Avid Technology, Inc.

We will be starting momentarily. Please hold on. Good afternoon, ladies and gentlemen, and welcome to Avid Technologies' third quarter 2022 earnings conference call for the period ended September 30th, 2022. My name is Witt Rappel, Avid's Vice President for Corporate Development and Investor Relations. Please note that this call is being recorded today, November 8th, 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 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 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 the 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 joining us today to review Avid's third quarter results. Overall, we're pleased with the results that we delivered in the third quarter, including strong earnings, despite revenue headwinds being caused by the overall global macro conditions that are challenging so many companies today. It's also clear that our strategy is working and delivering results, despite the more challenging environment we're operating in globally today. Let me dive right into the details. Let's start with the three main takeaways for Avis performance during the third quarter. First, we're very pleased at the strong growth of our software subscription revenue in this quarter, driven by very robust enterprise subscription results and the reacceleration of our creative tools, including terrific performance from Pro Tools, all resulting in record subscription net ads this quarter. Next, even though demand remained quite healthy for the integrated solutions portion of our business, we did realize slightly lower results than we had expected. While we successfully resumed production of certain audio hardware products late in the quarter, our recovery from the constraints caused by the current global supply chain situation is happening slower than we had anticipated. And finally, because of our continued prudent business management and proactive cost controls, we delivered improved profitability despite the headwinds associated with the macro conditions that so many global companies are facing, including worsening foreign exchange rates, difficult supply chain conditions, and cost inflation pressures. Through all of this, on a year-over-year basis, we delivered strong earnings per share growth, and on a constant currency basis, we delivered a solid overall revenue growth for the quarter. Now, let me dig in a bit more and provide some specifics on each of these key points. With robust adoption of subscriptions by both new and existing customers, both for our creative tools and enterprise offerings, we delivered strong growth in our overall subscription business this quarter. We realized net additions of 32,600 subscriptions, which is an all-time record. And we delivered over 24% year-over-year growth in the number of overall cloud-enabled software subscriptions. Our creative tools remain an essential part of our subscription growth. And during the third quarter, we had our largest number of creative net additions since the beginning of 2021, largely driven by strong performance of Pro Tools and Media Composer subscriptions. We realized a quite strong sequential increase in Pro Tools subscriptions at Q3, built on the momentum from our Q2 launch of the new Pro Tools Artist and Studio tiers. We continue to innovate and further grow the Pro Tools business to attract more of the next generation of music creators and audio professionals. In September, we delivered our latest release of Pro Tools with several new capabilities to enhance our users' music creativity and expand our existing audio ecosystem. We continue the trend of successfully converting a substantial number of enterprise customers to our subscription offerings in Q3, helping to deliver stronger than expected subscription revenue growth in the quarter, especially when comparing on a constant currency basis. In Q3, Avid secured enterprise subscription agreements with a number of media companies around the world, including large media and broadcast companies, YLE of Finland and ZDF of Germany. Admittedly, the enterprise subscription performance in Q3 was helped by favorable timing of a couple of key customer contracts that closed earlier than what we had expected, and as such, Q4 will not track sequentially to our typical seasonality pattern. That said, for the second half in total, on a constant currency basis, we expect that the subscription revenue to be on track to our previous guidance range, and we're just also tracking nicely to our long-term model. We also continue to expand our portfolio of high value enterprise subscription offerings, which is additionally contributing to our subscription revenue growth. And in the quarter, we saw continued uptick in our new Nexus subscription storage offering and with Media Composer Enterprise. Together, these factors resulted in a reported 49.2% year-over-year subscription revenue growth in the quarter. And on a constant currency basis, subscription revenue grew 56.2% year-over-year. During the third quarter, healthy demand for our customers and strong commercial activity continued across our business, resulting in 6% year-over-year revenue growth in constant currency. As a sizable portion of our Avid's business is traded in Europe, the UK, and Japan, the increasing foreign exchange headwinds, as I mentioned earlier, had an impact on total revenue results as reported. While in the past we have seldom talked about the impact of foreign currency exchange on AVA's results, as the euro, pound, and yen currencies have gotten progressively much weaker as this year has progressed, we're compelled to highlight the impact because we do not want the current FX headwinds to obscure the underlying growth and profitability we are seeing in the business. Customer demand for integrated solutions continue to exceed our ability to supply in the quarter, resulting in a further increased backlog. The global supply chain constraints that are impacting our business, which we do believe are temporary in nature, continue to affect production levels for our integrated