Avid Technology CEO Discusses Q3 2010 Results - Earnings Call Transcript

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Avid Technology, Inc. (NASDAQ:AVID) Q3 2010 Earnings Conference Call October 21, 2010 5:00 PM ET


Tom Fitzsimmons – Director, IR

Gary Greenfield – Chairman, President and CEO

Ken Sexton – EVP, CFO and Chief Administrative Officer


Mark Strauss – J.P. Morgan

Michael Olsen – Piper Jaffray

Andrew Abrams – Avian Securities

Steven Franco – Dougherty & Company


Good day everyone and welcome to the Avid Technology third quarter 2010 earnings results conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tom Fitzsimmons. Please go ahead sir.

Tom Fitzsimmons

Good afternoon. I’m Tom Fitzsimmons, Director of Investor Relations for Avid. I’d like to welcome you to today’s call. With me today are Gary Greenfield, Avid’s Chairman and CEO and Ken Sexton, Executive Vice President, Chief Financial and Administrative Officer.

Before we begin, please note that this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about our performance. There are a number of factors that could cause actual events or results to differ materially from those indicated by these statements such as competitive changes, our ability to execute our strategic plan, or adverse changes in general economic conditions. Other important events and factors appear in our filings with the U.S. Securities and Exchange Commission. In addition, our forward-looking statements represent our estimates only as of today, October 21, 2010 and should not be relied upon as representing our views on any subsequent date. We undertake no obligation to review or update these forward-looking statements.

During the call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles and may not be comparable to similar non-GAAP measures used or reported by other companies. The non-GAAP measures do not reflect all the costs associated with the company’s operations determined in accordance with GAAP. The most directly comparable financial measures calculating in accordance with GAAP and a reconciliation of GAAP to non-GAAP measures are contained in our press release announcing this quarter’s results and are available in the investor relations section of our website at www.avid.com.

For the purpose of understanding our future business model, we will also provide some forward-looking analysis on this call on a non-GAAP and GAAP basis. Some of our GAAP financial measures are not assessable on a forward-looking basis, and the differences between our future GAAP and non-GAAP financial measures could be substantial.

And now, I’d like to turn the call over to Gary.

Gary Greenfield

Thank you, Tom, and welcome to the conference call for the third quarter 2010. Avid delivered solid revenue growth and improved profitability in the third quarter. We reported year on year revenue growth of nine percent for the quarter and had another quarter of profit improvement.

Our GAAP operating loss is reduced by over 60 percent year on year and excluding certain items that Ken will review, we had a non-GAAP operating profit of $4.9 million, the highest since 2007.

While we have significant work to do to achieve our longer term financial goals, the third quarter results represent a key milestone in our transformation. I will discuss more about the business in a moment, but will turn the call over to Ken so he can discuss our financial results in more detail.

Ken Sexton

Thank you, Gary, and welcome everyone on today’s call. Revenues for the third quarter were $165.1 million as compared to $152.1 million for the same period in 2009. The GAAP net loss for the third quarter was $10 million, or $0.26 per share. This compares to a GAAP net loss in the third quarter of last year of $17.2 million or $0.46 per share.

Our non-GAAP net income for the quarter excludes amortization of intangible assets, stock based compensation, restructuring charges, acquisition costs, gain on asset sales and legal settlement and related tax adjustment.

Our third quarter non-GAAP net income was $1.6 million or $0.04 per share. This compares to a non-GAAP loss of $0.01 per share for the third quarter of 2009. The third quarter non-GAAP EPS is the highest for the company since 2007.

The items excluded from our non-GAAP results for the third quarter totaled $11.6 million and include amortization of intangibles of $3 million, stock based compensation of $3.6 million, restructuring of $185,000, acquisition related costs of $56,000, $572,000 on the gain of assets, a legal settlement of $5.6 million and related favorable tax adjustment of $399,000.

