Avid Technology, Inc.

Good afternoon, ladies and gentlemen, and welcome to Avid Technologies' second quarter 2022 earnings conference call for the period ended June 30th, 2022. My name is Witt Rappel, Avid's Vice President, Corporate Development and Investor Relations. Please note that this call is being recorded today, August 2nd, 2022, at 5.30 p.m. Eastern Time. 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 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 the 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 the non-GAAP measures and also definitions for the operational metrics used on this call and in the presentation. Unless otherwise noted, all figures discussed by management during the call are non-GAAP figures 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 annual report on form 10k and quarterly reports on form 10q 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 joining us today to review Avid's second quarter results. So let me dive right in. Let's start with the three main takeaways for Avid's performance during the quarter. First, we delivered strong subscription growth, including another good quarter for enterprise adoption, where we added 3,800 Media Central Flex subscriptions in Q2. And we continued to deliver sustained growth with another solid quarterly performance from our Creative Tools subscriptions. Next, we continue to experience strong overall market conditions and healthy customer demand for our software and integrated solutions. However, as expected, the global supply chain constraints that impacted our first quarter continued through the second quarter, and we were not able to ship a significant portion of the customer orders that we received for integrated solutions in the first half. And finally, even with these limitations, we still delivered 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, and we have a higher-than-normal level of unshipped orders for integrated solutions, which together give us confidence in our trajectory as we enter the second half. Now, let me dig in a bit more and provide some specifics on each of these areas. With sustained strong adoption of our subscriptions by both new and existing customers for both our creative tools and enterprise offerings, we saw strong growth in our overall subscription business in the second quarter. We realized net ads of 18,500 subscriptions and delivered year-over-year growth of 22% in the number of overall subscriptions. We continue to expand our portfolio of higher value enterprise subscription offerings, which are contributing to revenue growth. We launched Nexus Flex with our virtual file system software as a subscription and saw initial success with dozens of customers in the second quarter. The Nexus virtual file system is a software solution that runs on either our Nexus storage appliances or on our Nexus cloud storage to deliver the same media storage performance, whether using on-premises or cloud-based storage or both. We also launched the F-Series upgrade to our Nexus appliances in July. And our perceived pricing continues to improve as the higher-priced enterprise subscriptions becomes a larger portion of the business. Our creative tools remain an essential piece of our subscription growth, and during the second quarter, which is historically our seasonally weakest quarter for this part of our business, we had good net ads across all three of the creative tool product lines. We continue to innovate and further grow this business to attract more next generation creatives. In late April, we introduced Pro Tools Artist, a new lower-priced tier directed at the music creation community. Initial results from Pro Tools Artist are encouraging, and we look forward to continued growth from this new tier. Together, these factors all resulted in 58.7% year-over-year subscription revenue growth. Now, during the second quarter, healthy demand from our customers and strong commercial activity continued across our businesses, resulting in year-over-year revenue growth in the quarter. Business activity with our enterprise customers remained strong, and we continued to see healthy uplift when we convert customers to subscription. We closed 19 new enterprise subscription agreements, including with such notable brands as ITV News and Warner Brothers Discovery. Due to the ongoing global supply chain constraints that I mentioned earlier, and as we discussed on our previous earnings call, we realized a year-over-year 10.6% decline in integrated solutions revenue in Q2 as we continue to face challenges in delivering customer orders for certain parts of our integrated solutions portfolio. While we continue to see strong demand for our products, the expected supply chain constraints that we're facing are impacting production levels and our ability to meet this healthy demand. As a result of the lower shipments in the first half of the year due to these constraints, unfulfilled contractually committed orders for integrated solutions were more than 20 million above typical levels of unfulfilled orders at the end of the second quarter. We are making progress and working to resolve these issues. And based on what we're seeing today from suppliers, combined with the great work of our teams, we anticipate the impacts of the global supply challenges on our business will be gradually resolved over the next several quarters, starting during the second half of 2022. Our third takeaway is our business fundamentals and profitability remain strong. Our subscription and maintenance revenue grew 19% year over year in the quarter to 62 million. based on strong subscription growth across our businesses. As expected and as we have previously discussed, our success in converting enterprise customers to subscription is resulting in a reduction in maintenance revenue. However, the significant growth in our total subscription revenue continued to