Avid Technology, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Mar 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Avid Technology's Fourth Quarter and Full Year Earnings Conference Call. During today’s call, we will have a question-and-answer session. Now, let me turn the call over to Whit Rappole, VP of Investor Relations.

[Whit Rappole:]

Thank you, Carina. Good afternoon, everyone, and thank you for joining us today for Avid Technology's fourth quarter and full year 2020 earnings call for the period ending December 31, 2020. My name is Whit Rappole, Avid's Vice President for Corporate Development and Investor Relations. With me this afternoon are Jeff Rosica, our Chief Executive Officer and President; and Ken Gayron, our Chief Financial Officer and EVP.

[Jeff Rosica:]

Well, thanks Whit, and thanks to everyone for joining us to review Avid's fourth quarter and full year 2020 results. I'm here with our CFO, Ken Gayron, and we're happy to have this time with listeners to look back on Avid's performance. Overall, we're quite pleased with our progress and our execution through the difficult environment of 2020. Driven by our ongoing transition to a subscription-focused business and our focus on profitability, this year we turned the corner to being a growing free cash flow story. Given the improving profitability and free cash flow that Avid accomplished in the face of all the unforeseen difficulties, I would characterize Avid's rapid pivot and successes as a remarkable outcome.

[Ken Gayron:]

Thank you Jeff, and good afternoon everyone. Overall, we are very pleased with our business and financial results as we exit 2020 as the gradual recovery that started during the third quarter continued through the fourth quarter. All of our product areas saw sequential improvement during the quarter. Recurring revenue continued to show strength with strong subscription growth and growing ACV. Non-recurring revenue from integrated solutions had strong sequential growth. These areas combined with a significant year-over-year reduction in operating expenses and improved working capital trends resulted in Avid generating strong profitability and exceptional free cash flow in the fourth quarter. Our focus in 2021 will be to drive our subscription business, our high-quality recurring revenue streams and improve the non-recurring portions of the business related to integrated solutions. We expect these efforts to result in continued improvement in our key financial metrics, including stronger profitability and free cash flow in 2021 and subsequent years. With that, let's now turn to the details of our financial results.

[Whit Rappole:]

Thank you, Jeff and Ken. That concludes our prepared remarks and we are now happy to take your questions. Operator, please go ahead.

[Operator:]

Thank you. We'll go ahead and take our first question from Samad Samana with Jefferies. Please go ahead.

[Samad Samana:]

Hi, good afternoon, and thanks for taking my questions. Good to see the strong finish to 2020. Maybe first, Jeff just as I think about the commentary around enterprise subscription traction, can you help us understand maybe what's helping that inflect? It seems each of the last several quarters, there's been more and more traction for larger organizations moving over to a subscription. Is it more innovation? Is it on the cost side? Just help us understand what's driving that -- those gains?

[Jeff Rosica:]

Yeah. It's a good question Samad. So, thanks and good to hear you. So yeah, the -- if you remember, we talked about that we were going to gradually rollout enterprise subscriptions over the course of 2020 as new capabilities came online, and as we expanded the portfolio for creative individuals, it's Pro Tools, Media Composer, and Sibelius. For enterprises, it also includes a number of subscription offerings from our MediaCentral product line which is our enterprise-class software platform. So, as we started to roll those out and as the Media Composer enterprise product, which is a very subscription-based, enterprise-focused product as those rolled out and were made available in the second half of the year, and as we really started to bring up our go-to-market machine, I think we saw then obviously continued strength and building strength as it went through Q3 and Q4. And so it -- and the results we're seeing from our customers, as I said in my prepared remarks, they like the flexibility. They like the features and functions or innovation that we brought into our subscription offering because for the enterprise customer, we do differentiate the enterprise products from our standard creative tool products for individuals. And we give them a lot more flexibility. So there's a lot of benefits to those models for enterprise customers. And I would say we're seeing success a bit better than we envisioned originally. So we like what we're seeing so far.

[Samad Samana:]

Great. And then Ken maybe a follow-up in that vein. If I think about the -- it's good to see the full year guidance for subscription and maintenance combined as a signal of visibility. Is it fair to assume that maintenance kind of continues historical trends, which would maybe imply call it like 30%-plus growth for subscription services, or just maybe how should we think about those two lines given the stark difference in their growth rates?