The legal settlement concerns a breach of contract claim which relates to activities that occurred at Pinnacle Systems prior to our acquisition in 2005. This settlement will have no impact on our business going forward.

I’ll now discuss the results in greater detail. From an overall standpoint, the revenue for the third quarter was up nine percent year on year and up six percent on a year to date basis. The third quarter growth represents our highest year on year revenue growth since the third quarter of 2006.

We experienced growth across the business. We had a year on year increase for the quarter, and on a year to date basis for audio and video, products and services, and our three major geographies. Revenues from acquisitions contributed three percentage points of growth, while the changing currency exchange rates adversely impacted revenue by about the same amount as compared with last year’s third quarter.

Video revenues were $100.2 million, up eight percent compared to the third quarter of 2009. We continue to see good growth in most of our video product categories. Professional editor sales were up year on year and sequentially, as we continue to experience strong customer response to Media Composer Version 5.0 which was released in June of 2010.

We continue to see increasing sales for share storage products and a strong quarter for the broadcast market helped drive good growth for our news and interplay related products. Sales of our consumer video editing products were down year on year as we have seen an overall market weakness in this area.

In audio, we had another solid quarter. Third quarter revenues were $64.9 million which represents a nine percent year on year increase and a year date basis audio revenue up over 10 percent. Audio revenue for the third quarter benefited from several new product releases which Gary will speak about in a moment. We were pleased with the revenue contributions of the audio business from our recent acquisition of Euphonics.

As indicated in earlier quarters this year, we have experienced certain supply chain issues, primarily in the audio space. Although we made substantial progress in this most recent quarter, these issues did negatively impact our year to date revenue. At our current inventory levels we believe we are well positioned to better meet product demand in the fourth quarter.

Overall product revenue for the third quarter was $134.2 million, up nine percent year on year and our overall service revenue, which included maintenance contracts, professional services and training was $30.8 million, an eight percent improvement over last year.

Now I will discuss our results beyond revenue on both the GAAP and non-GAAP basis. The GAAP operating loss for the quarter was $7.1 million, an improvement of $12.1 million year on year, and our lowest GAAP loss since the fourth quarter of 2007.

Our non-GAAP operating profit for the third quarter was $4.9 million, which represents a $6.7 million improvement compared to the third quarter of 2009. On a GAAP basis, we reported gross margins as a percentage of revenue of 51.9 percent, down 1.3 percent year on year, but up over one percent sequentially.

Our non-GAAP gross margin was 52.7 percent, down about one percentage point year on year and up over a percentage point sequentially. The year on year decline was largely attributable to the unfavorable impact of the strengthening U.S. dollar and a higher proportion of professional services revenue.

The sequential improvement was favorably impacted by the improvements in our service gross margins, selective pricing actions taken early in the quarter and foreign exchange rates.

Our GAAP operating expense was $92.8 million for the third quarter, down $7.4 million year on year and down $2.3 million sequentially. The $5.8 million sequential increase in GAAP, General and Administrative expenses was driven by the $5.6 million legal settlement I mentioned earlier.

Our non-GAAP operating expenses for the third quarter was $82 million. This was down about $1.5 million year on year and over $3 million on a sequential basis. $1 million of the third quarter decrease is related to the sale of certain assets which we would not expect to occur in future quarters.

Even without this benefit, operating expenses were down. The year on year decrease is related to the sale of certain assets which we would not expect to occur in future quarters. Even without this benefit, operating expenses were down. The year on year decrease is significant in light of the fact that our third quarter expenses include costs related to the acquisitions, and higher compensation costs related to the reinstatement of compensation practices which were not included in last year’s number.

We continue to focus on the improving cost structure and improving our productivity. Now, turning over to the balance sheet.

We ended the third quarter with $34.4 million of cash which is down about $12 million from the beginning of the quarter. Cash used for operations was $12 million for the third quarter and included $5.6 million for the legal settlement, $2.4 million of payments related to restructuring, and $3.3 million related to our move in Burlington. We expect our cash balances to increase by year end 2010 primarily due to cash generated from operations.