drive double-digit subscription and maintenance revenue growth and also resulted in strong 14% year-over-year growth in ARR and 46% year-over-year growth in subscription ARR. We continued our focus on proactively managing our costs while also investing in technology innovation and digital transformation to fuel our strategic growth plan. The revenue growth combined with year-over-year improvement in gross margin and sequentially stable operating expenses enabled us to deliver a just EBITDA margin of 17% for the quarter, and we delivered non-GAAP EPS growth of 4% year-over-year. Now, let's talk about where we see things going forward from a business perspective. We've seen the healthy demand for our products and solutions continue into the third quarter, and we expect for this trend to continue based on the market signals we're seeing. We had several customer events recently that have reinforced this view. In July, we had an additional voice of the customer event in the UK with dozens of European members of the AVID Community Association. These discussions help us inform us on our customers' priorities and ensure that our product roadmaps will meet our customers' needs and investment priorities. In addition, during these recent meetings, we were happy to hear from our customers that they expect to continue to invest in the technology and solutions that they need to help deliver the increasing volume of high-quality content that consumers are expecting and to drive their own strategic priorities, including greater content supply chain efficiencies, which our solutions help clients address. Earlier today, we announced an important agreement between Amazon Studios and Avid to help advance Amazon's content production in the cloud and to enable their editors and other content contributors to use Media Composer, Nexus Storage, and the Media Central platform in a globally scalable studio in the cloud solution running on AWS. In the news release, Amazon Studios spokesperson stated that they see Avid as a central component of their studio in the cloud vision to provide a fully cloud-based tool set to their creative teams across the globe. We're really excited about this new agreement with Amazon Studios as we believe that it further demonstrates our unique position and the market leadership in helping move the media and entertainment industry to the cloud. We will continue to innovate with new technologies, develop new solutions, and forge partnerships that will contribute towards our growth plan. I'm encouraged by the additional new products and key product enhancements in our development pipeline to meet the market and customer demands that we see and to help drive our growth. As always, we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on the past few years, while we will also continue to make strategic investments in new innovative solutions, as well as our digital transformation in support of our long-term growth plan. As I said earlier, we currently expect that the global supply chain conditions that have been impacting our integrated solution shipments will moderate over time. And in fact, we are expecting to significantly increase production and shipments of integrated solutions in the second half compared to the first half. However, based on the current healthy demand overall for our solutions, we don't expect to fully catch up this year, and we expect to end the year with some elevated amount of unfulfilled orders. That said, this expectation is fully factored into our 2022 guidance. Our experienced supply chain operations and hardware design teams continue to work to mitigate the effects of the global supply chain situation on our business, and we will continue to be diligent in managing ongoing risk present from the macro supply chain environment and to maximize our business performance in 2022. Through all of this, for the full year 2022, we expect to deliver continued revenue growth and healthy profitability. We expect continued strong performance from our growing subscription business, and as such, we are maintaining our full year 2022 guidance targets for subscription maintenance revenue. However, while on the one hand, we are also seeing healthy market conditions and strong overall demand for integrated solutions, the impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full year 2022 business plans. As a result, we are prudently widening our range for our full year 2022 revenue guidance while keeping the same midpoint to better reflect the range of possible outcomes for the year. We are adjusting our full year guidance for adjusted EBITDA and non-GAAP EPS to reflect this wider revenue range. We are also adjusting our free cash flow guidance for full year 2022 as a result of several factors. First, we're seeing more rapid adoption of enterprise subscriptions globally, which are strategically important for the company and are positive for our long-term model, but they have different near-term cash conversion characteristics than our individual creatives subscription business. Second, the expected timing of the integrated solutions manufacturing recovery happening later in the second half will likely lead to some cash collections from these shipments falling into early 2023. And third, to the extent we can, our plan is to temporarily build up our inventories to a level that will provide a sufficient buffer and greater flexibility to better navigate the variability and anticipate supply chain conditions over the next several quarters, and most importantly, to better meet the stronger demand that we're seeing. 