[Ken Gayron:]

Yes. So, I would say, obviously, maintenance will gradually come down as we move to subscription. In our model, we believe that the subscription growth will be higher than 30%, which is the number you mentioned. Not only are we growing our creative users, but as Jeff pointed out, the enterprise subscription offering is being well-received. So, we believe that that will be a healthier growth rate on the subscription side with maintenance coming down. And if obviously the subscription business does better, maintenance may come down at a slightly more aggressive rate than our model, but we're very confident that we'll continue to have double-digit growth in subscription and maintenance, which is a real driver of higher gross profit and higher profitability for the business.

[Samad Samana:]

Great. And then maybe just a couple more questions. So, as I think about the sub adds, it was really robust in 2020. Maybe just how should we think about net adds in 2021? And just maybe how that presses up against maybe the TAM?

[Ken Gayron:]

Yes. So, we expect to continue to have strong net new adds in terms of the trajectory that we're on. We also believe that there's a lot of room to grow because the TAM, the addressable market is substantial across both audio, video, and cloud. And we're talking about a TAM that's tens of millions. So, although we're proud about growing 108,000 this past year and we're over 300,000 paid subscriptions and we've got three million downloads I would say that we have a lot more opportunity to grow this revenue stream as we look forward in our model.

[Samad Samana:]

Great. Last one from me. I think this could be for either of you, but the company is -- you mentioned significantly improving the balance sheet generating healthy free cash flow and the outlook for 2021 is even better. I guess thoughts on capital management as far as either a buyback or maybe where you plan to use that strong free cash flow that you'll generate going forward?

[Ken Gayron:]

Yes. Great question. So really our focus is really driving shareholder value for Avid. As we generate excess free cash flow, we're going to look at the options whether it's to drive share repurchases or tuck-in M&A or other forms to drive the best returns for shareholders. I would say at this time, Avid management we have a great partnership with our Board that's very experienced financially and operationally, and we're clearly focused on driving the right capital allocations to drive shareholder value. So, we're confident we'll make the right decisions to drive the best returns for our shareholders.

[Samad Samana:]

Great. Really helpful. I will hop out of the line. But thanks again for taking my questions.

[Whit Rappole:]

Thanks, Samad.

[Operator:]

And we'll go ahead and take our next question from Steven Frankel with Colliers. Please go ahead.

[Steven Frankel:]

Good afternoon and thanks for the opportunity. Keeping in the same vein as of the last question, so if I'm an enterprise customer, give me a feel for what happens to my average deal size when I go from perpetual to enterprise SaaS for -- if we're talking about Media Composer for example.

[Jeff Rosica:]

Hi, Steve, this is Jeff. So it really depends on the customer. I will say this as I said in my prepared remarks we are seeing very consistent evidence that as we move customers from a perpetual license and software maintenance program over to subscription, we're seeing a pretty significant uplift in the revenue from that customer. So we're seeing obviously better annual revenues from those customers and we're seeing better lifetime value. It really depends though on the situation. Enterprise customers are in all shapes and sizes and have different types of needs. So it can be from low-double digits to very-large-double digit kind of growth in that from a revenue perspective. But it really depends on the situation as to how much flexibility they want and do they want more licenses, they want more capabilities? Are they looking for more functionality. So it really depends, but I'll say that we've now done enough of these movements of customers over to enterprise subscription agreement that we're -- I think Ken and I are both very happy with the revenue uplift that we're getting on these agreements. And my guess is we'll probably share a bit more Steve when we get to the Investor Day. We'll probably show some specific models for people to show you some scenarios.

[Steven Frankel:]

And is there a risk as you migrate customers this way that it begins to eat into your storage business as they move to cloud storage along with the cloud software?

[Jeff Rosica:]

No. I don't, because those are moving to a SaaS offering that we're -- again we're still in the very early days of that. I think we've talked about this before but I'll reiterate. Today our on-prem subscription -- on-prem NEXIS product is really in high-performance production storage for editorial and other types of production applications. So we're in a very specific market. We don't really have an offering for near-line storage or cold or archive storage. As we go to the cloud one of the advantages of NEXIS because we actually have a product called NEXIS cloud that is on Microsoft Azure that is actually a multi-tier offering. So that is not just high performance. We also have super high performance with Azure and we also have near-line and very cold or archival storage. So as we move people to subscription, obviously, we're moving them from an upfront model to a subscription model but there is a very significant -- we've seen already a very significant expansion of the opportunity with those customers because we're taking them to more than just high-performance storage. We're taking them to multiple tiers of storage. So we -- even though we are, obviously, cannibalizing partially that storage, we're moving them to a high-margin recurring revenue stream that's got real long-term value to it. Also I think Steve we're seeing people really go in pieces. They're not really going overnight. It's not like they're just stopping their on-prem storage and going all the way to cloud. It's an evolution that will happen over many years for many customers. So we're going to be able to transition this I think in a very orderly, but more important very profitable way.