solutions and thus revenue for this part of our business. While we made good progress in resolving some of these challenges, including resuming production of our S6 and S4 control services, as well as our live sound consoles in late Q3, the recovery is moving slower than we had expected, and the lingering challenges we're facing are continuing to impact deliveries for certain parts of our integrated solutions portfolio. As a result of these constraints, unfilled contractually committed orders for integrated solutions grew to more than 25 million above our typical levels of unfilled orders as we enter the quarter. Again, we are making progress and working to resolve these temporary issues. And based on what we're seeing today from suppliers, combined with the magnificent work of our teams, we have visibility into further improvements expected during Q4. Though at this point, we anticipate that the recovery will likely extend into the first half of 2023. And we anticipate that we will be exiting 2022 with a heightened level of unfilled backlog of customer orders for certain parts of the integrated solutions portfolio. All of this said, and to be quite clear, none of these near-term headwinds change our view of the long-term opportunity for this business or the success of our strategic growth plan. Our third takeaway is that despite the temporary headwinds produced by the macro conditions mentioned previously, we continue to improve profitability and our overall business performance remains strong. We saw continued improvement in gross margin driven by growth of our higher margin software subscription offerings. The growth in total subscription revenue continued to drive double-digit subscription and maintenance revenue growth and resulted in, on a constant currency basis, over 13% year-over-year growth in ARR and approximately 37% year-over-year growth in subscription ARR. We produced improved year-over-year profitability with our continued focus on proactive cost management, while also continuing to be making prudent investments 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 an adjusted EBITDA margin of over 20% for the quarter, and we delivered non-GAAP EPS growth of 40% year-over-year. Let me now share with you where we see things going forward from a business perspective. While we face challenging macro conditions and global economic uncertainty ahead of us, as do almost all businesses across the globe, I'm confident that we'll navigate the conditions appropriately, and we believe that we're very well positioned with strong customer relationships, a solid growth strategy, and continued innovation plans to help capture future market opportunities, which together gives us confidence in the trajectory of the business and a positive long-term outlook. Supply availability and production capacity are improving, but not expected to fully normalize before the end of this year. While the availability of many standard components is improving, we're still facing constraints on some of our more specialized components. I am pleased with the team's accomplishments in the area of product redesign to support alternative components and to quickly and efficiently produce and ship products as components and new designs become available. We will continue to deliver a stream of valuable software releases, develop innovative solutions, and forge partnerships that will contribute toward our strategic growth plan. I'm encouraged by the additional new offerings and innovative enhancements in our development pipeline to meet the market and customer demands that we see and to help drive our growth. In October, we introduced Pro Tools Intro, a new free version of Pro Tools to help introduce more next-generation music creators to our products and provide a new offering for third-party vendors to offer in the box to their customers, giving us a nice on-ramp for new users to try Pro Tools for free before converting to a paid subscription. Just a couple of weeks ago, we also announced the official release and availability of the innovative Nexus Edge software subscription solution that uniquely enables more powerful and flexible remote editorial and distributed post-production workflows. In New York City last month at the AES show, we introduced two brand new audio products for the next generation of music creators, the M-Box Studio desktop interface and the Pro Tools Carbon Pre expansion, and have been receiving strong reviews from the community on these new solutions. As always, we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on for the past few years, while we will also continue to make strategic investments in new innovations, as well as our digital transformation in support of our long-term strategic growth plan. For the fourth quarter and full year, we believe we're well positioned to deliver earnings growth despite revenue headwinds from the impacts of foreign currency exchange and the temporary supply chain constraints. And we are confident in our ability to continue to deliver strong profitability and cash flow generation despite these factors. While we are needing to adjust our full year 22 guidance to reflect these macro conditions we're now facing, our adjusted EBITDA and non-GAAP EPS guidance range is narrowed, but within our previous guidance provided in August. 