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. In the second quarter, we continued our profitable growth driven by robust performance in our subscription business and our growing ARR. Our focus for the second half 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. With that, let us now turn to the details of our second quarter financial results. We are encouraged by the continued growth of our paid subscription base. Our total subscription count reached approximately 450,000 at the end of the second quarter, an increase of 22% year over year. Growth in both enterprise subscriptions and creative tools continued to be healthy and solid. Media Central subscriptions grew to approximately 23,100, an increase of about 3,800 during the second quarter, representing a year-over-year growth rate of 209%. The increase in enterprise subscriptions furthers our confidence in the transition of our existing customer base to subscription. Subscriptions for our creative tools performed as expected in the traditionally seasonally weaker second quarter, increasing by approximately 14,600. Subscription growth was solid for our creative tools, with year-over-year growth of 18%. 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 second quarter, which reached $34.1 million, an increase of 59% year-over-year. The shift to enterprise subscription customers continues to increase our per-seat revenue, a trend we expect to continue. In addition, the launch of the new Nexus Flex subscription that Jeff discussed contributed a small portion of the subscription revenue growth. Maintenance continues to be a solid part of the business. During the second quarter, maintenance revenue was $27.8 million, down 9% year over year. As we continue to successfully convert our enterprise customers to subscription offerings at a healthy uplift in excess of 140%, we are seeing a reduction in the related software maintenance revenue from those customers. In addition, hardware maintenance was up 4% year-over-year, mainly due to price increases, even as the lower integrated solutions revenue in the first half also reduced the associated first-year maintenance revenue. Total subscription and maintenance revenue increased year-over-year by 19% in the second quarter, Subscription and maintenance saw 15% growth for the first half of the year, in line with our 2022 financial model and long-term plan. Total combined integrated solutions, perpetual, and professional services revenue was $35.8 million in the second quarter, driven by lower integrated solutions and the continued transition away from perpetual software licenses. Integrated solutions revenue was $28 million in the second quarter, a decrease of 11% year over year. As was the case in the first quarter, despite continued robust market demand, several integrated solutions products were impacted by the global supply chain challenges, limiting our production capacity and our ability to meet customer demand at the end of the quarter. We ended the second quarter with approximately $20 million more than normal of unfilled, contractually committed orders for integrated solutions. The unfilled orders are primarily related to availability of certain chips and power supplies for our Pro Tools hardware, audio control surfaces, and live sound consoles. We expect to deliver significantly more integrated solutions revenue in the second half, But given the strong demand we're seeing, we don't expect to fully catch up on the production and shipments before the end of the year. And as a result, we expect to have an elevated level of contractually committed orders at the end of 2022. As we also indicated during our first quarter earnings call, risk remained from macro supply chain headwinds, so the recovery could be uneven. And we have factored these risks, as we understand them today, into our Q3 and full year 2022 guidance. Perpetual licenses revenue was $2.7 million, a decrease of 53% year-over-year, as we continue to de-emphasize 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 35% in the second quarter, as the subscription revenue growth significantly exceeded the perpetual revenue decline. Now moving to annual recurring revenue, LTM recurring revenue, and annual contract value from long-term agreements. As our business model continues to rapidly move towards subscription, we introduce annual recurring revenue as a new key metric at our investor day in May. Annual recurring revenue based on the annualization of subscription and maintenance bookings was $231 million in the second quarter, an increase of $28.4 million, or 14.1% year-over-year. Growth in ARR was due to subscription ARR growth of 46%, as we continued to drive a favorable conversion of maintenance revenue to subscription revenue, plus adding new customers to our subscription business. As expected, subscription revenue growth is not always going to track subscription ARR growth based on a few factors. First, subscription revenue growth for a quarter can vary based on the size and number of enterprise subscription deals. And we had a favorable comparison this quarter as the second quarter of 2021 had weaker subscription revenue on the enterprise segment. Second, as we discussed at our recent investor day, the revenue recognition of multi-year enterprise subscription deals under ASC 606 impacts the timing of the subscription revenue and creates some unevenness that affects comparisons with ARR. Also, the lower integrated solutions shipments in the first half negatively impacted the maintenance ARR at June 30th. as the unshipped orders would have contributed about $2 million to maintenance ARR from the first year of maintenance that is bundled with the product sale, impacting 100 basis points of the ARR growth. Our focus on growing our recurring revenue continues to drive healthier gross margin and greater predictability in our business. As of the second quarter, LTM recurring revenue was 80% of total revenue, up from 76% a year ago and in line with our long-term model. The annual contract value from our long-term agreement was $96 million at the end of the second quarter, up 13% year-over-year, excluding the subscription and maintenance portion, which is already captured