Earlier this month, we established a $60 million line of credit with Wells Fargo which is secured by receivables and inventory. The line of credit provides us with additional flexibility related to capital requirements in operating our business. While we currently have no specific plans to draw on this credit facility, we may use this line from time to time to cover short term cash requirements in certain geographies.

Our inventory at quarter end was $96.3 million which is up about $17 million from June 30. I indicated during our last call that inventory levels would probably increase in the second half of 2010 as we rebuild stocking levels to better meet current demand.

We also built inventory levels for several new products introduced in the later part of the quarter. I would expect a modest increase in our inventory levels during the fourth quarter. The annualized inventory turns for the third quarter were 3.3 turns.

Our accounts receivable balance of $89.7 million represent 49 days sales outstanding, which is down seven days from the end of last quarter and more in line with our historical experience. On the personnel side, we ended the quarter with 2009 employees and 492 contractors.

And now I’d like to hand things back over to Gary who will provide an update on the business.

Gary Greenfield

Hey, thanks Ken. As mentioned earlier, we’re pleased to report the highest non-GAAP EPS since 2007. The year on year revenue increases are positive indicators that our markets are improving. We continue to see growth across Avid’s audio and video business, particularly in the broadcast, post and government segments.

As Ken mentioned earlier, the broadcast sector continues to grow in the U.S. with a slight lag in Europe. According to a report that appeared in Broadcast Engineering Magazine in July, research firm DIA Kelsey has raised its 2010 broadcast TV station revenue outlook and now projects an overall U.S. industry revenue growth of $18.1 billion, which is a 10.9 percent increase from 2009.

And many of our own broadcast customers, including CBS Corporation, DeCler [ph] Broadcast Group, Direct TV, Discovery Communications and Cable Vision Systems have reported increased revenues this year.

We’re seeing more of our customers invest in infrastructure to facilitate the transition to HD, and deliver content to multiple mediums. We met with several of these broadcasters at IBC in Amsterdam last month, and there were a lot of discussions about multi-platform content delivery, media asset management and transition to file based high-def warp close.

At the show, we introduced a number of new solutions that will allow these customers to solve these complex business problems, including an updated version of our Air Speed Multi-stream Server, which enables broadcasters to easily record feeds, temporarily store files and play back news in either HD or SD, Hi-Def or Standard Def on the same channel.

News Vision, an end to end visual news production solution that allows local and regional broadcasters to increase the quality and speed of their hi-def file productions at a compelling price and Isis 5000, our new open shared storage solution that brings the power of best in class shared storage to local and regional broadcasters and post production facilities at a lower cost.

We also had some significant recent broadcast wins including Finnish broadcaster, Wiley [ph] who is building a new production facility that exists of Isis, Interplay, Air Speed Multi-stream, Media Composer and Pro Tools and KMSP TV in Minnesota, who’s building a complete Hi-Def work flow using Interplay, Isis and our Archive.

We also continue to see growing interest from the government sector. Increasingly, these organizations are looking for ways to manage the massive amounts of media they have acquired, are investing in our broadcast and post production solutions to more cost effectively and efficiently catalogue, store and retrieve their media.

We have entered into a strategic alliance agreements the SRA International, a government systems integrator and believe this partnership will open new revenue opportunities for Avid, particularly in media asset management.

This quarter also brought continued growth in our post production and editing systems. A recent report from Proust and Sullivan indicated that the overall (inaudible) editing market had more than $600 million in revenues in 2009, and is expected to grow at an annual rate of about seven percent over the next six years.

Media Composer Version 5 continues to gain traction in this market, thanks to features like script sync, AMA and our new Smart Tool. In April, we also introduced DS 10.5, the first cell phone only version of our all in one visual effects finishing and conform solution.