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 third quarter, despite FX headwinds, Avid delivered over 40% earnings growth that was at the high end of our guidance range. Our financial performance was driven by robust performance in our subscription business, including an all-time record net increase in paid subscriptions during the quarter and prudent management of our cost base. As we enter the fourth quarter, our focus will be to further expand our higher margin subscription revenue, improve our profitability and cash flow, and remain on track with our long-term metrics. With that, let us now turn to the details of our third quarter financial results. We are encouraged by the continued growth of our paid subscription base. We ended the quarter with our largest ever sequential increase of cloud-enabled software subscriptions. Our total subscription count reached approximately 483,000 at the end of the third quarter, an increase of 24% year over year. Growth in enterprise subscriptions continue to be healthy and solid, and we saw a reacceleration of our creative tools. We added approximately 20,000 new creative subscription users, our best quarter for net ads since Q1 2021, reflecting growth of 4.7% sequentially and 17.7% year over year. We had terrific performance in Pro Tools, which saw strong acquisitions enabled by the exceptional performance of our Pro Tools artist here. We launched Pro Tools Artists in late April 2022, and this was the first full quarter with a new tier, which had robust acquisitions in the quarter. We also had a strong quarter with Media Composer subscriptions that had an acceleration in net ads. Moving to our enterprise business, Media Central subscriptions grew to approximately 35,600, an increase of about 12,500 during the third quarter, representing year-over-year growth of 290%. The increase in enterprise subscriptions furthers our confidence in the transition of our existing customer base to subscription. As our enterprise subscription business continues to become a more meaningful part of our subscription mix, It is positively impacting our overall price per seat, as the price of an enterprise seat is a multiple of the price per seat for our creative tools. 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 third quarter, which reached $41.8 million, an increase of 49% year over year, and 56% on a constant currency basis. Total subscription and maintenance revenue increased year-over-year by 18% in the third quarter and 22% on a constant currency basis. Subscription and maintenance saw 16% growth for the first nine months of the year and 19% at a constant currency basis, which is slightly above our long-term plan. Maintenance continues to be a solid part of the business. During the third quarter, maintenance revenue was 27.3 million, down 11% year over year. As we continued to successfully convert our enterprise customers to subscription offerings at healthy uplifts in excess of 140%, we are seeing a reduction in the related software maintenance revenues from those customers. However, hardware maintenance was up 8% year over year due to continued improvement in renewal rates and higher pricing. Total combined integrated solutions perpetual and professional services revenue was $33.9 million in the third quarter, driven by lower integrated solutions and the continued transition away from perpetual software licenses. Integrated solutions revenue was 26.3 million in the third quarter, a decrease of 16% year over year. Despite healthy demand for Avid solutions, several integrated solutions products were impacted by the global supply chain issues, limiting our production capacity and our ability to meet customer demand at the end of the quarter. We ended the third quarter with over $25 million on unfilled contractually committed orders for integrated solutions. The unfilled orders, which grew 5 million over the prior quarter, are primarily related to the availability of certain chips and power supplies for Pro Tools hardware, audio control surfaces, and live sound consoles. We are working to resolve the issues through finding alternative sources of supply, selective redesigns, and other means. As Jeff mentioned, we made progress in resolving some of these challenges in the quarter, but overall, our capacity remains below the demand we experienced in the first nine months of 2022. We expect to deliver more integrated solutions revenue in the fourth quarter. However, 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 the year. We have factored these risks related to the macro supply chain headwinds as we understand them today into our full year 2022 guidance. Perpetual license revenue was $1.8 million, a decrease of 69% year-over-year as we continue to 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 29% in the quarter as 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. Annual recurring revenue based on the annualization of subscription and maintenance bookings was $237.2 million in the third quarter, an increase of $21.5 million, or 10% year-over-year, and 13% year-over-year at constant currency. Growth in ARR was due to subscription ARR growth of 33.2% as we came to drive a favorable conversion of maintenance revenue to subscription revenue, plus adding new customers to our subscription base. At Constant Currency, subscription ARR increased 36.9% year-over-year. Subscription revenue growth the over year outpaced subscription ARR growth due primarily to strong third quarter 2022 enterprise subscription revenue, which has different revenue recognition characteristics under AOC 606. Also, the lower integrated solution shipments in the first nine months negatively impacted the maintenance ARR at September 30th. as the unshipped orders would have contributed approximately $1 million to maintenance ARR, negatively impacting ARR growth by 1%. Our focus on growing recurring revenue continues to drive healthy gross margin. As of the third quarter, LTM recurring revenue was 83% of total revenue, up from 77% a year ago, and in line with our long-term model. Now let's look at our operating results for the third quarter. Total revenue the third quarter was 103 million, up 1% year over year, and up 6% at constant currency. As a reminder, 51% of our revenue is in the Americas, 36% is in Europe, the Middle East, and Africa, and 13% is in APAC. And we collect approximately 20 percent, 22 percent of our revenue in euros, 7 percent in British pounds and 4 percent in Japanese yen. Due to the continued weakness of all three of these currencies versus the U.S. dollar, there was a more meaningful impact to the difference between our reported revenue growth and our growth under constant currency. We saw continued robust market demand, but total revenue was constrained in the quarter from weakness in foreign exchange rates and an increase