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.

Thank you, Jeff. Thank you, Ken. That concludes our prepared remarks, and we are now happy to take your questions. Our first question is from Jack Vanderaard from Maxim to be followed by Josh Nichols. Jack, please go ahead. Hold on. Hang on, Jack, we'll come back to you. Our next question will be from Josh Nichols from B Reilly, to be followed by Jack, if we can get him. Josh, please go ahead.

Yeah, thanks. How's it going? You can hear me okay?

Yes, we can. Thanks, Josh.

Look, it seems like the subscription business is doing as good or better than people kind of thought, right? Just some lingering headwinds on the supply chain side. But before we dive into that, I just wanted to know if you could provide a little bit more color on the company SaaS business. I know it's relatively small, but it's been growing. I think you said that the investor day was around, like, seven million on a trailing 12-month basis. How is that growing so far and what's the opportunity to build that up over the next 12 months as like a third leg of growth for the subscription SaaS piece?

Hi, Josh. This is Jeff. It's a good question. I don't think we're going to unveil any more numbers than Ken already estimated at the investor day, but I'll say this. If you saw today's announcement, you might have seen what happened. It came out earlier today that we've signed a multi-year agreement with Amazon Studios. That is not in our numbers yet. We won't be turning that system on until late this year. But so I think, you know, I think we're still, as you know, we're on the early cusp of this third leg of growth for us. You know, we see some pretty robust growth in this part of our business over the next three years. And so we're very happy with where it's going. And we're pretty excited about the agreement with Amazon Studios today, because that's going to be a pretty, you know, I think it's a pretty big deal in the eyes of Hollywood and the entertainment community.

Yeah. And just to add to that, you know, obviously the growth algorithm we put publicly related to our cloud business as well as our subscription business. You know, the growth algorithm for our creative business, our enterprise business, and our cloud business still holds. And as Jeff pointed out, the Amazon, you know, announcement will likely accelerate the cloud evolution. So, you know, we're obviously pleased with the performance of that high margin subscription business.

And I was going to follow up about the Amazon deal. Congratulations. Great to see a win like that, multifaceted. Are you able to find any bit more detail on the color as far as like the sizing, the breakdown, right, of the revenue of that? Or if not, do you think the deal is really more emblematic of opportunities to grow across other platforms given how dominant it is? it's become over the last few years as far as a media and entertainment company and a production company?

Yeah, well, it's a good question. I think, look, we're not revealing with Amazon the size of the project or the size of the deal. I will say it's substantial. It's not just symbolic. It actually is a meaningful project. agreement that we have with them directly because what we're doing is actually helping them outfit their own production capabilities to be deployed globally for a lot of their productions they're doing for prime video um it it it is going to be i think of a fuel to help you know fuel the hollywood transition obviously it's a big piece of news that amazon studios has made um it also obviously it's amazon so we are going to deploy it on the aws environment We're working together with Amazon to do that deployment. They actually are helping invest in that cost of that deployment. So we're in the midst of working on that now. That development's been going on for several months. But now we've publicly announced that this has been going on. And later this year, as I said, and as the release said, our plan is to start to bring that system live for Amazon Studios. But it is a sizable multi-year agreement that we've signed with them.

Thanks. And then last question, honing in on the guidance a little bit. Again, wider range, understandable given what's going on on supply chain for the hardware piece of the business. At least, could you help quantify, like, you know, what's the delta as far as that you're kind of factoring in for potential hardware range for the third quarter? And do you have a lot of visibility into how long it'll take to get this right-sized or at least largely right-sized? Because historically you've done a lot more hardware business like late in the fourth quarter. And is that kind of still the expectation for this year? It's likely going to be even more heavily fourth quarter weighted?

I would say that at this time, you know, our seasonal pattern at the fourth quarter is strongest for the company will continue. We also have much stronger integrated solutions and hardware revenue in that quarter, just given the seasonal pattern. You know, we did widen the range on revenue given the current supply chain conditions. We do expect, you know, gradual recovery and, you know, I would say that the recovery is more weighted towards the second half of the year, hence the change in the guidance. We still feel strong about the market demand for our solutions. but we need to temporarily bring up some inventories if we can to meet that demand, which along with the you know, the timing of the recovery on integrated solutions, plus, you know, the growth that we're seeing in enterprise, which has, you know, slightly different shorter cash characteristics is the reason why we're changing the cash flow guidance. Again, we feel good about the long-term, our long-term model. We want to be in terms of our subscription and maintenance business. And we feel good about the long-term cash flow of the company in terms of the conversion rate.