We has some significant wins in our post production segment this quarter, including an upgrade to a high-def work flow at Warner Brothers Extra TV show and films like The Town, Ironman II, and the Twilight Saga, all relied on Avid video solutions in the post process.

The U.S. MIA channel continues to show modest growth with most of our key categories turning positively according to a July MIA sales track report. Avid continues to maintain the number one positions in the studio monitor market in the U.S. in terms of total units sold. This includes our BX and Studio File family of products.

Q3 was also a busy and productive quarter for audio developments at Avid. In September, we introduced a new Pro Tools and Box family and Pro Tools SC modules. Both are geared towards customers making music at home or on the go.

One important thing to note is that we have opened End Box up to work with a variety of third-party digital audio work stations. Now customers can use the End Box hardware with software like Apple Logic and Steinberg Q base to add more flexibility in the way they work. Orders for both End Box and the Pro Tools SC bundles have been strong from retail partners and educational institutions and are optimistic they will continue to sell well through the holiday retail season.

We also introduced a series of new leading design hardware and software solutions designed to enhance the quality and performance of Pro Tools HD. The new interfaces, HDIO, HD Omni and HD Manny [ph], offer customer flexible configurations to support a variety of analog and open digital formats for audio recording, mixing and playback.

Avid customer N-3, our music mix mobile, recently purchased 15 Manny [ph] interfaces to outfit their mobile remote recording trucks to dramatically improve the audio quality and reliability of live broadcast events like the Grammy and Country Music Awards.

Rounding out our audio news, we introduced Pro Tools HD Native earlier this month enabling a growing market of music and post production professionals to tackle demanding audio products using the full capabilities of Pro Tools HD software, running entirely on computer CPU power.

The launch system market continues to do well. Our year to date revenue is up 30 percent and we expect to see continued growth here for the remainder of the year. Venue Systems are once again used at a number of music festivals and on tours this summer including Rockin’ Japan 2010, the Bonnaroo Music Festival and Dave Matthews’s tour. Venue SC 48 was also just named audio product of the year by AV Magazine in the U.K.

In addition, we have made great progress on integration of Euphonics, which we acquired early in Q2. We continue to expand our Yukon partner roster. Yukon, as you may know, is our high-speed Ethernet protocol that enables our line of control services to work with a variety of third party software. We now offer support for Auto Desk Smoke for Mac, the Foundry Storm and Red X Calibrating software applications.

The market continues to respond favorably to the openness as well as breadth and depth of features our control services can deliver to creative audio and video professions. Yukon will continue to be a key driver in empowering Avid to deliver more open solutions to the market.

Finally, Avid celebrated a few other notable successes this quarter. We were honored by the Academy of Television Arts and Sciences in August with two AMA awards. We received an Emmy Engineering plaque for Avid Media Access, AMA for its roll in dramatically improving the process of working with tapeless media.

Avid also shared the reception of this year’s Television Academy’s Violet C. Farnsworth Award, named for the television inventor which honors an agency, company or institution whose contributions have significantly affected the state of television technology and engineering over a long period of time.

The award also recognizes the company’s ongoing industry importance.

Avid acquired Digi Design in 1995, and therefore recognition extends to Avid for its continuation of the Digi Design tradition and its Pro Tools digital audio work stations. And last, but not least, interplay was also honored by Cable and Satellite Magazine International for Best Media Asset Management Solution.

Overall, the progress we’ve made in the past quarter is promising and we’re optimistic about what this means for Avid’s (inaudible). Now I’ll turn it back over to Ken to provide some context for the remainder of 2010.

Tom Fitzsimmons

Thank you Gary. While we are not providing specific guidance for the balance of 2010, we want to reiterate our comments from our previous 2010 earnings calls.

Our breakeven point for non-GAAP operating income in 2010 remains at the annual revenue level of $645 to $655 million. Revenue in excess of this threshold should generate 50 percent or higher contribution to our non-GAAP operating profit.