[Steven Frankel:]

Okay, great. And then in terms of the overall subscription business, what's the churn dynamic that's happening? You're adding about the same number of subscribers the last few quarters, while you're rolling out enterprises, which one would assume are fairly large numbers of users that are getting rolled into there. So what's happening with the Tier 2, Tier 3 customer base relative to churn and those that aren't on annual?

[Ken Gayron:]

Yeah. So I would say our retention rates are solid. That said, we continue to look to invest in certain areas of customer care to improve our retention and reduce our churn. And as you mentioned, the enterprise subscription is really taking shape really the second half of 2021. So as we think about Investor Day, we'll be adding more metrics related to enterprise as part of our subscription business.

[Steven Frankel:]

Okay, great. Thank you.

[Ken Gayron:]

You're welcome.

[Operator:]

And we'll go ahead and take our next question from Josh Nichols with B. Riley. Please go ahead.

[Josh Nichols:]

Yeah. Thanks for taking my question. Great to see the really strong cash flow coming out of this quarter and the expectation that that's going to continue into 2021. I think a lot of people hit on the enterprise business and it's pretty clear the subscription business is firing on all cylinders here. One thing I did want to touch on, what do you have in terms of visibility on the product side of the business? I know that there's some opportunity for significant improvements in the second half with the vaccine rollouts and whatnot as we think of things like live music. And could you elaborate on the expectations as we move through the year, or is that something you're going to update a little bit more on at the Investor Day?

[Jeff Rosica:]

I think both. I can add a little bit -- hi, Josh, this is Jeff. I can add a little color here but also you're right, we’ll probably continue to add color as we get to Investor Day. As Ken and I both said, we're optimistic but we're also going to be cautious in -- especially in the first half of the year just as the markets are -- as we said are recovering. We're starting to see recovery. We saw a good sequential recovery in Q3. We saw again in Q4. We like what we're seeing so far as we look into 2021, but it will -- in some markets it will be gradual as things come together. But we are seeing -- all the indicators we see around -- as we talked about the bookings and billings were very strong in Q4. Even though not all of that turned to revenue in Q4, it did turn to revenue backlog. And as Ken said our opening revenue backlog this year is I think 16% higher than last year. And remember last year was pre-COVID. It was before COVID hit. So it's really a comparable comp. And so to see that strength we -- on top of the strength we saw in the revenues and EBITDA and cash flow in Q4, we did see these real strong billings and bookings revenues, which is giving us nice visibility across -- or better visibility across 2021. So I think the markets are continuing to recover. As Ken and I said all along, it's going to be a gradual recovery into the first half of 2021. Live sound hopefully will start to come back also maybe this summer. I don't know. Fingers crossed. We'll see, but we're being careful right now. But as I said in my remarks we'll continue to keep an eye on things. We'll continue to revisit and look at where we -- our outlook and what we look at. And I'm sure Ken and I will give some updates during Investor Day in May. Did I lose you Josh?

[Operator:]

Yes. I believe Josh has stepped away. So we'll go ahead and take our next question.

[Jeff Rosica:]

Okay.

[Operator:]

We'll take our next question from Nehal Chokshi with Northland Capital Markets. Please go ahead.

[Nehal Chokshi:]

Thank you. And congrats on a blowout free cash flow quarter nice subscription results that's even more impressive in the context of the guidance that you're providing for the full year. So really congratulations. That's pretty awesome.

[Jeff Rosica:]

Thanks.

[Nehal Chokshi:]

So within that 12% year-over-year guide growth for subscription plus maintenance for the quarter and then it looks like that you have a slight tapering off of that in growth as the year continues given the about 10% year-over-year growth for the full year which is consistent with what we've seen over the past year, but it's off of a much, much tougher year ago comps. And I presume the tapering is slightly because of that tougher year ago comp, but I mean it's still a really impressive growth that you're implicitly guiding to in the back half on the subscription off of really tough comps. So what gives you the confidence to provide that implied strength in the back half on the subscription business?

[Jeff Rosica:]

Thanks Nehal for the question. Let me -- I'll let Ken answer maybe more specifically, but I'll say broadly obviously we've got good visibility with that element of our revenue stream. And so there's a lot of metrics and indicators that we look at to determine that. And we do see a solid growth of our enterprise business. We've been able to look closely what our enterprise opportunity is. As we look out at that over the year, we feel good about how that's going to progress. Ken I don't know if you want to add any color financially on that.

