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.

thank you jeff and ken that concludes our prepared our prepared remarks and we are now happy to take questions hold on while we prepare the queue our first question is from nahal chakshi from northland securities to be followed by samad samana nahal go ahead thanks thanks uh so

Netflix earnings was just two weeks ago, but are you seeing any signs of softening video production pipeline as a result of what appears to be Netflix pulling back on programming?

Hi, Neil. Yeah, it's a good question. I think the simple answer is no, and I can say that pretty surely because we just finished going to NAB and, you know, having our voice-to-customer sessions. No, we really haven't seen anything. I know Netflix was an early bellwether to this whole move to the streaming services, but I There is so many players in the space and so much competition, even on a global basis. We're still seeing a very healthy pipeline of opportunities across the globe and, quite frankly, even in the U.S. and what's happening here.

Okay, great. Certainly your unchanged guidance would indicate that's the case. And then regarding the March quarter results, what was the cost for subscription plus maintenance to come in at $61 million, which is, you know, Towards the lower end of the $60 million to $64 million guidance that you guys have provided.

So, hey, Dale, good question, and thank you for that question. So, you know, our business continues to remain solid in subscription and maintenance. When we look at the underlying trends, we came in with our subscription business, very solid on the enterprise side with strong wins with some large customers, as well as continued momentum on the creative side. The maintenance revenue was impacted by lower product sales in the quarter related not only from the supply chain, but that result, the lower product sales includes a maintenance component And because of the delay in the backlog of those certain product sales, maintenance revenue was impacted slightly in the quarter. So, you know, although the subscription business did very well, maintenance did have an impact because of the product sales. and we were slightly below, you know, the midpoint of our guidance. But we continue to believe that that backlog on the integrated solutions will ship. We will get the associated maintenance for it, and our subscription business continues to be very solid. We're very excited about the new product introductions, and that's why we feel very good about the year-end subscription and maintenance guidance.

I see. Okay, that makes sense. And then, you know, your guidance on subscription and maintenance is effectively Flattish Q2Q. But I believe in the past you have, you know, called out that Q2 and Q3 tend to have are seasonally softer relative to Q1 and Q4, especially since their significant portion of subscription revenue is term-based subscriptions. So what gives you confidence that, you know, this will indeed be Flattish Q2Q given that what you have historically called out some seasonality here.

You know, great question. Really, it comes down to the new product introductions and, the pro tools re uh new subscription offerings um that we have been encouraged by the initial success um so we feel good about also the enterprise business in in the second quarter um as well as strong growth and the core creative tools so all those elements give me confidence that will continue to drive um you know i would say improving subscription revenue through the year And our team is very excited about these new introductions. And that innovation will drive very strong subscription growth for the year for our company. So we're very excited about the new innovation. Guy, great. Thank you for taking my questions. Thank you, Nahal.

Thanks, Nahal.

Our next question is, And hold on please. Our next question is from Samad Samana from Jefferies to be followed by Jack Vanderaard. Samad, please go ahead. Samad, please go ahead.

Hey, apologies for that. Sorry. When it upgraded me to a panelist, it disconnected my audio. So no matter how many years go by since the start of the pandemic, we'll never figure Zoom out. So I appreciate your patience. A few questions for me. First, it's great to hear from you guys. But on the new pricing tiers, Jeff, I'm just curious what you think about the philosophy both on creating a lower price entry point For new hobbyists, how should we think about that impacting the funnel? And then how are you guys thinking about maybe the upgrade opportunity for the higher priced tiers that you're talking about? It's kind of along both the north and south strategy.

Yeah, it's a good question. And to the point you made, and it's a good question, Smad, is in the middle tier, which we call studio, traditionally it's been our highest volume tier is that middle tier that used to just be called Pro Tools without a nomenclature. Now that's Pro Tools Standard. We've actually even strengthened that product, which we think is going to really help even in that space. But part of what we did with the re-tiering is that we have eliminated the first freemium offering. We felt like that had really kind of played out really well for us, but it was, you know, over time we were seeing that we needed to kind of even change our strategy because we were seeing that there was a real demand for an offering that was more than first, but not the full Pro Tools. And so we created an artist tier that isn't just about, you know, how we've tiered the features and functions, but we also have created a new experience in that product. The artist product has a new entry user experience for the user. It also comes with GrooveSell and Syncell, some new tools we put in there. And we've really created a product that has, we think, the right price points and the right feature set. And there's more to come. We're just getting started in that music creation tier, but this is our first entry since prior Pro Tools tiering. We think that's going to really help us significantly expand the funnel and go after a broader part of the TAM, which I know we've talked about in previous calls and our investor day last year. This is our first step as we are really building out a more aggressive music creation strategy. And so the artist product is, again, our first step there. On the higher end, which is traditionally audio post-production for TV and film and higher-end music recording studios, We've brought that tier up in price. Actually, it's about $200 more per year. And so in that tier, we're going to be putting more. We have put more value in there. We're going to continue to put more value in there because we do believe the higher end of the market is looking for more value and will pay for that value. And so I think there's a real opportunity here to not only get more per user and per seat at the higher end, but allows us to go after a wider market opportunity in the music creation, especially for next gen music creators. I hope that answered your question.

