the second quarter of 2020. The year over year decrease in operating expenses was due to the benefit from our cost savings efforts, including $6 million from temporary furloughs, $2.8 million from travel reductions, and $2 million from contractors and consulting. partly offset by a bonus accrual of $6.1 million, of which $3 million was related to a one-time catch-up for the accrual in Q1 and Q2 of this year, as we are seeing an improvement in our internal forecast for certain metrics for AVID's 2020 corporate bonus. Adjusted EBITDA was $19.3 million in the third quarter, up 51% or $6.5 million year-over-year as the benefits of higher gross margin and lower operating expenses far outpaced the 3% revenue decline. Adjusted EBITDA margin was strong at 21.4% in the third quarter, a significant improvement from 13.7% in the prior year period. Non-GAAP net income per share was $0.27 for the third quarter, up $0.17 year over year, reflecting the increase in non-GAAP operating income. Free cash flow was $15.5 million in the quarter, up $20.2 million year over year, due to the improvement in adjusted EBITDA. Our free cash flow for the quarter could have been higher, but we chose to repay $4.4 million of accounts payable to drive better pricing with our key vendors. Working capital was a source of cash of $3 million in the quarter, as we are clearly seeing an improvement in AVID's working capital cycle, as our business moves to more software and annual paid upfront subscriptions. Now moving to recurring revenue and annual contract value. The percentage of our revenue that is recurring continues to increase. For the 12 months ending September 30, 2020, 71% of total revenue was recurring, up from 59% in the 12 months ending September 30, 2019. The percentage of recurring revenue increased due to higher subscription revenue and revenue from long-term agreements, plus lower non-recurring product and professional service revenue in 2020. While our strategy is focused on building the recurring revenue portion of our business, we believe the percentage of recurring revenue has been elevated in the last few quarters due to the impact of COVID-19, which has caused volatility in our non-recurring integrated solutions, perpetual licenses, and professional services revenue. As such, the recurring revenue percentage could be uneven during the next few quarters as those non-recurring revenue streams continue to recover. Annual contract value was $271.9 million at the end of the quarter, up 6.5% year-over-year, benefiting from increased subscription revenue, offset in part by decreases in maintenance and long-term agreements year-over-year. During the third quarter, we renewed three of four long-term agreements and added one new long-term agreement. As was the case last quarter, the one agreement we did not renew was with a channel partner who serves the live sound market. We expect to revisit the agreements with these two partners when the live sound market recovers. As we look into the detail of our revenue streams, we continue to be encouraged by the resilience and growth of our subscription base, which reached a new high in paid subscriptions. In the third quarter, we added roughly 27,000 net new subscriptions for our creative software solutions, and our total subscription count reached approximately 269,000 at quarter end, an increase of 58% year over year. Also during the quarter, we signed five multi-year enterprise subscription agreements resulting in one million of revenue in the quarter. Overall, the growth in subscriptions has accelerated since the third quarter of 2019 through the combination of new product innovations, improvements in pricing strategy, and increased digital demand generation efforts. Subscriptions growth was strong in all creative tools, with Pro Tools up 68.5% year-over-year, Media Composer up 41.3% year-over-year and Sibelius up 43.6% year-over-year. Additionally, we continue to see a shift towards annual paid upfront contracts, which we believe are higher quality revenue streams for AVID when compared to monthly paid subscriptions. Annual paid up subscriptions grew 209% year-over-year in the third quarter. and now represent 23.5% of total subscriptions, up from 12% a year ago. We believe that the share of annual paid upfront subscriptions will continue to grow as more of our enterprise customers adopt subscriptions and we continue to optimize our pricing models. Finally, when we look at our total creative tools users, both subscriptions and active maintenance agreements, the total number has grown 20% year over year. as the growth in paid subscriptions far exceeds the decline in active maintenance contracts. Now moving to the composition of our revenues. The continued growth in paid subscriptions for our creative tools, as well as new revenue from enterprise subscription and cloud drove continued growth in subscription revenue during the third quarter, reaching $17.9 million, or an increase of 74% year-over-year. Maintenance revenue was $30.8 million during the third quarter, down 7.6% year-over-year but up 0.8% sequentially. We continue to see small impacts from decreasing non-cash revenue and from the end of support from legacy storage solutions last year. Excluding these factors, maintenance revenue would have been down 4.7% year-over-year, due primarily to reduced first-year maintenance revenue from lower product sales in the last three quarters as a result of the impact of the COVID-19 pandemic. Perpetual license revenue was up 3.5% year over year as demand for our media central enterprise products and perpetual licenses for our creative tools started to recover in the third quarter. Gross margin on software licenses and maintenance was 85.2% in the quarter, down 