Avid Technology, Inc.

Good afternoon, ladies and gentlemen, and welcome to Avid Technologies' first quarter 2022 earnings conference call for the period ended March 31st, 2022. My name is Whit Rappel, Avid's Vice President for Corporate Development and Investor Relations. Please note that this call is being recorded today, May 4th, 2022, at 5.30 p.m. Eastern Time. With me this afternoon are Jeff Rostica, our Chief Executive Officer and President, and Ken Gayron, our Chief Financial Officer and EVP. In their prepared remarks, Jeff will provide an overview of our business, and then Ken will provide a detailed review of our financial and operating results, followed by time for questions. We issued our earnings release earlier this afternoon, and we have prepared a slide presentation that we will refer to on this call. The press release and presentation are currently available on the events and presentations page of our investor relations website at ir.avid.com, and shortly following the conclusion of this call, a replay will be available on our IR website for a limited time. During today's call, management will reference certain non-GAAP financial metrics and operational metrics. In accordance with Regulation G, both the appendix to our earnings release today and our investor website contain a reconciliation of the most closely associated GAAP financial information to these non-GAAP measures and also definitions for the operational metrics used on this call and in the presentation. Unless otherwise noted, figures noted by management during the call are non-GAAP, except for revenue, which is always GAAP. In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this call, as well as the accompanying slide deck, may include statements that are forward-looking and that pertain to future results or outcomes. These forward-looking statements are based on our current beliefs and information available as of today. Actual future results or occurrences may differ materially from these forward-looking statements. For more information, including a discussion of some of the key risks and uncertainties associated with these forward-looking statements, please see our press release issued today and our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. With that, let me turn the call over to our CEO and President, Jeff Rosica, for his remarks.

Thanks, Whit, and my thanks to everyone who joined us today to review Avid's first quarter results. We continue to have good success growing our subscription business as more enterprise customers adopt subscription licensing, coupled with continued strength in subscriptions for creative individuals. While we continue to see strong customer demand and business activity across our portfolio, we have seen a tightening of supply for several components for our audio integrated solutions at the end of the first quarter that impacted our ability to meet that demand, resulting in first quarter revenue at the lower end of guidance. We have been aggressively and proactively addressing these constraints, and although the global supply chain situation continues to present challenges, which could cause some uneven quarterly performance in the near term, We currently believe that these to be temporary for AVID due to our proactive efforts to mitigate these effects, and as such, we are maintaining our full year guidance. We also remain encouraged and confident in our growing subscription and healthy maintenance business, especially with several new innovations and exciting additions to our subscription offering planned to be released over the coming months. In addition, we've recently introduced several exciting new product enhancements for Pro Tools, Media Composer, Media Central, and Edit on Demand. And we have more plans as we continue to execute on our strategy for profitable growth. Let me get into some of the details of our Q1 results. Let's start with the three main key takeaways for Avid's performance during the quarter. First, we delivered strong subscription growth, including another great quarter for enterprise subscription adoption, where we added 6,100 Media Central Flex subscriptions in Q1. That's our largest quarterly increase to date. And we continue to deliver sustained growth and another solid quarter performance for our creative tool subscriptions. Next, as I just mentioned, we continue to experience strong overall market conditions and healthy customer demand for our products and solutions. However, global supply chain constraints at the end of the quarter limited our ability to deliver some customer orders for certain parts of our integrated solutions portfolio. With these intensifying supply chain headwinds late in the quarter, we would have easily shipped several million dollars more during Q1, which would have brought us well above the midpoint of our total revenue guidance. And finally, even with the situation, we still delivered 7% year-over-year total revenue growth and expanding gross margin and adjusted EBITDA margin, which together drove continued year-over-year improvement in profitability. Overall, we ended the quarter seeing continued strong market demand for our solutions, as