in unfilled contractually committed orders for integrated solutions. The unfilled contractually committed orders for integrated solutions was over 25 million more than normal in the third quarter. If the currency headwinds had not occurred, and if we had shipped all these integration solutions orders in the quarter, total revenue would have been in excess of $130 million in the quarter. Non-GAAP gross margins was 68.3% for the third quarter, up 300 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 to robust growth in our subscription business. Non-GAAP operating expenses were 51.5 million in the third quarter, a $200,000 increase year over year, due mainly to investments in support of our product innovation to drive our long-term model. The impact of FX did favorably impact our operating expenses by 1.8 million in the quarter, as our global cost base does provide a partial head against inflation. Adjusted EBITDA was $21 million in the third quarter, up 23.5% or $4 million year-over-year, driven by the improvement in both revenue and non-GAAP gross margin. Adjusted EBITDA margin was 20.4% in the third quarter, an increase of 360 basis points compared to the prior period. When adjusting for the FX impact to both revenue and cost, adjusted EBITDA was negatively impacted by $2 million in the quarter and $3 million for the first nine months of the year. Finally, non-GAAP earnings per share was $0.38 for the third quarter, up $0.11 year over year. Now let's look at the rest of the results for the third quarter. Our strategy of investing in innovation to drive higher quality recurring revenue together with effective cost controls has resulted in a sustained trend of margin expansion and profitable growth. Free cash flow for the quarter was $6.6 million, down $7.4 million year-over-year due to lower product deliveries in our audio hardware business and an increase in inventory that will provide a buffer stock of supply of components to meet the healthy demand we are seeing in the business. During the third quarter, we repurchased 758,000 shares for $18.6 million. Additionally, during the fourth quarter, we also repurchased 254,000 shares for $6.4 million, bringing total repurchases to 2.8 million shares, or $75.1 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 1.9 times. Also, in October, we amended our credit facility, increasing the revolving credit facility from $70 million to $120 million and adding $20 million incremental term loan on favorable terms and no change to pricing. This provides Avid more financial flexibility with over $150 million in liquidity to execute our growth plans in our capital deployment strategy as we work to enhance returns for Avid shareholders. Let's now turn to guidance. As Jeff said, we are confident in the underlying strength in our business, including the healthy demand for our solutions that we are seeing. We expect continued strong growth in our subscription revenue from continued solid performance in our creative tools and enterprise subscription business. We expect increased contribution from recent new subscription product offerings, including Pro Tools Artists and our Nexus storage subscription offerings. However, the strengthening U.S. dollar continues to create a headwind of year-over-year comparison against our plan for the full year. We expect headwinds from FX on our total revenues this year will be $12.8 million for the full year, with $6.9 million in the fourth quarter. In addition, the ability to procure certain specialized components to meet the current healthy demand and backlog of unshipped orders is taking longer than we had expected. As a result, we expect to have an elevated level of unshipped orders of audio hardware in our backlog as we complete our fiscal year. As a result, AVID is adjusting its full year 2022 revenue guidance. Our guidance for 2022 total revenue is now $412 to $424 million. As we look at bridging our prior guidance that we had with a midpoint of $440 million in total revenue for 2022, the change is an incremental $9 million in foreign exchange headwinds, which we cannot recover from, with the remainder of the gap from lower product sales in our audio hardware business related to the macro supply chain issues. At this time, solely as a result of foreign exchange headwinds, AVID is modifying its full year 2022 guidance for subscription and maintenance revenue. We expect the headwinds from foreign exchange on subscription and maintenance revenue this year will be $6 million for the full year, with $3 million of the headwind expected in the fourth quarter. Our guidance for 2022 subscription and maintenance revenue is now $260 to $268 million, a range which represents year-over-year growth of 14% at the midpoint and 17% excluding the FX impact at the midpoint. For the full year, AVID is tightening its guidance for non-GAAP EPS and adjusted EBITDA. Our guidance for 2022 adjusted EBITDA is now 83 to 87 million, reflecting a tighter range aligned with our smaller band on revenue. The decrease from our prior guidance at the midpoint of $4 million is solely as a result of foreign exchange headwinds that are impacting our 2022 adjusted EBITDA by approximately $6 million. Excluding the FX headwind of $6 million, AVID would have exceeded the midpoint of its 2022 EBITDA guidance by $2 million. Our guidance for 2022 non-GAAP earnings per share is $1.40 to $1.50. assuming 44.8 million shares outstanding. This reflects a midpoint of $1.45, which is unchanged from the initial guidance given in March 2022, reflecting prudent management of the business in spite of the headwinds in foreign exchange and global supply chain conditions that are temporarily impacting our hardware business. We are adjusting our guidance for 2022 free cash flow to $38 million to $43 million due to foreign exchange headwinds impacting adjusted EBITDA by approximately $4 million, $3 million of higher interest expense due to a higher base rate, and other working capital items, including an expected higher amount of inventory. With that, I would like to turn the call back to Whit.