150 basis points year over year due to a one-time credit in Q3 19. But otherwise, the gross margin remains stable. The company's hardware integrated software or integrated solutions revenue was 26.8 million in the third quarter, up 28.8% sequentially as demand started to recover from the COVID-19 downturn. However, due to the continued impact from COVID-19, our integrated solutions revenue was down 21.7% year over year. Gross margin from integrated solutions was 30.3% in the third quarter, down 390 basis points year over year, as lower production volumes did not absorb as much of the manufacturing overhead in the quarter. However, gross margin improved 450 basis points sequentially on the higher volumes in the mixed shift towards higher margin storage in the third quarter compared to the second quarter. The balance of our revenue comes from our professional services business. Professional services revenue was $5.9 million in the third quarter, down 14% year over year as certain projects were pushed back out due to the COVID pandemic. However, professional services revenue was up 27.4% sequentially on improved ability to complete service delivery during the quarter. Gross margin of professional services was strong at 23.7% in the quarter, up 920 basis points year over year, due to the ability to work remotely and other cost saving measures. Now let's turn to free cash flow. You can see that AVID is on a path to generating sustainable levels of stronger free cash flow and significant improvement in the conversion of adjusted EBITDA to free cash flow as we projected during our investor day last November. As a result of our strategy of driving higher quality recurring revenue we are seeing stronger profitability, higher margins, and lower investment in working capital. With this transition in our business, Avid reported its strongest third quarter free cash flow since 2007. Free cash flow in the third quarter was $15.5 million, up from negative $4.6 million in the third quarter of 2019. The company generated positive $3.2 million in free cash flow year-to-date in 2020. up from negative $4.5 million in the first nine months of 2019. And during the last 12 months, the company generated $20.2 million in free cash flow, up $7 million or 53% year over year. As the company enters its seasonally strongest quarter, Avid is well positioned to drive further improvement in free cash flow through the shift in our business to more predictable and higher margin recurring revenue streams in an improved working capital position with a significantly reduced amount of accounts payable and higher accounts receivable both sequentially and year-over-year. Now let's move to the balance sheet. The company ended the third quarter with $49.1 million in cash after fully repaying the $22 million outstanding balance on its revolving credit facility in September. Accounts receivable was up $6.8 million sequentially and up $6 million year-over-year on the strengthened billings at the end of the third quarter. That should also help augment our cash collections in the fourth quarter. Inventory remained low at $28.4 million as we are seeing the benefits from the transition the manufacturing supply chain vendors completed in 2019. Accounts payable was reduced and was $13.5 million at the end of the third quarter. down 4.4 million sequentially, and down 22 million year-over-year. With a lower accounts payable balance, we are seeing improved pricing from our vendors that will allow for continued improvement in profitability. Now let's move to our capitalization and credit metrics. The company ended the third quarter with a healthy cash balance and net debt of 159.1 million. The strong free cash flow in the third quarter and the year-over-year improvement in adjusted EBITDA resulted in a reduction in the company's total leverage to 3.6 times at the end of September 2020 and net leverage at 2.7 times. With AVID's improving credit metrics and a clear path to improve free cash flow, the company is well positioned for a potential reduction in borrowing costs during 2021. Finally, let's turn to our outlook. We expect the external markets to continue their gradual improvement in the fourth quarter and into 2021. And this improvement should result in a sequential benefit to revenue in the fourth quarter. In addition to the expected continual gradual improvement from the COVID downturn, we anticipate typical seasonality to benefit AVID in our fourth quarter revenue. We expect continued growth during the fourth quarter in subscription revenue from both additional paid subscriptions from our creative tools and growth in enterprise subscription in cloud as well as the expectation for improvement in non-recurring perpetual license integrated solutions revenue in the fourth quarter. We ended the temporary furloughs we implemented during the second and the third quarter at the end of September, but we continue to be on track to deliver the cost-saving targets we set in the second quarter. We expect adjusted EBITDA margin in the fourth quarter to be higher year on year. on higher gross margin and lower operating expenses than in Q4 2019. The seasonally higher revenue expected in the fourth quarter combined with the higher adjusted EBITDA margin and improved working capital position at the end of the third quarter positions AVID for seasonally strong free cash flow in the fourth quarter. Also, as we exit 2020, we expect approximately 60% of the cost savings in fiscal year 2020 to continue into 2021 as we realign our cost structure so that Avid exits the pandemic a stronger company that is well positioned to generate sustained improvement and profitability in free cash flow. With that, I'd like to turn the call back to Whit.