well as the significantly elevated backlog of integrated solutions orders, which gives us confidence in our full year 2022 targets. Now, let me dig in a bit more and provide some specifics on each of these areas. With sustained strong adoption of subscriptions by both new and existing customers for both our creative and enterprise subscriptions offerings, we saw solid growth in our overall subscription business in the first quarter. We realized net ads of 21,200 cloud-enabled software subscriptions in this quarter, delivering year-over-year growth of 24% in the number of overall subscriptions. Enterprise subscriptions continue to exceed our expectations, increasing our confidence in the growth trajectory of our subscription business. As we've discussed on previous earnings calls, we expect to typically see around 120% to 140% uplift on conversion to subscription, and we were at the high end of that range again during Q1. And our per seat pricing continues to improve as the enterprise subscription becomes a larger portion of the business. Our creative tools remain an essential piece of our subscription growth. And during the first quarter, we had good net ads across all three of the creative tool product lines as we continue to innovate and further grow this business within current customers, while also successfully attracting more of the next generation creatives. Together, these factors resulted in 32.5% year-over-year subscription revenue growth. During the first quarter, healthy demand and strong business activity continued within our existing markets and customers as well as in new customer segments. Our success in converting enterprise customers to subscription is resulting in a reduction in maintenance revenue, as expected and as we have previously discussed, but the total subscription plus maintenance revenue grew at a healthy 12% year-over-year in the quarter, which contributed to the year-over-year growth in ACV. Business activity with our enterprise customers remains strong. We closed 11 new enterprise subscription agreements, including with such notable brands as Fox and NFL Films. We also announced a strategic cloud agreement with Paramount Global to support the reshaping of their content creation operations and driving towards our mutual vision of a common cloud-based solution for content production across the industry ecosystem. Even with the supply chain constraints that I mentioned earlier, we had 7.6% year-over-year growth in integrated solutions revenue helped by solid performance in our Nexus storage solutions. We saw good recovery in live sound as well as continued strength across the audio portfolio, but our total potential was limited, and we ended the quarter with about $10 million more backlog of integrated solution orders than we typically carry from one quarter to the next. We are proactively working to mitigate the effects of the global supply chain situation on our business. Based on those efforts and on what we can see today, we currently expect to be able to begin catching up and meet customer demand as we head into the second half of 2022. And I want to reiterate that we will continue to be diligent in managing ongoing risks present from the macro supply chain environment. During the first quarter, we saw improved profitability as a result of total revenue of over $100 million. Non-GAAP gross margin of 66.8% was up 120 basis points year over year due to the continued shift of revenue towards more subscription and maintenance and improved hardware gross margin year over year. The revenue growth combined with improved gross margin enables to deliver adjusted EBITDA margin of 19.2% for the quarter. And we delivered non-GAAP EPS growth of 17.9% year over year. We continued our focus on managing our costs. We'll also invest in technology innovation and digital transformation to fuel our strategic growth plan with several new software subscription introductions and other product innovations planned in the near term that will contribute to our revenue growth later this year. Free cash flow was lower than last year due primarily to the use of cash for working capital that we expect to reverse in the second half, as well as increased capex to support our digital transformation initiative. Now let's talk about where we see things going forward from a business perspective. We've seen the healthy demand for products and solutions continue into the second quarter, and we expect for this trend to continue based on the market signals we're seeing. We've had several customer events recently that have reinforced this view. We had our annual Voice of the Customer event with the Avid Customer Association in early April and listened to what they had to say around the industry's direction, their most important business and technical needs, as well as where they feel investments will be made in 2022 and beyond. And just last week, we met with many key clients and prospective customers at the NAB show, our first major in-person trade show since early 2020. I was involved in dozens of customer meetings at the show that reaffirmed for me the strong customer demand for our solutions and our innovation