For the full year 2010, we expect to report a non-GAAP operating profit. We expect our non-GAAP net interest and income taxes for 2010 to be about $10 million. Therefore, operating results at a non-GAAP operating breakeven level would result in a non-GAAP net loss of $10 million or approximately $0.26 per share loss.

The non-GAAP net loss of $10 million excludes the following GAAP adjustments; restructuring charges and other charges, stock based compensation, amortization of intangibles, acquisition related costs, the loss or gain on asset sales, legal settlement costs and related tax adjustments. Based on what we know today, we would expect these items to be about $37 to $39 million of charges for 2010.

Including these costs would result in a GAAP net loss of approximately $47 million to $49 million, assuming the same revenue level.

Before we move to Q&A, I’d like to remind you that our 2010 investor day will be held on Thursday, November 11 here at our new Burlington location. More information and registration is available on our IR page of our website. I hope you’ll be able to join us.

Also please note that our fourth quarter earnings call will be held on a Friday, February 4, 2011 at 8:00 am EST.

This concludes our remarks and we would now be happy to take your questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question will come from Paul Coster with J.P. Morgan.

Mark Strauss – J.P. Morgan

Hi. Mark Strauss on behalf of Paul. Thanks for taking our questions. The question on spending on local TV stations, it seems that there’s been a firming in the ad budgets and also a surge in political spending. Are you guys seeing any kind of trickledown effect from that?

Gary Greenfield

We did. You know I mentioned to you a couple of examples. St. Clair is an example and we also talked about the broadcast industry as a whole being up. You know, not that much different than us, in fact even more so than us, a drop in advertising revenue hits profits 100 percent.

Similarly, this increase in the broadcast industry in advertising is a big multiplier effect. So indeed, we talked about St. Clair. We talked about an individual station in the Midwest. We’re seeing a lot of activity and a lot of decisions being made, and we’ve not seen decisions being made for either station groups or individual stations for some time. So we are seeing a lot of activity there.

Mark Strauss – J.P. Morgan

All right. A couple more if I can. Can you guys just give an update on the competitive landscape especially with regards to Omni on Harmonic and then it seems like we’ve seen a flurry of contract activity with Grass Valley Group in the last couple of months. Just comment on anything there?

Gary Greenfield

I don’t think the marketplace in terms of competitive activity has really changed. You know Omni and Grass, we compete, both compete with and complement on the server side so it’s not unusual to find a work flow that would you know, might include Omneon or Grass Valley and Avid or you know, it would be unusual to see all three, but not certainly see Avid mixed in with those.

I mean the Harmonic acquisition only completed a month or so ago, so we certainly have not seen anything any different in the marketplace. Both companies, both Omneon and Grass are good companies as is Harmonic, so I won’t anticipate anything changing.

I think the activity for Grass again, is not any different than we’ve seen before we – we’ve seen them in competitive situations, but we continue to hold our own there. But clearly, they’re good companies.

Mark Strauss – J.P. Morgan

Thanks. Last one for us. Just the mix between hardware and software on the Media Composer side, is that now stable or are we still seeing some shift toward software and I guess if there is a shift, can you just talk about potential impact on margins.

Gary Greenfield

Whenever we release a new release of Media Composer, the shift looks a little heavier towards software. We did release in mid-June and that upgrade cycle will continue, but we would have gotten a good part of it in late June in the early part of the year. So you do see a tick up in software for Media Composer in that timeframe which does of course result in improved margins.

As you can imagine, margins on software sale versus software with hardware is higher. I think over time we will see, you know we will continue to see that shift not just during an upgrade cycle, but more permanently. For a variety of reasons, we’ve set a price point for Media Composer to make it attractive as we did for a software version only version of DS by creating attractive price points for people to start to be able to use it, and students to be able to use it on a Notebook to allow broadcast facilities, to be able to put folks in the field using it.