Thank you, Jeff and Ken. This concludes our prepared remarks. We are now happy to take your questions. Operator, please go ahead.

Thank you. Ladies and gentlemen, if you'd like to ask a question, you may signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Star 1 for questions. We'll pause a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Steve Frankel with Colliers. Please go ahead.

Good afternoon, and thank you for the opportunity. I'd like to ask a little bit about these enterprise subscription agreements. Could you give us some details on maybe the size of the number of users covered in these agreements and what the term length is?

Hi, Steve. This is Jeff. I think I can give just a general sense. So the agreements can run anywhere from one year to five years. Typically, they're two or three years in length, the ones that we're doing. And as far as number of users, they can be anywhere from, let's say, dozens of users for the smaller accounts to hundreds of users on the larger accounts. It just depends on the size of the account because, you know, we deal with everything from, you know, a larger account may be a large media broadcast company or a large higher educational institution. Smaller may be more post-production companies that may have dozens of users.

tier three prosumer kind of base that you've been growing so nicely over the last year or so?

Yes. Yes. But it was, you know, it was helped some by the, by the start of the enterprise. But as we mentioned, the enterprise description is just started in September. So it's, it's impact is still fairly limited compared to the rest of the business. But yeah, most of the growth is from the growth in individual creative professionals and small businesses who are subscribing to our creative tools.

Yeah, Steve, in terms of adding to the color there, you know, our license count was up 58%. Revenues were up 74%. You know, the enterprise subscription, you know, accounted for roughly 8% to 10% of that growth, about a million dollars. So, you know, again, that's going to be our second stage of growth, but we're in the, you know, the early phases, and, you know, we see a lot of opportunity ahead.

Okay, and... How long do you think it's going to take for the live sound business to recover? Is that something we ought to think about maybe late next year into 22 before that starts to rebound?

Yeah, I would say there's probably a good estimate, Steve. We may see a little bit of opportunity in the second half of 2021. It really depends on how the pandemic evolves on a global basis. Because it's not just a regional, you know, to mount a lot of tours and a lot of events, you need some, you know, regional, you know, improvement. But it really will depend on how, you know, how things evolve and how things open up from, you know, not 20 or 50 people, but how hundreds or thousands of people can come together. So, you know, I think we're right now expecting late 21 at the earliest and probably more like 2022.

Okay. And then in the core business, do you expect to see a normal level of year-end budget flush this year? Is that giving you confidence in the sequential gains in Q4?

Yeah, I think, you know, it's what, I mean, there will be, you know, a typical flush or a typical investment at the end of the year. And there's also just, you know, typical timing of things that happen naturally at the end of the year. I think we'll see that happen. It will be on a different base, obviously, this year than in prior years. But, you know, we do see that as a benefit for Q4. As you know, Q4 is a seasonally strong quarter for us, both on, you know, level of business, but also in our, you know, free cash flow performance.

And any update on cloud storage trials that you've done with a couple of your large customers?

Yeah, they're going well. I'll say in general, we are You know, a lot of these larger companies don't allow us to name them anytime soon, but, you know, we're working with large media companies, large broadcasters, film studios, and even production companies. And the tests are going well. And, in fact, more than tests, some are in production. And, in fact, feature films have been in production in the tool. We've also got pretty important content that's being produced for television in the cloud already. So it's progressing well, and, you know, we're happy so far with the progress.

Okay, great.

Thank you.

Thanks, Steve.

We'll take our next question from Josh Nichols with B. Reilly.

Great. Thanks for taking my question, and good to see such a strong showing for free cash flow this quarter as you rebound from the lows to Q. I was going to ask, one thing I wanted to just hit on is if you could talk about strength or weaknesses that you're seeing in various geographies just because the way COVID has evolved and it's popping up in some places and coming back down in others, what you're seeing on that front?