roadmap. Also at NAB, together with Microsoft, we previewed our new enhancements to our Avid Edit on Demand SaaS offering that includes an innovative over-the-shoulder experience with Media Composer, streaming directly to and integrated with Microsoft Teams, and the addition of Avid's new Media Central Stream ingest and play out solution, also available on the Edit on Demand SaaS service. We also just released new versions of Pro Tools last week, as well as introducing a re-tiering of the subscription price points, including a new paid Pro Tools artist subscription offering targeted at aspiring music creators that replaces the first freemium tier we have now discontinued. As part of the pricing re-tiering, we have added a new higher price subscription tier called Pro Tools Flex that is targeted at enterprise customers and higher end applications. We believe that these moves will help to both expand our total market opportunity in the wider music creation segment and optimize our business opportunity at the higher end of the market, where we will continue to deliver a greater value to our customers. The initial numbers from the first week since the launch of Pro Tools Retiering are encouraging. We will continue to innovate with new technologies, develop new solutions, and forge unique strategic partnerships that will contribute towards our strategic plan. We have additional new products in our pipeline to meet the market and customer demands and to help drive our growth. We will continue our efforts to improve efficiency and maintain the cost discipline that we've been so focused on the past couple of years, but we will also continue to make strategic investments in support of our five-year growth plan. We have a very experienced supply chain and hardware engineering teams, and as I said before, they have been taking proactive measures to minimize the impacts of the macro supply chain issues. We are aggressively looking for and securing alternative sources of supply, and we are doing selective hardware board redesigns where necessary to improve our optionality for alternative components that can help us meet the demand. We currently expect these headwinds to moderate over time, but they could continue to create uncertainty and unevenness in the near term. As a result of this, we are being prudent and are providing a wider than normal guidance range for Q2 total revenue and earnings, but we are keeping the normal guidance range for subscription and maintenance revenue, which we expect to continue its growth trajectory. Most importantly, we are maintaining our full year 2022 guidance as we believe the supply constraints will moderate in the second half due to the efforts of our teams, as I mentioned. Through all of this, for the full year 2022, we expect to deliver continued profitable growth and improving free cash flow. So with that, let me now turn the call over to Ken to review more of the financial details. Take it away, Ken.

Thank you, Jeff, and good afternoon, everyone. During the first quarter, we continued our profitable growth, driven by robust performance in our subscription business and our growing recurring revenue. Our focus for the remainder of 2022 will be to further build our high-margin subscription revenue and continue to stay on track with our long-term model. We expect these efforts to result in continued improvement in our key financial metrics, including stronger profitability and free cash flow through 2022. With that, let's now turn to the details of our first quarter financial results. We are encouraged by the continued growth of our paid subscription base. Our total cloud-based software subscription count reached approximately 431,800 at the end of the first quarter, an increase of 24.1% year-over-year, We had the largest quarterly increase to date in enterprise subscriptions, and Creative Tools subscription growth was healthy and solid. Media Central subscriptions grew to approximately 19,300, an increase of about 6,100 during the first quarter, representing a sequential growth rate of 47%. The sequential increase in enterprise subscriptions furthers our confidence in the transition of our existing customer base to subscriptions. Subscriptions for our creative tools increased by approximately 15,100 during the first quarter. Subscription growth was solid for all creative tools with year-over-year growth of 20%. Now moving to the composition of our revenues. The consistent growth in the number of paid subscriptions drove continued growth in subscription revenue during the first quarter, which reached 33 million, an increase of 32.5% year-over-year. As we have previously discussed, our subscription revenue can show sequential volatility due to the size of certain enterprise agreements and the impact of ASC 606 revenue recognition. As we will discuss in more detail during our investor day on May 24th, the shift to enterprise subscription customers also continues to increase our per seat revenue, a trend expected to continue in our model. Maintenance continues to be a solid part of the business, and during the first quarter, maintenance revenue was $28.3 million, down 5% year over year. As