If I can just add, Josh, you asked a question about the timing. We are always fourth quarter loaded for a lot of reasons. We will see that this year for sure. And, you know, we're not necessarily laying out exactly what the numbers are, the variability we see. I think you can see by the implied change in guidance what the variability is that we see in the business. You can kind of see the numbers pretty clearly. You know, the team's making good progress. We are seeing some great results and we're seeing some good plans for the second half. But we're going to be careful. Again, this is not – I want to say this is not about our suppliers and our factories. Our factory production capacities are there, what we need. It really is about getting the ample chip supply and other components of supply that we need to meet the demand we're seeing. And we are – to be clear, we are seeing healthier demand than we originally expected this year.

And that does provide some help. But just to maybe simplify my question, if you have a $20 million – backlog, right, or above normal at the end of 2Q, is your expectation that at the end of the year, that's more like a $5 million backlog or $10 million backlog or any type of estimate that you had built into your guidance for here just to get an idea for how much that may flow through?

Well, I wouldn't say that we would necessarily give that number, Josh, because it really depends on bookings. The commercial team can book more than we expected, and we could take an even bigger backlog into 2023. What we have modeled is our expectation for increased production that's going to happen in the second half. that increased production will be a lot more closer to our normal levels of production. It will be heavily weighted to Q4, but there will be improvements in the second half from a total production at the end of the semester. But the combination of just catching up to what our normal production levels are is not enough. We've got to try to go beyond that because supply or the demand is running even hotter than our original expectation for supply requirements. Thanks. I'll hop back in the queue. Okay.

All right. Next, we have Nehal Chokshi from Northland Securities to be followed by Paul Chung. Nehal, please go ahead.

Thank you, guys. And nice, strong subscription revenue growth, as well as AR growth, both of them accelerated. That's awesome. And it sounds like it's a, you know, enterprise subscription that's driving that. And that's A little bit surprising given what you guys have described in the past, typically seasonally weak conversions from maintenance to subscription during the June and September quarters for enterprise, and then also a weakening macro backdrop. So given these negative tailwinds, what's driving these really strong enterprise results?

Yeah, well, I think, first of all, I think the offering we've put together, and by the way, I nailed this, Jeff. The offering we've put together is very competitive, and I think it's really helping solve a lot of business problems and operational problems that our customers have. When you say the macro, obviously we can all read the news and see the opinions on the macroeconomic conditions. We're not seeing anything yet ourselves in the customer's buying patterns that is weakening across the enterprise customers. We're seeing still continued strength with them. And I think the offering that we've put forth on our enterprise subscription offering is very attractive for enterprise customers because they've got their own challenges of trying to be more efficient with their content supply chains, how they're going to, you know, produce more content for basically not the same amount of money, for sometimes less or same amount of money. So they've got their own strategic priorities that they're dealing with, you know, as the malls are shifting. I think we have a very attractive tool set that has got a very attractive offering for them. And our commercial team is, I would say that our commercial team has built a really great engine on how to take customers to a subscription. And I think it's all shown up to be great success for us. And you're right, typically maintenance to subscription conversions are best in the Q4 and Q1 period. But I think for all the reasons I just said, we are seeing strength throughout the year lately. And that's, again, for all the reasons I laid out for you.

Great. Okay. A separate question. Did supply chain disruptions extend to different product lines within integrated solutions?

Well, so the situation has been hitting, you know, across the board. I can't say that there isn't. Our team is dealing with issues across almost every product we make. Some of those issues are able to be mitigated quickly and resolved quickly. Others are tougher to solve for. So I don't want to leave you with, you know, our team is dealing with issues across the board. But, again, some are slower to recover from or more difficult to recover from.

I see. And what was actually the unfilled order level above normal levels for the March quarter?