No, definitely. That's very helpful. And then Um, you know, maybe another one around, um, the NAV conference, it's going back in person again. I'm curious if you're finding, let's call it the lead gen efficacy or ROI maybe of, of, uh, of the spend around that to be the same as you did. Um, uh, let's call it pre, pre 2020 and maybe how we should think about that influencing where you're allocating. marketing dollars or sales and marketing dollars over the next couple of quarters?

Yeah, very good question, a topic that we talk about a lot internally. So we'll never go back to the marketing spend like it was. We'll never be spending at the level that we used to at trade shows, even if we go to NAB. As an example, this year, our investment, I'm giving you a rough number. I don't have the exact numbers in front of me, but it was probably around a tenth of the cost of what we did prior to the pandemic. So what we really did this NAB was focused on more a meeting center and just an environment to meet key customers and to meet new prospects. And I think the ROI and what we did this year for NAB will turn out to be quite good, much better than we saw prior to the pandemic. You know, we may at some point put exhibits back on the show floor, but we'll never go to the size or scale we used to because, you know, I think – our marketing dollars are better spent on a lot more digital-focused and more data-driven marketing and not just, you know, dropping a lot of money at a trade show. So we're going to be very careful going forward, even if we're going to these trade shows. I'll say that we really like what we saw at NAB. We had the same level of meetings that we've had traditionally at NABs and without having the big cost of the, you know, exhibit on the show floor. And I think, as I said in my prepared remarks, we really feel good about the feedback we're getting from those customers and what we see as opportunities going forward for this year and even beyond.

That's great to hear. And then, Ken, maybe some model-related questions. Just I know there are a lot of things that are in the company's control, but many that are also out of the company's control. I think we should think about in terms of the guidance framework for QQ and the rest of the year versus maybe what you've done over the past few quarters. I mean, you guys have navigated the last couple of years about as well as you can, but just anything that you change just based on what's called an uptick in uncertainty out there?

You know, thank you for the question. You know, really due solely to the supply chain conditions, we felt it was appropriate to widen the guidance for the second quarter in terms of the range on both the top line and profitability. Again, solely related to supply chain, we firmly believe that The backlog will be recovered and we will achieve our year in numbers. The health of the business in terms of orders coming in is very strong. At this point, it's the macro supply chain conditions that is resulting in a widening of guidance for Q2. But we feel very strong about, you know, achieving the year-end numbers at this point. The business and the conditions and the environment and the strong demand for our products gives me high confidence for the full year.

Perfect. And the last one for me, and I promise I'll turn it over to the next analyst, but just You know, retention, as you're now lapping, you know, some very strong cohorts over the last couple of years. Just anything that we could tie to retention dynamics, whether it's by subscription tier or by subscription type, would be helpful.

Yeah, so at this point, the retention continues to be solid for the company. I would say that in general, we'll spend a little more time talking about certain metrics on the investor day. But, you know, we feel like the investments that we made in customer success management have paid off. We're seeing improving, I would call it, MPS scores in certain of our products. So, you know, and that translates into, I would say, a reduction that we're seeing in the debookings on our creative tools. So we feel really good about those trends. And then second, our enterprise customer base is extremely sticky. We have not had any loss of any enterprise subscription customers as they've come on to our subscription model. So very, very strong metrics in that regard.

Great. Thanks for all the questions, and look forward to hearing more at the end. I'll stay. Take care. Thanks, Mark.

Thanks so much.

great our next question is from jack vanderarty from maxim to be followed by josh nichols jack go ahead please jack it looks like you're still muted there we go okay there we go jack i think i did it three times you can hear me good yeah hi jack

Hey, guys. Great. I appreciate the update and, you know, look forward to learning more at the investor day, of course. So I'll just jump into a few questions. Jeff, can you maybe talk about what you're hearing from, and you kind of covered a little bit of this, but just, you know, specifically talk about what you're hearing from your existing enterprise customers that are not on that subscription model yet. How are those discussions evolving and any anecdotal kind of data points that might illustrate how demand shaping up and timing of additional conversions?