expected, as we are successfully converting many of our enterprise customers to subscription offerings, we are seeing a reduction in the related maintenance revenue from those customers. We saw benefits from the maintenance price increases we implemented in 2021 as part of the strategy to encourage subscription conversion. For fiscal 2022, we expect maintenance revenue to continue to come down incrementally as we convert additional customers to subscription and as we introduce new subscription offerings this year, including Avid Nexus storage. Total subscription and maintenance revenue increased year over year by 12% in the first quarter. As we have previously discussed, there is some quarter-to-quarter variability in our enterprise subscription business. We expect subscription and maintenance revenue to grow 19% year over year in the second quarter using the midpoint of our guidance range, which equates to 16% growth for the first half of the year in line with our 2022 financial model and strategic plan. Perpetual license revenue was $5.2 million, a decrease of 26% year-over-year, as we continue to deemphasize perpetual licenses and focus on strategic subscription revenue. Even with the declining perpetual revenue, total software revenue from subscription and perpetual licenses increased year-over-year by 19.5% in the first quarter, as the subscription revenue growth significantly exceeded the decline in perpetual revenue. Our integrated solutions business remained healthy with integrated solutions revenue of 28.2 million in the first quarter, an increase of 7.6% year-over-year. As Jeff mentioned, several integrated solutions products were impacted by supply chain issues, limiting our ability to meet customer demand at the end of the quarter. We ended the quarter with approximately 10 million more backlog than normal in integrated solutions orders. primarily related to Pro Tools hardware, audio control surfaces, and live sound consoles. We believe we will recover the majority of this backlog over the next couple of quarters, but risks remain from macro supply chain headwinds, so the recovery could be uneven, and we have factored this into our Q2 and full year 2022 guidance. Integrated solutions growth was solid in live sound consoles, graphics, and video servers in the quarter. Live sound product revenue was up year over year due to continued strong demand as many venues and concerts have opened and had further upside limited by the supply chain issues. Revenue from graphics solutions increased year-over-year due to several large deals, and video service revenue also had strong product sales in the quarter and saw year-over-year growth as well. Audio control services revenue and Pro Tools hardware revenue were impacted by supply chain issues, resulting in backlog being carried over into the second quarter and a decline in year-over-year revenue. Revenue from our storage products was solid and in line with our internal plan. The balance of our revenue comes from our professional and learning services business. Professional services revenue continued to be steady at $6 million in the first quarter, a decrease of 6% year over year. Total combined integrated solutions perpetual and professional services revenue was $39.4 million in the first quarter, basically flat year over year. Now moving to recurring revenue in the annual contract value. Our strategy in recent years to focus on recurring revenue sources continues to pay off as driving improved gross margins and greater predictability in our business. As of the first quarter, LTM recurring revenue was 79% of total revenue, up from 75% a year ago. The LTM recurring revenue percentage increased through the strong subscription revenue growth and higher revenue under long-term agreements as more of our channel revenue is coming from strategic purchase agreements with our strong channel partners. Annual contract value was $339 million at the end of the first quarter, up 12.3% year over year. ACV benefited from strong year over year growth in subscription revenue and increased ACV from strategic purchasing agreements with our channel partners. ACV is impacted by revenue recognition under ASC 606, which does create some unevenness on a sequential basis due to the seasonality in our subscription revenue. Now let's look at our operating results for the first quarter of 2022. Total revenue in the first quarter was $100.6 million, up 6.7% year-over-year. At constant currency, our first quarter 2022 revenue would have increased 9% year-over-year, as FX was a headwind in the quarter. Non-GAAP gross margin was 66.8% for the first quarter, up 120 basis points year-over-year. Our high-margin subscription business made up a larger share of revenue, and integrated solutions gross margin increased year-over-year, resulting in the improving gross margin. Non-GAAP operating expenses were $49.7 million in the first quarter, a $3.4 million increase year over year, due mainly to investments to support product innovation to drive our long-term model, as well as $600,000 increase in travel associated with our commercial efforts, and a $500,000 one-time expense for an IT asset write-off. Adjusted