Well, if you remember, we said it was in excess of 10 when we left Q1, and when we left Q2, we're making clear that it's well over 20 million today.

Great. Thank you very much.

All right, thank you, Nahal. Our next question is from Paul Chung at JP Morgan, to be followed by Steve Frankel. Paul, please go ahead.

Hi, thanks for taking my questions. So just on the enterprise ads, is there any kind of seasonality that impacts ads here? I assume they can be lumpy at times, but how do we think about that pace of ads through second half of 2022 and kind of respective impact on pricing? I know it's still a small percentage today, but Any insight on enterprise trends as we move into 23?

Well, I think, yeah, Paul, good question. I think I would say from a business perspective, I'll let Ken maybe speak to more of the financial element. But from a business perspective, traditionally, for customers, we're converting from maintenance to subscription. Q4 and Q1 are traditionally the strongest quarters. that we seasonally have to convert them to that model. What the team is finding is that because customers are looking at their business and looking at their strategic priorities, we're finding that we're getting customers to move anywhere in the year. And our team has been very, very good at coming to them with offers that can expand our footprint in these customers. There'll always be seasonal strength in Q4 and Q1, but I think we're seeing some goodness across the year. I mean, Q2 was great. You know, we saw great conversion. I think as we look forward, we see strength in this part of our business for sure. We're also expanding the offering. It originally started with just Media Central. We've expanded to now allow, you know, we can add to that Media Central subscription around Nexus. We're going to be soon adding graphics products into that offering. So we're continuing to expand that offering as we go.

And then can you expand on the cash impact? You know, what kind of determines the different, you know, cash timing, I guess, do certain enterprises pay during certain quarters and how does that evolve as that base?

Yeah, so we typically, you know, obviously, Bill, uh if it's a let's say a two-year deal you know one year we build the first year and there'll be a second on the second year um so you know for example on a two-year deal so you know we're getting the cash over over you know two years versus um a creative which we maybe build on an annual basis where they're paying up front annually so as strategically we move to the enterprise which is important from a strategic element because it's stickier revenue higher arpu As we build the business, the near-term cash characteristics are longer than a creative individual that is signed in the year and then typically is paid up front in the year. So that's what we're seeing in the cash.

Then once you start to get some visibility into the multi-year agreement with Amazon, I mean, the impact on revenues and margins sounds pretty material and provides some nice kind of upside to subs and margins and cash flows, I assume. So does this start to accelerate in Q4 or early next year?

I wouldn't say that. I mean, obviously Q4 is always a strong quarter for us. But, you know, when you say material, I mean, look, it's a sizable contract. I think like many of our enterprise customers, they're sizable contracts. It's similar to some of the other bigger agreements that we have for the enterprise subscription business. This will be similar to that. Again, we're not stating numbers, but it's an important contract. I think also It's another example that I think is going to help move the industry, help motivate the industry to move faster. From what I've seen just today from the responses I'm getting myself even on e-mail or text from customers, it resonated in a big way today across the entertainment business.

That's awesome. And lastly, any FX impact in the quarter and for the year? Thank you.

Yeah. So FX was a headwind of one point five million in the quarter for for for for this quarter in terms of revenue. And, you know, at this point, it is impacting us negatively in Q3 as well. So it is a headwind on revenue. I would say we do get the benefit on OpEx, on FX, but from an EBITDA net income perspective, it is negative.

Thank you.

You're welcome.

All right, our next question is from Steve Frankel at Rosenblatt Securities to be followed by Samad Samana.

Good afternoon, thank you. Steve, on the hardware backlog, are you missing or losing some opportunities or market share from customers that need this equipment around events?

No, not yet, Steve. I think it's a good question. The team's done a great job. First of all, this problem is hitting a lot of – you're talking about the event business. You were talking about, like, Live Sound and some of the event business. All of the suppliers are facing issues across the board on this. So I think it's kind of an even situation with the big suppliers. You know, I'd say that we are starting to see some movement of production on the live sound as an example for events business for the summer. And so we're starting to move some of that. We see more of that moving in Q3. But it's, you know, so far I'd say, you know, we've seen really strong demand. The demand continues. We're building a pretty significant contractually contracted backlog for immediate delivery as soon as we can build. So I, you know, so far we're comfortable with it. And I'm, you know, as I've talked to our head of commercial, You know, if they're losing business, it's minuscule. There's nothing major they're losing at this point.