I think in general what I would say is that when we look back at Q3, Europe actually performed quite strong over Q3. It actually was up slightly year over year. So we saw really, really solid performance in Europe. Asia and the Americas were down slightly. from your perspective. I think that's more also based on the regional business that we have in those areas. You know, Hollywood obviously is a big driver, and so is, you know, large broadcasters in the U.S. So I think it really depends on, you know, the different markets. But we did see a lot better situation in Europe than we did see. We saw a better recovery everywhere, but we saw a better result in Europe than we did other parts of the world. I should say Europe and Middle East, actually, across the whole EU.

Thanks for clarifying. And then how should we think about the sales mix a little bit more if we think about separating it between distribution, direct, and e-commerce? I assume e-commerce is going to continue to play a very big role in the company sales or an increasing role as time evolves based on the current economic backdrop.

Yeah, I think as we reported, again, this quarter, e-commerce had a growth that was north of 40% year on year. That trajectory hasn't let up for us in several quarters. I mean, it's plus or minus a little bit beyond that, but we're seeing some really strong growth, very strong double-digit growth in e-commerce. If you look at Q3, we did see a nice sequential recovery in the Tier 1 or the large media enterprise business. It was north of 50% improvement. uh quarter quarter over quarter so that was nice to see we also saw double digit increase improvement sequentially in the channel uh part of the business so it's it's progressing i think you know the business will evolve as we as we go to more uh subscription business and more sas business that's more of a direct digital engagement through web store through digital digital selling but channel and our direct sales teams that call them larger enterprise accounts is still a significant portion of the business.

And then I think you mentioned in your earlier comments that you saw a pretty nice rebound from the storage business. I was wondering if you could elaborate a little bit on maybe what the outlook looks like for 4Q, because that's a pretty favorable margin contribution business on the integrated hardware side piece, right?

I think, I mean, we don't give specific guidance, but I would say, you know, the recovery we saw, we expect that recovery to continue, and we expect the storage business to continue to be a strong contributor for us. There was a lot of pent-up demand and catch-up going on in Q2, but there was also a lot of that demand still being fulfilled, and Q4 is typically also a pretty strong quarter for us, a relatively strong quarter for storage business. But I'd say generally what I would tell you is we expect, you know, a similar trend to continue.

And then last question for me and then I'll pass the baton and hop back into Q. If you could comment a little bit, pretty phenomenal growth from the subscription piece of the business. Are you expecting, I guess if I'm looking at 4Q, relatively similar like quarter over quarter growth rates if I look at that relative to last year or subscriber increases or what's the pace that you're seeing on that front?

I think, well, if you look, you've probably seen similar pace in the last couple of quarters. I think at the moment we're assuming that that pace is going to continue into the fourth quarter. Fourth quarter is typically a strong quarter because of holiday shopping, especially for our music customers. It's typically a very strong quarter. So, you know, we're obviously encouraged with the level of the market adoption and the response we've had to our subscription offering for our creative tools. But as we look to, you know, everything from, you know, you know, Cyber Monday all the way through the holidays, we expect that to be a typically strong period for us.

Thanks, Jeff, and Ken are back in the queue.

Okay, thanks, Josh.

Thanks, Josh.

We'll take our next question from Neil Chokshi with Northland Capital Markets. Please go ahead.

Yeah, thank you, and great free cash flow, awesome free cash flow. Congratulations on that. Regarding the South Quad saying expect normal seasonality for revenue, if I look at the past six December quarters, it's the average of about 3% QQQ and a standard deviation of 11%. So I'm not really too sure what is normal seasonality. Can you just help us define that a little bit better? Sure.

Yeah, no, I would say in the fourth quarter, normally do we see improvements in our subscription business that Jeff mentioned earlier due to holiday buying, especially in music with Pro Tools. But also, we see improvements in certain integrated solutions. So in general, there is an uplift in the fourth quarter, I think, historically. The fourth quarter has revenue increases of generally $15 to $20 million over Q3. And that's kind of historically when you look back. So I think that's a good estimate of kind of the traction that the company had historically. And I think that's, although we're not providing guidance, I think those are some goalposts to help you with your model.