Yeah, that's a good question, Jack. I mean, generally, I would say the view is very positive. I say both from the customers we're talking to as we, obviously our commercial team, as they were engaging in these customer meetings during NAB and just day-to-day in our commercial activities, the response of customers is quite strong. We've been pleasantly surprised. We originally, I think we've talked about this before with you, we originally thought that the uptake would be a little bit slower maybe and not quite as the pace that we're at. what we're seeing is really, really good response from these customers. And the commercial team also tells us that they're seeing really good response from customers. I think at this point, I don't see any end in sight to our success of converting customers to subscription. And the economics, as Ken has talked about before, the economics we're getting on these conversions are very helpful. We're delivering a lot more value to these customers, and they like what they're getting. But also for us, it obviously drives, you know, improved economics and, quite frankly, a larger percentage of their share of wallet. So it's been going well and the feedback's really good. I think we're also hearing the move to cloud is accelerating. Kevin, our CTO, is sitting next to me here. He jokes that only one customer has said that they're not interested in cloud. Every customer is really looking very carefully about first making the move to subscription and getting themselves on a more flexible business model, and then over time moving different workflows to a real SaaS environment. So we see a lot of really good runway ahead of us for the enterprise customers.

That's great. It's helpful color and maybe just to follow up on enterprise subscriptions. So 19,300 or so that's up 46% sequentially clearly robust growth there. How many of these subscriptions are are from new customers to avid and maybe how many are from conversions of previously existing customers?

Yeah, it tracks pretty much – again, I'm going to give you a rough guidance. It really tracks pretty much as a company. Around 10% to 15% of our business comes in to new customers, and I think it similarly tracks that. We're still early in the enterprise subscription migration, so I wouldn't want to put exact data points, but we are seeing subscription as a very successful – business offering that helps us go after new customers. And our funnel is looking really good. And both our conversion already has been good, but we're seeing really strong and building funnel. We also are seeing obviously converting current customers. But one of the good things about our current customers is we are using this as an opportunity to, as I said, grow share of wallet. And so we see an opportunity in our current customers to expand our footprint and to expand what we're doing in those customers. And many times pushing out competitors, you know, we may have a large footprint, but competitors could have, you know, ancillary footprint within our customer base. And we're losing this also as a way to really, you know, drive a higher share in each of the accounts.

Very helpful, Culler. And then maybe just one for Ken maybe. approximately the approximate 10 million or more backlog from integrated solutions at the end of the quarter, exiting the quarter. Can you provide me some more color on what specific product solutions those are related to and looking at the inventory on hand, which it seems like lower than normal when you exit the quarter. Just do you have the inventory to satisfy that backlog? Is it all related to a specific kind of product category? Just any more color would be helpful.

So, again, you know, the $10 million of backlog, let me kind of talk about the components. It's mainly in the audio business. I would say half of it is in Pro Tools hardware, so obviously very, very – unique to the Pro Tools ecosystem. The other half is in live sound and control surfaces. So that's probably, you know, those three categories are 90% of the backlog, 95% of the backlog. We have some servers and graphics in the hardware side that is a very small amount. It's largely related to the audio business. In terms of the inventory and how we're positioned, you know, again, the team, the supply chain team here at AVID is first class. They get a lot of experience, a lot of relationships. We're looking at ways to deliver this backlog by looking at alternative suppliers as well as product redesigns. And, you know, I feel very confident that we'll be able to deliver it in 2022. It could be a little uneven as we go through the quarters, but, you know, I'm very confident in being able to deliver it. most of this backlog in 2022. It probably will shift more to the second half of the year, and you can see that in our guidance, but that's kind of where I expect the backlog to resolve itself. And I feel very confident in our supply chain team in terms of navigating through this with them. And I feel very confident about the year-end guidance.

Okay, fantastic. Well, I appreciate the time, guys. I'll jump back in the queue.

Thanks, Jack. Thanks, Jack. And our next question is from Josh Nichols of B. Reilly Securities. Josh, please go ahead.

Yeah, thanks for taking my question. Can you hear me? Yeah, we can. Hello. Good. Just to follow up on the last point. So clearly the Pro Tools hardware is kind of most of the backlog is Yes. Could you dive into a little bit like some of the specific components that are causing this? Where are those components being sourced from? And then also you mentioned a few times that you have a lot of confidence that you'll be able to fill this demand. Like what is actually what are you seeing in the market in terms of additional supply coming on and what it may be that makes you so confident that you're going to be able to kind of fill that that gap?