Okay. And then on the perpetual business, which dropped much faster than at least I had modeled, is that the new normal and that reflects these enterprise conversions, or was there something else going on in the quarter that caused a significant sequential drop in perpetual?

Yeah. So, you know, I would say that, you know, on the perpetual business, you know, in terms of moving forward, I would say that the level that we have there is probably likely in that range within a million dollars per quarter, half a million dollars per quarter in terms of that range. You know, we will be looking to optimize price and perpetual to move people to subscription. There was one, I would say, product area that we did end the perpetual that had a little bit of a headwind this quarter. We don't expect any big end of life for the perpetual, you know, in the next couple of quarters. So that's why I think, you know, this area you're going to see within a half a million to a million dollars.

Okay, and then to just drill down on the, you know, the creative net ads were the, you know, smallest number in quite a while. Are you confident that that's the bottom, and do you have marketing programs and other things in the works to help make sure that snaps back in Q3 and Q4?

Yeah, so first I think, you know, on the creative net ads, if you go back, you know, You know, several years I'm going back to even 2019 Q2 is is typically a downturn in terms of the net ads versus Q1. And that's relates to the education cycle. We actually saw in Q2 the lowest sequential drop. When you look when you look back three years. And so, you know, so I just want to put that in perspective. That said, we are looking at driving down. um i would say you know we did a retiring on pro tools that we mentioned we're optimizing our go-to-market to drive better performance and i do expect that the creative net ads will will improve um in the second half of the year versus versus the q2 performance okay great thank you you're welcome thank you steve next we have samad samana from jeffries uh to be followed by jack vanderard uh samad please go ahead

Great, thank you, Witt, and it's good to hear from you, Jeff and Ken. Hope you're doing well. Maybe first, on the Amazon deal, I totally hear you on the timing as far as how it impacts your business, but maybe is there anything else under the hood there in terms of will Avid be using AWS for your own hosting? Are you already using it? Is there a potential gross margin tailwind there? that we can see as part of this? I don't know if there's anything else involved beyond just the Amazon Studio side of the deal.

Oh, yeah, no, this is just a deal between Amazon Studios and Avid. We are deploying the Avid technology stack in the AWS environment. As you know, today, Microsoft Azure is our strategic partner. They continue to be our preferred partner. They're our partner for all of our SaaS offerings like Edit on Demand run from the Azure environment. But certain customers are going to want to deploy in an AWS environment. Obviously, Amazon Studios wants to deploy in an AWS environment, no question there. So, you know, we're working with them to get these systems that they want to deploy, which are basically our core production environment, you know, whether it's Media Composer, Media Central, and Nexus. That's all being, as you know, Nexus is running, Nexus file system is running in the Azure system. When we're done here with Amazon Studios, the Nexus file system and the Media Center platform will be running natively in the AWS environment for Amazon Studios. There'll be other customers that want to deploy in AWS environment. But, no, it doesn't change our strategic partnership with Azure, which Azure is who hosts all of our enterprise environment runs in Azure.

Great. And then maybe, Ken, I wanted to double click on that FX question. I know you gave the consolidated amount. Can you just for, you know, our focus tends to be on the subscription line most. And so as I think about where that FX disclosure actually hits you, how much of that is maybe isolated to subscription? Like maybe what's the geomix there versus the overall revenue mix, which we know from the filings?

yeah so a million and a half is that is the total the subscription is you know likely in the 400 000 range of that of that million and a half uh 350 to 400 000 range

Okay, okay, great. And then maybe just one more and then I'll pass the baton. But just, Jeff, when I think about the changes to the, you know, the freemium model, and I'm curious what you're seeing now we've had enough time. Is there a change to maybe the top of the funnel that's worth calling out? Is there a change in maybe the retention of who you are converting? Just anything that you can share now that we've had enough time to maybe see some patterns there?