[Ken Gayron:]

Yes. So I would say first when we -- as we think about the business it's improving. It continues to do -- to gradually improve. As we think about guidance we're -- this is -- we're cautiously approaching it. And when we think about our guidance for subscription plus maintenance, last year we guided roughly 8% and we did over 12%. We're guiding here a little over 10% subscription and maintenance for 2021. In terms of the license growth so far this year we feel good about that that we're seeing and in terms of that pattern. We believe that the creative tools granted have -- we have higher base. We see continued improvement in that area. We have new features and functionality coming out in different areas whether it be Pro Tools Sibelius or Media Composer. And we think there's a real strong opportunity to continue to grow the creatives at very aggressive growth rates in those areas. And really we think we'll see that through Q2, Q3, Q4 throughout the whole -- all four quarters. And then the enterprise subscription as Jeff pointed out earlier we're just getting started and we're seeing nice uplifts as we move those customers. So we feel very comfortable that we will achieve if not exceed the guidance that we provided on subscription and maintenance.

[Nehal Chokshi:]

Okay. Great. And then why aren't you providing a non-GAAP net income guidance but you have confidence to provide free cash flow guidance? Can you explain to me this bridge on why you have confidence in free cash flow but not non-GAAP net income?

[Ken Gayron:]

At this point we wanted to introduce these two metrics. As we think about our Investor Day, we'll provide more metrics and we feel like the trajectory of the business continues to be favorable. We'll put more metrics in. We'll likely have that metric that you mentioned as part of the full year on Investor Day. I just want to capture it in the whole as we think about that presentation our strategic outlook, a lot of the areas that we're going to invest as well as that we'll return to growth and put together a whole 5-year model for our people so they can see the evolution not only of the revenue streams, but cash flow and profitability over that 3- to 5-year period so people can look at EPS growth over a 3-year model.

[Nehal Chokshi:]

Okay. And then, in terms of this free cash flow guidance which is 30-plus percent year-over-year growth, how much of that is due to favorable working capital dynamics, most specifically probably days payables continuing to go up? How much of that is driving that year-over-year growth there into free cash flow?

[Ken Gayron:]

Yes. No. We'll get some benefit of working capital and free cash flow, but really it's -- we're going to improve profitability. There'll be some savings on interest expense, obviously, from what has occurred. So those are really going to be the two drivers. We should get some benefit on working capital, but we're also going to be investing in the business and like we have a little bit more capital expenditures, as we look to invest to support our rapidly growing subscription business. So those are the areas that we're investing. Working capital will become a source of cash, but it's not a huge source that's driving the improvement. It's really profitability that's going to be driving the improvement.

[Nehal Chokshi:]

Okay, great. I'll cede the floor. Thank you.

[Ken Gayron:]

Thanks, Nehal.

[Operator:]

We'll go ahead and take our last question from Jack Vander Aarde with Maxim Group. Please, go ahead.

[Jack Vander Aarde:]

Great. Hello, gentlemen. Thanks for taking my questions.

[Jeff Rosica:]

Hi, Jack.

[Jack Vander Aarde:]

Solid, very impressive free cash flow and subscription growth momentum is just great to see. So I'll start just with a question for Jeff. Hoping you can speak to -- and you've kind of touched upon this already a little bit, but hoping you could speak to any interesting kind of changes in the sentiments and overall tone of maybe what you're hearing from your customer discussions of the nonrecurring product categories, which were under pressure in 2020, but gradually improving. So maybe as it relates to storage, live events and graphics and servers, are you surprised by any of these categories and customer discussions that -- more positive in sentiment over the last three months ,relative to today? Anything of note there?

[Jeff Rosica:]

Yes. It's a good question, Jack. I think that -- look, overall, I think we're seeing -- customers are still being a little bit cautious, but they're all pretty optimistic on also their investment plans for the upcoming year for this year and quite frankly for the next couple of years. And so, I think there is -- look, there is a bit of pent-up demand, in that people didn't execute on projects or on plan so that there will be some benefit from that. I don't think it's going to be -- I don't think the flood gates are going to open, but I think it's going to help really bring some strength to the business. Nobody's really put aside plans completely. I think a lot of people have updated their plans and what we're generally seeing from people is that, they do see continued strength in the markets. I'll address live sound separately. But, in general, when we're talking about storage or graphics or servers or even the audio consoles for the larger studios, we're seeing those markets continue to strengthen. We're seeing that, as we look into the early part of this year too. So, again, we've got -- again, we're being cautious, but we're optimistic on what we see. And the sentiment we're seeing from customers is quite good. There is some change in how they're going to spend. There are people who are going to make big on-prem investments. Now they're looking for more kind of hybrid environments, where they still have to make investments on-prem, but they're also looking for cloud-based solutions to create a more adaptable workforce that is more work from anywhere and is more flexible. So I think there's definitely different conversations, but great conversations and they're going well. And the funnel that we see looks very good. The funnel is stronger this year than when I was looking at last year. As far as the live sound market clearly it's predicated on the return of events and not just big events, but also the return of people into churches and into other types of end use. I will say this; we did see a nice improvement in Q4. We didn't expect any improvement in live sound sequentially. We did see a bit of an improvement in Q4. And again as vaccines get out there and as people get more comfortable and people start reopening, we'll start to see small and medium-sized venues open up. And there's some benefit in that for us including churches. And then obviously, the larger concert tours will take a little bit longer to come live again, but we do see them starting to plan. We're even seeing some festivals in Europe start to talk about opening up in July and August. So, again, we're optimistic, but we're going to -- Ken and I will plan carefully.