So I think we’ve tried to encourage more software. You know another example is, we talked about on the last call, was creating a third party interface, allowing a third party to create an interface for IO for video IO and other IO, for media composers.

So as we open it up to that world, we would hope to see more software sales, and as I commented, that does improve our gross margins.

Mark Strauss – J.P. Morgan

Got it. Okay. That’s it for us. Thank you very much.


We’ll go now to Michael Olsen – Piper Jaffray.

Michael Olsen – Piper Jaffray

Thanks. Good afternoon. Just a question about revenue mix. I think this is the first quarter since late ‘08 that video revenue growth outpaced audio revenue growth, and audio revenue growth decelerated in Q3 for the third quarter in a row. Do you think video can continue to grow in the mid to high single digits based on the improving broadcast environment and will audio potentially reaccelerate with the supply chain issues that you mentioned getting worked out?

Gary Greenfield

Ken, you want to comment on that first?

Ken Sexton

Sure. So first off, I’ll talk about the audio, and audio, the audio growth rates were hurt this year due to supply chain as you’d indicated and as I indicated in the call. And we expect to be better positioned or whatever, to really kind of meet the demand in the fourth quarter.

As I said, we did catch up with a lot of it here in the third quarter, but in some cases, people may have delayed orders too because of other backlog. So from that standpoint, I think that audio’s been pretty much of a steady grower over time and I’d expect that, and I’d expect slight upticks and downticks each quarter.

I think on the video side, it was probably hurt more by the downturn that happened in 2009 and I think that we’ve seen indications of our customers recovering and spending more, and in some cases, maybe you know, it takes a while before they start to spend more money, and I think we’re starting to see that.

It’s hard to make a long term prediction off a short term or a one quarter result growth rate, but we’re certainly encouraged by it.

Michael Olsen – Piper Jaffray

Okay. Then another question, as we look out to modeling Q1 operating expense, I was wondering if you could share your approach to NAB this year. Should we expect a large Avid presence at NAB in 2011? I guess maybe one way to look at it is how will it compare to last year?

Gary Greenfield

I think you’ll see a comparable presence. We were very pleased by the turn out of customers at NAB and a number not just on the floor, but scheduled customer meetings. We had a similar experience at IBC a month ago, so customers clearly are willing to take the time to not just come and knock on the doors but have meaningful meetings. So I think you will see at this stage of the game, our plans would be for a comparable presence.

Michael Olsen – Piper Jaffray

Okay, thanks very much.


And we’ll move now to Andrew Abrams with Avian Securities.

Andrew Abrams – Avian Securities

Hi guys. I just wanted to talk a little bit about the consumer side. Maybe you can kind of walk through what you’re seeing there, why things have been kind of on the weak side and what fourth quarter looks like in terms of the consumer business because that tends to be the better quarter, and what you’re seeing kind of on a longer term basis for that part of the business.

Gary Greenfield

When we speak to the consumer side, Ken commented a little bit when he was talking about the audio/video mix. We did see – we had seen some strength during the first half of the year on the consumer side, and I think there still remains strength out there.

Pinnacle Studio ultimate is an individual SKU as an example did well on the video side. On the audio side we introduce a series of products. We did face during the quarter, and Ken commented on it in the script, a shortage of product, and that had to do with supply chain shortages that we spoke to, and that impacted a couple of areas.

One was the consumer side. I think the macro trends that we’re seeing for our own business are comparable to what one is seeing in the market. We’ve talked to the retailers. The retailers have said they do expect this year to be better than last year, but no one is anticipating to be back at the levels of a couple of years ago.

So we are seeing a trending upward. We’re seeing people starting to not just buy, but buy a larger keyboard instead of a smaller keyboard, that type of activity there. So I’d say that the biggest single thing in the quarter was that we were impacted by some of the supply chain challenges which we identified on the last call.