EBITDA was 19.3 million in the first quarter, up 9% or 1.6 million year-over-year, driven by the improvement in both revenue and non-GAAP gross margin. Adjusted EBITDA margin was 19.2% in the first quarter, an improvement of 50 basis points compared to the prior period. Non-GAAP earnings per share was 33 cents for the first quarter, up $0.05 year over year, reflecting the increase in operating income and the reduced share count due to share repurchases. Excluding the one-time asset write-off discussed above, our non-GAAP earnings per share would have been $0.34. Now let's look at the rest of our results for the first quarter of 2022. Our strategy investing in innovation to drive higher quality recurring revenue together with effective cost controls and reducing interest expense has resulted in a sustained trend of profitable growth. Free cash flow was 4.7 million in the quarter, down 6 million year-over-year, primarily due to the $9 million use of cash for working capital compared to the first quarter of 2021. relating mainly to a reduction in accounts payable and deferred revenue and to an increase in prepaid expenses related to our digital transformation efforts. Free cash flow was also lower year-over-year due to a $2 million increase in capital expenditures primarily related to our digital transformation and growth investments. Now moving to our leverage and liquidity. The growth in adjusted EBITDA and free cash flow has enabled us to continue reducing our leverage which was 2.2 times total debt to EBITDA in Q1 and 1.7 times net debt to EBITDA. At the end of February, we also amended our credit facility, which reduced the interest rate spread by 25 basis points and extended the maturity of our loan to 2027. During the first quarter, we repurchased approximately 354,000 shares for $10.8 million. And through May 3rd, we have repurchased an additional 46,000 shares for $1.5 million, bringing total repurchases to 1.3 million shares for $37.4 million under the $115 million authorization announced in September 2021. We believe that repurchasing our shares at these prices is a good use of capital to enhance shareholder returns, given the confidence we have in our long-term business model and in the 2025 targets we provided at our May 2021 Investor Day. We will continue to deploy our free cash flow responsibly, and we will continue to look at strategic token acquisitions as well as share repurchases as ways to drive long-term shareholder value. We ended the quarter with $41 million in cash and had $111 million in total liquidity, including our undrawn revolver. Let's now turn to our guidance. As Jeff said, we are confident in the underlying strength in our business as we progress through 2022. We expect continued growth in subscription revenue from expected strong performance in enterprise subscription business, solid performance from our creative tools, and contributions from new subscription product introductions, including the new tiers for Pro Tools artists that Jeff mentioned previously. In addition, we expect to be able to recover most of the Q1 backlog from our integrated solutions during 2022. We believe AVID is well positioned to drive further improvements in free cash flow due to the continued movement of our business to higher margin recurring revenue streams and a continued focus on managing our cost base. For the second quarter of 2022, our total revenue guidance is $92 million to $104 million, a wider range than normal. The wider range is solely related to the supply chain risk to integrated solutions revenue we discussed earlier. Our guidance for second quarter 2022 subscription and maintenance revenue is $60 to $64 million, representing at the midpoint 19% year-over-year growth in the second quarter and 16% growth for the first half of 2022. Our guidance for second quarter 2022 non-GAAP earnings per share is $0.19 to $0.32, assuming 45.5 million shares outstanding. Our guidance for second quarter adjusted EBITDA is $13.5 million to $19.5 million. At this time, we are also affirming the guidance for full year 2022 that we issued on March 1, 2022, as we currently believe that the supply chain impacts to our integrated solutions revenue will moderate through the year. Our guidance for 2022 total revenue remains $430 to $450 million. Our guidance for 2022 subscription and maintenance revenue remains $266 to $274 million, a range which represents year-over-year growth of 17% at the midpoint. Our guidance for 2022 non-GAAP earnings per share remains $1.40 to $1.51, assuming 46.2 million shares outstanding. Our guidance for 2022 adjusted EBITDA remains 84 to 94 million. Our guidance for 2022 free cash flow remains 60 to 67 million, which we expect will be more weighted to the second half of the year due to the backlog of integrated solution orders. Lastly, we'll be hosting an investor day on Tuesday, May 24th, 2022. At the investor day, we will provide further detail on AVID's business, our strategy, and our progress under our long-term model. We invite all investors to attend the online event. Information can be found on our investor relations website. With that, I'd like to turn the call back to Witt.