[Jack Vander Aarde:]

Great. Thank you for that. That's a great answer. And then maybe I'll follow up with a question for Ken. The 2021 guidance for subscription and maintenance revenue $214 million to $221 million that was ahead of my forecast at least and so clearly a positive as I view it. Can you maybe provide some additional color on what's embedded in that guide of the subscription portion? Maybe like how much of a role does yesterday's latest enterprise subscription product offering play into that? And any other factors I guess as it relates to subscription between enterprises and creatives?

[Ken Gayron:]

I would say that I think in general the growth will continue to be very strong as we think about the subscription business. I think our creative base is much -- is higher than enterprise. So, just the growth rates will look lower on the creatives because the base is so much higher. But we expect the dollar growth to be very, very solid across all segments Pro Tools Media Composer and Sibelius for the creatives as we're adding product functionality. And those will be in excess of in aggregate, the 30% that one of the analysts indicated earlier. So, we expect that to be more solid. And then really the enterprise will have stronger growth rates just because of the base and we expect that to be a significant contributor to the total subscription revenue. So, we believe we outperformed our strategic revenue guidance last year. We believe these numbers -- although they're attractive, we think that we'll continue to execute this potential for outperformance. But at this point this is what we feel comfortable in guiding. We think we'll have solid double-digit strategic revenue performance with subscription being the leading category driving that.

[Jack Vander Aarde:]

Got it, great. Well, I wish you guys the best and I appreciate the time. Thank you.

[Ken Gayron:]

Thanks Jack.

[Jeff Rosica:]

Thank you.

[Operator:]

We do have a follow-up question. We'll go ahead and take that with Nehal Chokshi with Northland Capital Markets. Please go ahead with your follow-up question.

[Nehal Chokshi:]

Yes, thank you. So, you guys had a press release I think about a month ago where you said that you had three million freemium downloads and one million of them had occurred over the last 12 months. I believe that works out to about 10% conversion rate freemium to paid both cumulatively as well as over the past year which seems pretty good. Do you believe that there is room for improving that?

[Jeff Rosica:]

So, Nehal, let me say – so yes, it was actually – just to be precise, it was – 3 million was announced and it was 11 months to get that third million going. So we have seen – with first we've seen acceleration of that product and that is a very successful conversion or product for us. Now I will say this

[Nehal Chokshi:]

Okay. Great. And then how big do you think is the user TAM for the creatives here? How many more freemium downloads, do you think you can drive over the course of say like five or 10 years?

[Jeff Rosica:]

I will say this

[Nehal Chokshi:]

Okay. Great. Thank you very much. Congratulations.

[Jeff Rosica:]

Yes. Thanks, Nehal. Appreciate it.

[Operator:]

And with that I'd like to turn the call back over to Mr. Rosica for any additional or closing remarks.

[Jeff Rosica:]

Okay, thank you, operator. So I'll close by saying that Avid is today a much stronger company than we were at the start of 2020. Our intention on this call has been to give our investors and others ample additional insights that proves Avid's ability to skillfully navigate the future, keep growing and remain consistently profitable. We look forward to engaging with you again during Avid's annual Investor Day, which we expect to take place virtually during May. Today we only touched briefly on the widening horizon of Avid's total market opportunity. We'll continue to explore this in detail during that event. So I hope you can join us. As Kenneth pointed out earlier, Investor Day details are coming soon. So on behalf of everyone at Avid, I extend our best wishes for the continued safety and health of everyone who follows and collaborates with us. We are deeply grateful for your support throughout this very challenging past year. Goodbye for now. Talk soon.

[Operator:]

Once again, that does conclude our conference.