Okay, great. And then, Ken, you did mention that there was a spread between subscription revenue increasing 74% year-over-year and subscribers up 58% year-over-year. And I think you said about 1,000 basis points came from the beginning of the enterprise subscription. A, is that correct? And B, what's the remainder for that spread?

Yeah, no, so you're absolutely correct. So, you know, we are seeing the benefit of revenue being higher than the license count because of Number one, continued traction, annual paid upfronts, both for creative users, but also as enterprises start migrating, there's better upfront revenues. They're signing typically the upfront agreements, and there's better revenue recognition on those agreements. So roughly excluding the enterprises, we would have been up 65%. With the enterprise licenses that we talked about, it was up 74%.

OK, great. And then my final question is that on your slide deck, you provide a nice breakout of the subscribers between Pro Tools, Sibelius, and Media Composer. And it looks like Pro Tools was a major contributor to that Q2Q increase. And you did give a metric out, I think, about total subscribers. That's the perpetual plus the subscription subscribers still being up 20% year over year. I guess the bearish pushback that I've heard on this before that I'd like to get your take on is that, well, are you just simply potentially harvesting perpetual users that had stopped playing the maintenance that wouldn't show up in that maintenance space? Can you address that bear argument there?

You know, I think looking at the subscription and the active maintenance contracts being up 20% year over year, highlights that we are growing the pie. I think that's one piece of data. I think also subscription plus maintenance continues to grow double digits at 11.6%. So we are expanding the pie. It's just not moving one piece of revenue stream to the other. So we're expanding the pie and we're increasing gross margin and You can see that in the total consolidated gross margin of the company and the nice attractive EBITDA and free cash flow we're generating.

Okay, great. Thank you very much. Congratulations again on the great free cash flow.

Yeah, thanks, Nihal.

We'll take our next question from Samad Samani with Jefferies. Please go ahead.

Hey, good evening, gentlemen. Thanks, as always, for the time today. Um, uh, first hope everybody's doing well and maybe just diving right into the questions. So I want to maybe ask a follow up on the subscription side. Um, if we take maybe a step back, could you maybe help us understand what you view as, um, as kind of either the TAM or what is the kind of logical end market? I mean, we've seen really strong, durable growth in cloud subscriptions. How should we think about maybe that, that total market opportunity from your perspective?

Yeah, this is Jeff. I mean, I don't want to necessarily give you just, you know, well, I'll give you imprecise numbers, but I'll say this. If you look at our music space where you've got Pro Tools and Sibelius, though we have very large market share, we're still only a, you know, a relatively small portion. Even in music, we're probably... you know, one third of the market, there's still two thirds of the market that uses other tools. Um, in Sibelius is even, it's, it was even a bigger difference in video editorial. We're probably of a total 10, maybe 10%, less than 10% of the market. So there's still like, you know, you can do the math. There's a pretty large opportunity for the company to expand this. I would also say that the pie itself is growing in that you're seeing growth, whether it's on the music side or on the video editorial side, content creation is growing. And so there's, um, For us, we have a lot of runway left to continue to grow our opportunity here.

Great. That's helpful. And then, you know, on the enterprise side of this, appreciate the color around its contribution to growth. When we think about the opportunity there, at least let's call it maybe over the next six, 12 months, is it more about attaching subscriptions to the existing base or do you view it more as a new customer acquisition strategy that to have these enterprise subscriptions?

It's a little bit of both. I will tell you that the first rollout of the subscription is around what we call fusion packages, which are preset workflow packages around the media central platform. And these are designed to either get greater share of a current account or to, in other words, get, take a competitor out with a, with a specific workflow or application and a customer. but it's largely also to get new customers onto the platform. And so while we are converting some existing customers over to these offerings, we're also having great success of getting new customers on. And so it is designed to be a new customer acquisition tool. One of the things we found in subscription, is subscription really does open up opportunities for customers that maybe thought or maybe even improperly felt they couldn't enter with an average solution, I think we learned pretty quickly that when you offer a subscription offering, it really allows people a lower entry point and easier entry point into our solutions. So we do see it as a very important driver of new, again, new opportunities. And that's why we did these subscription packages to make it also very easy around enterprise customers to be able to, you know, acquire the right solution and then deploy it.