I'd say convert numbers, the conversion numbers are still looking very good for us, and they're quite good. And I'd say retention is still what we expect in the business. You know, on the freemium model, it is an acquisition tool, and we have been leaning into trial. I would say, Samad, what I can say publicly is we're looking at all that very carefully to understand what our strategy is on the freemium level. I would just say stay tuned. Maybe some more news coming on that. Understood. I will stay tuned.

Thanks, gentlemen. Thanks, Simon.

All right. And next, we will come back to Jack VanderAard. Jack, are you there?

Hey, Whit. Jack's here. Can you hear me okay?

We can. Thank you.

All right. Great. Sorry for fudging the microphone earlier, but thanks for the update. So maybe just a quick question for clarity on integrated solutions, back orders. Those are about, I guess, $20 million at the end of the quarter. And I think I recall a similar dynamic last quarter. I think it was about $10 million of backlog. Is this an apples-to-apples compare? Did this accumulate? Did you recognize some of that $10 million during the second quarter? Or was that $10 million of orders building up?

It's building up, but remember, it's kind of like a bucket where you've got water coming in one side and water going out the other. Obviously, a lot of what we carried over from Q1, some of that was resolved during Q2, but we also got a lot of new orders in Q2. So the demand, the best way to think about it is the demand is moving faster than our ability to move the supply up. That's why it went from 10 million aggregate to 20 million. It built over the course of Q2 because the demand for the products was coming in faster than we could ship. And so that's good news in that demand is very high. Obviously, we don't like carrying, you know, over $20 million in unfulfilled contractually obligated orders that, you know, these are customers who want immediate delivery. This is not backlogged for future deliveries. This is stuff that Traditionally, Jack, we carry about one or two million that we can't fulfill in one quarter to another. That's about our traditional pattern. This is obviously significantly more than that because of the production levels.

Okay, gotcha. That's helpful. You know what? Since I fudged the microphone to start, a lot of my questions were already asked, so I'm going to try more of a fun question or bigger picture topic. given your creative focus. So NFTs, blockchain, web 3.0, not sure if you've given the idea any meaningful thought or seen the obvious compelling opportunities that would make sense, but just like to hear your perspective because in a vacuum or at least on paper, I think the idea has legs when considering the core competencies of Avid technology and price offerings and your target customer base is artistic creative. is there a place for nfts or web 3.0 design uh with your business given you know your young creative base made pro tools users maybe they want to create an nft to market themselves just wondering if that is a you know a place in your in your product portfolio

well i wouldn't say if i i wouldn't i wouldn't necessarily address that directly i'd say this our teams are looking at all of these things including i mean you know the the deep fake subjects the um ai i mean there's so many subjects we're working on including things like web 3.0 etc but i think that that's you know those are innovation plans our team's looking at what our role is and what how we could leverage those technologies But I think a lot of those workflows are still being kind of figured out as an industry. We're in that, looking at what our role is. I wouldn't give you a direct answer today, but I would say it's an interesting space in that there's so many developments technologically that, you know, give us some opportunity out there.

Got it. And then just maybe one more, just to be crystal clear, the long-term plan from your May investor day recently? Okay. That is completely unchanged. You're still on track. And this Amazon announcement is not baked into that at all. Is that correct?

No. The Amazon, you say, Nate, not baked into it. We consider a lot of things when we look at the forecast of where the business is going. Amazon, a lot of customers are considered in our forecasting of things. Look, we've known about Amazon as a company for several months. We've been doing the R&D with them for over six months. So we've known about this a while. This is really just more public information that is now finally coming out.

Okay, guys, that's helpful. Well, I appreciate the time. I'll hop back in the queue.

Thanks, Jack. And that concludes the Q&A session. I'll now turn it back to Jeff for concluding remarks.

All right, Whit. Thank you for your participation and your questions. In closing, I do want to reiterate that we believe we will continue to see strong demand across the end markets of our solutions, including our growing subscription business. And we are managing through this temporary supply chain headwinds to enable Avid to continue to achieve our company strategy and our long-term growth plan and profitability targets as we move forward through 2022 and beyond. And with that, I just want to say I hope everyone has a nice evening. Thanks again.