Andrew Abrams – Avian Securities

If we break out the consumer business now, or what I guess what you would classify as the consumer business, is there a way to balance out what the ratio of hardware to software would be in that part of the business?

Gary Greenfield

In that business, we tend to sell bundles. If you think about it, you’re selling a keyboard. We’re selling you know, we talked about Pro Tools on the call. Pro Tools SE is really sold in conjunction with musical devices, with MI devices, so there’s really not a way to separate hardware versus software.

We do sell some pure software for our consumer product, consumer video editing product. Of course we sell some mixture. Surprising, I’ll tell you hardware has been very strong in the consumer video hardware area, in our different brands. So there’s no real way to go X versus Y in the consumer thing because it’s the nature of what the products are.

Andrew Abrams – Avian Securities

Just one last question on the dealer network. You’ve been kind of trimming your dealer network, or at least focusing your dealer network. Can you give us an update on how that’s been going? What are the good points? What are the bad points?

Gary Greenfield

Ask that again. I’m not quite sure I ...

Andrew Abrams – Avian Securities

On your dealer networks, you’ve kind of trimmed your dealer network or focused your dealer network over the last couple of quarters, and I’m wondering where that’s going.

Gary Greenfield

What are the good points and what are the bad points. I just want to be sure. Yes, we have been doing, really what we’ve done in terms of our dealer network is we’ve both trimmed, but we’ve also identified who our elite partners are so we as an organization are providing more help both in terms of training; you know when we rolled out some of our Pro Tools products we were on the phone at literally five in the morning helping train some of our partners, our dealers on that.

So it’s really that we’ve created a tiered model and that tiered model is going well because it allows us to focus on the 20 percent with 80 percent of the effort. The because parts of the world or because of smaller geographies or whatever reason, there’s still the other important 20 percent of the revenue. But it’s a tier.

You know we had some I don’t understand. I’ve been selling your products for umpteen years and why me? And the answer is why me, is because you’re not producing. And what we’ve done with those, it’s not that we’ve eliminated them. We’ve moved them to two-tier distribution so that in fact, they can still acquire our products, but we don’t have to worry about shipping one offs to those folks, but other organizations that are more efficient to do that. So while they may have gone out of our direct management, they may still be selling Avid products.

Andrew Abrams – Avian Securities

So I understand that part of it, there’s another third party between you and those third tier resellers.

Gary Greenfield

Right. As an example, Tech Data.

Andrew Abrams – Avian Securities

Oh, okay. I got it. So standard third tier. Got it. Thank you.

Gary Greenfield

Yes, it’s not that we created something new there.

Andrew Abrams – Avian Securities

Right. It’s not your organization that built this. It’s an existing organization.

Gary Greenfield


Andrew Abrams – Avian Securities

Got it. Thank you.

Gary Greenfield

And then we treat them as one large partner. We help them, but they’re just more efficient at that.

Andrew Abrams – Avian Securities

Great. Thank you.


We’ll go now to Steven Franco with Dougherty & Company.

Steven Franco – Dougherty & Company

Good afternoon. Initially this broadcast business operated with a lot of visibility and backlog. Given what’s happened over the last few quarters, are you now seeing an uptick but it’s more kind of book and ship business and you’re in the process of building backlog or do you have some good visibility going out the next couple of quarters?

Gary Greenfield

I would say that we are – we have seen on our video side, our broadcast side, we have seen, and we didn’t speak to it explicitly this time, but we did last quarter, but we have seen more bookings. In fact sometimes when we talk about some wins, they’re wins where we haven’t recognized the revenue yet.

You know we’re frequently asked the question why do we think XYZ quarter will be a little stronger versus whatever and it is because of the bookings backlog, and we have seen pretty strong bookings backlog for that.

So we have both what you refer to as a ship and book, ship and recognize it. Typically it’s editor, storage, items of that. The integrated work flow typically takes at least one quarter to recognize as revenue. It’s not unusual to take even three or four quarters if it’s a large installation. But that has been growing, and without speaking to it, an example is a station group that we have won, but they’re going to roll out one station at a time, and we’ll recognize that revenue over the implementations as the work flows at each individual station.