Great. And maybe, Ken, a couple of questions for you. I heard you mention on the enterprise license agreements, the renewals there and the one that you guys will come back to later. But maybe, you know, again, stepping back and more broadly looking at, as contracts are coming up for renewal, how should we think about the general maintenance renewal rates? Are you getting pushback on price? Are you getting requests for discounting? Are you renewing? Maybe how should we think about kind of the dollar-based retention on that maintenance?

Yeah, no, I would say in terms of the renewal rates, obviously the ones that were impacted both this quarter and last quarter were more on the hardware side with live sound. And, you know, we expect to revisit that as that market recovers. But in general, the renewal rates for maintenance are have been relatively stable, though we did see a little bit of weakness the last two quarters just because of the impact of the environment with COVID. But we have been selectively increasing pricing to compensate for that to keep the dollars whole. So we saw sequentially our dollars in terms of maintenance revenue actually went up slightly. But we continue to, I would say, not look at big discounting to hold on to revenue. We've been able to kind of work in terms of actively going out to negotiate the maintenance contracts to make sure that we continue to have strong and stable maintenance revenue.

Gotcha. And then just one last one, and then I'll cede the floor. But if I think about... the cohorts of individual creatives that you've sold cloud subscriptions to. Any noticeable differentials in the trends between the early cohorts versus the more recent quarters in terms of either retention or unit economics?

We've actually, on the The retention rates, we've actually seen a slight improvement on the retention rate, both on the annual paid monthly and annual paid annual. We continue to focus on providing the right level of customer service and nurturing those customers. In terms of the economics, we've been successful at driving price increases. We did that last July. and still have accelerated revenue since those price increases. So we continue to drive more lifetime value with those customers. We expect that to continue over time because of, number one, our products are leading brands. They're well regarded in the market. And people get a lot of joy from using them. So there's a lot of, you know, good momentum that we have in the marketplace.

Gotcha. Thanks again for taking my questions. We appreciate the color and great to see a good quarter.

Thank you so much, Samad. Appreciate it.

We'll take our next question from Jack Vanderaard with Maxim Group. Please go ahead.

Okay, great. Hey, Jeff. Hey, Ken. Exceptional results. Yeah, it's a strong quarter. I think all the other analysts have been driving home that point as well. So thanks for taking my questions. I'll start with a question for Jeff or Ken as well. In terms of LTAs, you mentioned you renewed three of those four LTAs that were up for renewal, but you also added a new enterprise customer under LTA. I'm just wondering if you – Are you able to share any additional color on this particular new LTA customer, maybe in terms of the duration of the agreement? Is it the typical three- to five-year duration? And what kind of types of product solutions are included in this LTA?

I don't know. We can't go too specific on this because it's not something we disclosed and plus the customers don't want us disclosing if it's found out. But let's say the one, the first of all, yes, we've been renewing LTAs. The one area that's been more difficult is one to relay the live sound as Ken mentioned in his remarks. We believe the live sound partners will come back on board once they really see their end market start to come back together. And again, that may be a, that may be a year out. We've also been bringing in new agreements. And so we have been, you know, still keeping a very strong performance in this area of the business. The LTA that you're talking about is a three-year agreement. It does include several products from our portfolio. And it's probably the general, it's probably the most I can give you at the moment on that one.

Okay. No, that's helpful. And I appreciate any call you can provide. I understand it's, you know, not, not, not necessarily publicly available information or things you want to, you want to provide. So, but that's helpful. And then just of, of the, I guess if I just continue with this customer, though, of the products that they are paying for, are you able to say, if anything, how that relates maybe to the three new releases that you made in Q3 with Media Central and Avid Connector and enterprise subscriptions for Media Central? Are any of those three categories, is there a chance that they are going to be involved in this contract, or are they interested and maybe already paying for it?

Look, it's not – well, I – Not directly were they involved, but anybody who is a Media Center customer has the ability to add any of the modules or applications that we have in that. And again, I don't have all the details of what they're allowed to do within the agreement or not. But I would say that a lot of our larger customers, before they sign agreements like this, Jack, they do look at our roadmaps. They want to understand when they sign a multi-year agreement where we're heading. It's not that we make any commitments to them, but they generally want to know what we're investing in and where we're heading generally. And so they've all, when people sign those, they've got a pretty good idea what our, you know, innovation plans are in general.