in ARR. This growth is a result of increased ACV from strategic purchasing agreements with our channel partners. With the addition of ARR, we are going to de-emphasize the total ACV metric moving forward, but we have included it in the appendix for reference. Now let us look at the operating results for the second quarter of 2022. Total revenue in the second quarter was $97.7 million, up 3% year-over-year. We saw continued robust market demand, but total revenue was constrained during the quarter as we ended the quarter with unfilled contractually committed orders for integrated solutions that were approximately $20 million more than normal. If we had shipped all these integrated solution orders, total revenue would have been in excess of $115 million for the second quarter. Non-GAAP gross margin was 65.5% for the second quarter, up 160 basis points year over year. Our high-margin subscription business made up a large share of revenue, resulting in the improved gross margin. We expect improving gross margin in our long-term model as we continue to drive robust growth in our subscription business. Non-GAAP operating expenses were $49.6 million in the second quarter, a $2.5 million increase year-over-year due mainly to investments to support product innovation to drive our long-term business. Adjusted EBITDA was $16.5 million in the second quarter, up 4% or $700,000 year-over-year, driven by the improvement in both revenue and non-GAAP gross margin. Adjusted EBITDA margin was 16.9% in the second quarter, an increase of 20 basis points compared to the prior year period. Finally, non-GAAP earnings per share was 26 cents for the first quarter, up one cent year over year. Now let us look at the rest of our results for the second quarter of 2022. Our strategy of investing in innovation to drive higher quality recurring revenue together with the effective cost controls and reduced interest expense has resulted in a sustained trend of continued profitable growth. Free cash flow was 3.2 million in the quarter, down 2.4 million year-over-year, due to a 3.1 million increase in capital expenditures associated with our digital transformation and innovation investments, as well as the pressure of lower product deliveries, which resulted in lower collections. During the second quarter, we repurchased approximately 560,000 shares for $14.1 million, bringing total repurchases to 1.8 million shares for $50 million under the $115 million authorization announced in September 2021. We will continue to deploy capital prudently in the most responsible way to drive long-term shareholder value. We ended the quarter with a strong financial position with net debt to EBITDA of 1.8 times and a healthy liquidity profile of 95 million, consisting of our cash balances and unused borrowings under our revolving credit facility. Finally, let's now turn to guidance. As Jeff said, we are confident in the underlying strength in our business, including the healthy market conditions and strong market demand for our solutions that we are seeing. We expect continued growth in subscription revenue from expected strong performance and enterprise subscription and solid performance from our creative tools. We expect contribution from recent new subscription product introductions, including the first full quarter of Pro Tools artists, plus our new Nexus subscription offerings. For the third quarter of 2022, our total revenue guidance is $100 million to $112 million, a similar size range as was provided for our second quarter of 2022, solely related to the supply chain risk to integrated solutions revenue we discussed earlier. Our guidance for third quarter 2022 subscription and maintenance revenue is 67 to 70 million, representing at the midpoint 16.7% year-over-year growth in the third quarter. Our guidance for third quarter 2022 non-GAAP earnings per share is 27 cents to 39 cents, assuming 45 million shares outstanding. Our guidance for third quarter 2022 adjusted EBITDA is $17.5 million to $23.5 million. At this time, we are also reaffirming our full year 2022 guidance for subscription and maintenance revenue based on the strong demand we are seeing for these solutions. While we are seeing Also seeing healthy market conditions and strong demand for our integrated solutions, the impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full year 2022 business plans. As a result, we are keeping the same midpoint but widening the range for our full year 2022 revenue guidance to better reflect the range of possible outcomes for the year. Our guidance for 2022 total revenue is now $425 million to $455 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 is now $1.37 to $1.53, assuming 45.2 million shares outstanding, reflecting the wider revenue range. Our guidance for 2022 adjusted EBITDA is now 83 to 95 million, reflecting the wider revenue range. We are adjusting our guidance for 2022 free cash flow to 45 to 59 million due to the factors that Jeff mentioned previously, which include first, we're seeing more rapid adoption of enterprise subscriptions across our global customer base. While enterprise subscription is strategically important for the company and is a positive for our long-term model, it does have different near-term cash conversion characteristics than our individual creative subscription business. Next, given that we expect the recovery in our integrated solutions to be later in the second half, we currently expect that some of the cash collections from these shipments to fall into early 2023. And third, Where we can, we plan to temporarily build up inventories to add buffer stock and provide us greater flexibility to better navigate the variability in anticipated supply chain conditions over the next several quarters, and most importantly, to better meet the strong demand that we're seeing for our products. With that, I would like to turn the call back to Whit.