But that has been positive. I used to have good visibility. That obviously was before Ken and I had a chance to join the organization, so not sure we’re quite back to perfect visibility, but it is clearly improving visibility.

Andrew Abrams – Avian Securities

Okay. And from an industry perspective, where do you think you are in terms of local news producing stations, broadcasting in HD. Any numbers for how many stations for that?

Gary Greenfield

Well I think the real question that you’re asking is really about the news versus just broadcasting. I mean everyone is broadcasting in – I shouldn’t say – most stations have some type of broadcasting. Part of the question is are they in HD but part of the question is are they creating content locally which is what drives our revenue, is the local news station etc.

And it’s in the 35 to 40 percent range here in the United States. Overseas it’s not that far. In most regions overseas, it’s not in the regional organizations. It’s not that high at this stage of the game.

Andrew Abrams – Avian Securities

On the audio business, you talked about the new native Pro Tools system. Do you think going forward, that’s going to be the majority of the way it’s used at the high end of the market?

Gary Greenfield

Could you ask that one more time? What about used at the high end?

Andrew Abrams – Avian Securities

In other words, the professional customer that used to load up with HD card, HD XL cards, whatever you were calling them. Do you think they’ll be exploiting the new native software for Pro Tools?

Gary Greenfield

For Pro Tools. You know, we have actually spend quite a bit of time with our customer advisory boards on that and I think that you are going to find some cannibalization of the high end, at the high end where we sell our TDM, where we have traditionally sold our TDM product.

But we’ve also been told by the very high end, that they clearly continue to want a TDM product. One of the reasons that folks wanted the native card is to actually open up an audience that was using our standard product, just Pro Tools without, we call it Pro Tools. We call it Pro Tools today.

Using a standard product that they could do a little bit better mix or a little bit better work flow. The second thing is, a lot of the HD players say we want to be able to do this at home and we want to have just a simple board, and the board is really (inaudible) so that we can do this at home and we don’t have to have the entire rig.

So we’re going to capture both – we’re going to capture a little cannibalization for new users, a little bit of folks that want to have a second option, because one of the things Pro Tools does is, it does allow you to – if a vendor provides a plug and it works both with TDM as well as with (inaudible) will substitute those in, so you can use software based plug ins versus the hardware plug ins.

And then we’re going to pick up some folks that want to come up from just the standard product. So it’s a mixture.

Andrew Abrams – Avian Securities

And one more question. Because in the past, the company’s been tripped up on the plug in transition. Where are the key plug in vendors in this transition to your new product. Do you have those plug-ins today?

Gary Greenfield

These work with – the answer is current plug in vendors – there’s a lot of plug in vendors that are out there and they all are at different stages. But there’s a wide set of plug-ins today available for them.

But as you know, one of the great things about Pro Tools is its wide audience of, its tremendous developer network, so different people are in different stages of validating that, but Pro Tools continues to help that group. So most of those will continue to work with existing software based plug-ins.

Andrew Abrams – Avian Securities

Okay. Great. Thank you.


And we have no other questions at this time. Mr. Greenfield I’ll turn the conference back to you for closing remarks.

Gary Greenfield

Well thank you all for joining us. We’re pretty pleased with the quarter. We think that the types of things we’ve spoken to you about in terms of the operating leverage that we do have in the business, we’ve seen that demonstrated in terms of the growth in both the audio and video businesses, the best performance for 2007.

So we’re pleased with where we are today and should you all have any follow up questions, please let us know. We will be available for follow up after today’s call. I hope you all will join us on Thursday, November 11 for the investor day. We’d love to have you there and share with you some of the new products and some of the new things that we are doing. Thank you all for joining.


That does conclude our conference. We thank you for joining us.

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