Yeah, good question. There's a lot in that, but I'll try to lay it out. So, first of all, yes, the challenges – now, I'll say in general, I think you're hearing that from a lot of companies, the supply chain environment or the supply environment does have constraints. I mean, you know, we don't have as much – in any product, we don't have as much upside flexibility as we used to have. That's a little more limited in the near term. But specifically where we're having trouble, you know, keeping up to the demand, because we've got very good demand across all of our products – is really around, again, the audio. It's Pro Tools Audio I.O., not all of it, but some of the Pro Tools Audio I.O. hardware. It's a lot of our control services and our live sound. The component, it really varies, Josh. In some cases, it's chipsets around network connectivity, which are more difficult in the market today. We even have some sources of power supplies that are short, and we're waiting for power supplies to come from, in this case, China. And, you know, even the situation in China isn't helping because we're not getting a lot of confirmations yet on when some of these power supplies will arrive. And we've got other things with other drivers that are, you know, behind screens or there's different components. It's generally chip availability is most of it. You know, there is certain things that we're managing. Our team is knocking down 99% or 95% of the problems. It's just there's a few that they can't, they haven't been able to resolve fully yet. And it only takes one chip in a product for us to not be able to ship that product. So they are scouring the world and working aggressively, and they're largely successful, though, other than a few cases to get the supply. So a lot of it is chip-related. What we are doing is in areas where we don't have confidence that the supply situation in a particular chip is going to resolve itself, Then we are doing, in those cases, specific spins or re-spins of the hardware boards associated, or let's say it was a network connectivity chip or something, we'll redesign that out and do an alternate one. And what that does for us is in those cases where we see higher risk on the horizon, it gives us optionality. It gives us, as I said in my prepared remarks, you know, we can have two network connection boards, as an example, with using different chips. And depending on what we can get a hold of, we can build with either one. And so it's really just opening up the window and the aperture for us that we can rely on a greater set of chips than just maybe a more narrow choice, if I'm answering that correctly. And it's something that we've got to make sure we've got visibility out, you know, a couple of years on this stuff. And that's important. Again, I think the important thing, Josh, is, you know, we're not passively just sitting by waiting for the supply chain situation to clear up. We are being quite aggressive on how we can in the near term get this resolved. Now, Ken, it does take time sometimes to get the supply. under our, in our, in our door, but it also is the redesigns do take a few months, but once we do that, it gives us a lot more optionality. So we are, we are doing what needs to be done to, to get this resolved.

Last question for me. I'm looking at, I know 2Q can be a little bit tougher for subscription, right? You should do more business in 4Q, 1Q. But just looking at the guide here kind of implies back into the envelope calculation, like 40 to 50% year over year subscription growth, which is above where it has been for the last two quarters. Is that because are you up against like an easier comp than that? Or are you seeing more demand for the cloud solutions? And so there's probably a little bit less seasonality than you may have used to see in that business. What's driving that?

Yes, so I would say it's really a combination of both. So we do have an easier comp last Q2. You know, we were earlier in the enterprise selling cycle. So, you know, now that we've got, you know, a year and a half of continued aggressive calling efforts in our enterprise customers, we expect that to be, you know, a lot more successful than the prior Q2. And our team already has a great funnel to look at those opportunities and drive execution and close those opportunities in the quarter. So as a result, we do expect subscription growth to be very strong in Q2. And again, our subscription and maintenance growth which was 12%, the guide, you know, that we provided is closer to 19% at the midpoint. So, you know, we expect to come in, you know, in the first half of the year, you know, high teens growth for the full year. And that's driven by the subscription growth. And remember, we also have new innovation, whether it's the pro tools retiring that we have encouraging results and new enterprise products that are in the nexus area, as well as graphics and servers. So, you know, so that's why I feel good about, you know, the strong growth that we, you know, in terms of realizing that the Q2 guidance, given all those factors.

Sounds good. That's all for me.

Great. Thank you. That concludes the Q&A session. I will now turn it back to Jeff for closing remarks.

Well, thank you again for your participation and your good questions. In closing, we believe we will continue to see strong demand across the end markets for our solutions, and we are managing through the temporary supply chain headwinds to enable AVA to continue to achieve our company strategy and our long-term growth and profitability targets as we move forward through 2022 and beyond. I hope you will join us on May 24th for our annual investor day and details for the event are available shortly on our IR website. Thank you and have a good evening.