Sure, sure. Absolutely. I appreciate the added color there. And then I'll switch gears quickly. Maybe a question for Ken. Subscription business momentum continues to accelerate. It's a major bright spot for you guys. And obviously, you've talked a lot about this call and previous calls that annual paid upfront subscriptions are increasing in mix. I believe you referenced like a 23.5% or so of those total subscriptions are annually upfront, which is almost double the mix last year. But my question is, in terms of total subscribers added during this quarter, um and even previous quarters in recent quarters can you provide any color on what the percentage of new subscriber ads um are in terms of like on a geographical basis you provide three uh regional kind of segments um wondering if you could talk about subscription strength new subscription ads in each region where the strongest ads coming from maybe um in in how the annual paid up fronts um you know mix happens in in each of those three regions

Yeah, no, I would say that, you know, we're a global, you know, the subscription business continues to be, you know, impressive in terms of its growth rate. You know, it is sold mainly through our e-commerce engine, but also sold through partners. You know, it really is, you know, sold globally. You know, in terms of breaking out geographies, that's something that At this point that you know we just we just don't do And you know, we'll look at potentially providing other other metrics related description over time. But at this point, you know, we're not breaking out geography.

Okay, fair enough. Um, And regardless, I mean, the business, the subscription momentum is exceptional and accelerating. So that's certainly a bright spot. Congrats on that. And then I guess lastly, I'll just squeeze in a question more related to fourth quarter outlook. You guys, you know, talked about free cash flow. Free cash flow is exceptional, again, through Q. I mean, record high, really. And given your comments that you expect Q4 to still be a seasonally strong free cash flow quarter. I'm trying to figure out what that implies then for the EBITDA comments you've provided for the fourth quarter. So EBITDA is supposed to be up year over year, I believe you said. But I'm not sure you necessarily said on a Q over Q basis. I guess, one, is that correct?

No, I mean, I would say our outlook is that, you know, we expect – our fourth quarter to, you know, obviously have sequential improvement in revenue. We expect, you know, good performance in terms of sequential improvement in terms of the dollar of EBITDA and year over year improvement and EBITDA margin. And then when you think about free cash flow, you know, stronger EBITDA is one component, but, you know, our working capital position is very favorable right now with very high receivables, which will help our collections and low payables. So we think we'll generate very strong free cash flow in the quarter, and our LTM free cash flow should progress over time. So we have a clear path to improving free cash flow and improving conversion of EBITDA to free cash flow.

Yep, that makes a lot of sense. I appreciate the color there. And then just as it relates back to the EBITDA in the revenue growth sequentially here, as you look at the fourth quarter, in terms of gross margin, because it's very sensitive to revenue mix, obviously. And just wondering if, I mean, would it be reasonable to assume in software and hardware products, it's starting to recover, not quite to the normalized levels, but it's getting there. So That is a lower margin, though, I believe so. Is that – I mean, where do you see gross margins, I guess, on a sequential basis for the fourth quarter, assuming that that trend continues with an increasing mix of hardware revenue?

Yeah, so I would say sequentially, you know, we do expect, as Jeff pointed out, you know, our integrated solutions to kind of continue to perform better in the fourth quarter, but as we think about gross margin, some of those revenue lines will have a lower gross margin than, let's say, our subscription or software. So that will impact overall gross margin, but we'll have more gross profit dollars, which will add to the EBITDA. So gross margin sequentially could be impacted on the negative side slightly because of the increase in revenue from the integrated solutions in fourth quarter. The other part of it is, so I think that's the main theme you should, you know, you would expect.

No, fantastic. That's everything I needed there. Guys, again, congrats on the strong results and, you know, best of luck. I hope the momentum continues. Thank you so much. Appreciate it. Thank you so much.

And ladies and gentlemen, this will conclude today's question and answer session. I would like to turn the conference back to Jeff Rosica for any additional or closing remarks.

Well, thank you, Operator. And thanks again to our investors, our analysts, and others for joining us today. As I said earlier, we're very pleased with Avid's third quarter performance, the resilience we've shown in our business, and the uniquely strong position to capitalize on our market's recovery as a result of our commitment to our strategy and operational and fiscal disciplines. Look forward to reporting our progress when we deliver our fourth quarter and full year results next year. And I hope everyone will remain safe and healthy until we have the opportunity to speak with you again. So have a good evening.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.