Avid Technology, Inc. (NASDAQ:AVID) Q4 2018 Earnings Conference Call March 14, 2019 5:00 PM ET
Whit Rappole - VP of IR and Corporate Development
Jeff Rosica - President and CEO
Ken Gayron - EVP and CFO
Conference Call Participants
Samad Samana - Jefferies LLC
Steven Frankel - Dougherty & Company
Hamed Khorsand - BWS Financial
Good day, and welcome to the Avid Technology Q4 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Whit Rappole, Vice President of Investor Relations for Avid Technology. Please go ahead.
Thank you, operator. Good afternoon, everyone and thank you for joining us today for Avid Technology's fourth quarter and full year 2018 earnings call. My name is Whit Rappole, Avid's Vice President of Corporate Development and Investor Relations. With me this afternoon are Jeff Rosica, Chief Executive Officer and President; and Ken Gayron, Chief Financial Officer and EVP. Jeff will provide a strategic overview of our business and then Ken will provide a detailed review of our financial and operating results followed by Q&A.
We issued our earnings release earlier this afternoon and we are prepared a slide presentation that we will refer to on this call. The press release and presentation are currently available on our website at ir.avid.com and a replay of this call will be available on our website for a limited time. During today's call management will refer to certain non-GAAP financial metrics and operational metrics. In accordance with Regulation G the appendix to our earnings release and our Investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and definitions for the operational measures used on this call and in the presentation.
In addition certain statements made during today's presentation contains 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 they pertain the future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements. For more information including a discussion of some of the key risks and uncertainties associated with these forward-looking statements please see our press release issued today and our 10-K filed with the SEC.
With that I will turn the call over to Jeff to start the call.
Great, thanks Whit and for those of you who haven’t met him yet, I hope you will soon. He is really a strong addition to our team as the Head of our Avid's Investor Relations. So, thanks everyone for joining us on our call today. I will say that I believe that Avid's results are beginning to show strong evidence that our business and financial performance are improving according to our plan. Along with our CFO Ken Gayron I'll provide some insights into the progress we've made last year and the new steps we're taking all of which we believe support the potential for good value creation for our investors.
So let me get started with my prepared remarks today. First, I'll offer my observations on the important foundation that we put into place during 2018 and that is our new Senior Leadership Team, the progress they've delivered and the better position Avid is in today because of the way we've gone to work and focused on improvement. Optimizing our Senior Leadership Team was crucial to getting our improvement plan on track to drive positive change and create shareholder value. We did exactly that and did it rapidly. Today, our senior leadership team is complete with the ideal balance of proven media industry experience along with new expertise in enterprise software and SaaS delivery. I'm pleased that our renewed team is collaborating quite effectively and moving quickly. We've been demonstrating meaningful progress for the past few quarters having built consistent momentum and wrapping up 2018 with a strong quarter.
Since I stepped into the CEO role in early 2018 this team has been empowered to reshape our strategic plan. This included starting up several beneficial operational improvement and efficiency initiatives that we expect will continue to contribute to the strengthening of Avid's business profile. At the same time, the leadership team has been driving significant re-prioritization and enhancing our product roadmaps to help drive more profitable and sustainable growth. Overall, after three full quarters as CEO, I am encouraged by the initial results we're seeing, especially our churn in revenue growth, adjusted EBITDA, and free cash flow generation. Today, the leadership team is continuing the decisive work that aligns our business model to higher margin recurring revenue which will provide greater transparency and enhances our ability to better project future results. Based on what we've already been able to accomplish, I have growing optimism about our forward-looking prospects. I trust this team will lead us through the continued work that is both prudent and necessary in order to ensure that we make 2019 overall a year of continued progress as well as delivering improved business performance and financial results.
Now let's take a look at Avid's Q4 performance through some key indications that the overall plan and the changes we've been putting into place are beginning to yield quite positive results. First, we were in line with our own expectations with GAAP revenue being up 5% versus the same quarter last year representing Avid's first quarter growth since early 2016. This growth was driven from strong overall performance of our product sales, in particular with the Integrated Solutions category showing really solid growth. It also highlights the major Q4 contributions of e-commerce and subscriptions. Revenues from e-commerce activities grew 50% year-over-year in the quarter which now represent a meaningful portion of the company's overall revenues. Software subscription continued its strong growth trend with 77% revenue growth in the quarter and surpassing 125,000 paying subscribers. Our premium offering the Avid First product family has continued to be quite successful in the driving the adoption of and subscription to our creative tools with over 1.2 million First downloads at the year-end, and we're continuing these users into paying customers at a higher rate than typical industry averages for a premium offering.
Avid continued to realize good momentum in our recurring revenues with last 12 months recurring revenues reaching a historical high in the fourth quarter at 56%. While the total annual value contract flattened out in the quarter due to timing of the bookings of renewals for certain long-term agreements, we expect this metric to continue to grow in upcoming quarters. Contractually committed backlog was down slightly on a sequential basis for the same reason but was up year-over-year. Gross margin improved for the fourth consecutive quarter, reaching nearly 61% in the fourth quarter driven by the continued positive impact of several initiatives that have been underway since mid last year, including more stringent controls on discounting, implementing new pricing strategies, and a beneficial mix as software and subscriptions continued to grow. As these efforts continued to contribute to margins, we expect to see further improvements during 2019 as we transition into our new supply chain strategy.
Our smart savings initiatives continued to make good progress with our OPEX coming in better than anticipated in the quarter helping contribute to improved EBITDA and free cash flow. Due to the strong revenues, the improving gross margin, and the benefits from the lower OPEX we realize better than expected adjusted EBITDA and net income in the quarter. And finally, due to AVID’s overall financial performance and strong execution we were able to deliver significantly improved free cash flow generation which resulted in our largest quarterly cash flow in seven years. These are all good signs and we're encouraged by the results we delivered in the fourth quarter but I want to underscore that we're just getting started and we have a lot of work ahead of us in order to ensure consistent performance.
Now let's turn to Avid's full year 2018 results which is good evidence of the progress we've made in sequential improvement and building momentum throughout the last three quarters. Revenue was in line with our hope and our expectations for the full year and within our guidance. Excluding non-cash revenue, total revenue was up 5% year-over-year, taken in combination with billings which has demonstrated single-digit growth for over two years running, we have increased our confidence that the company can deliver single-digit growth in 2019. With non-cash revenue not clouding the year-over-year comparisons, we anticipate demonstrating a return to GAAP revenue growth in 2019 on a full year basis.
E-commerce continues to be a fast growing and important part of the business with revenues up 52% year-over-year and surpassing $50 million in 2018. E-commerce is an important engine for growth of our software subscription business which continued its strong revenue growth of 78% when comparing 2018 to 2017. Excluding the impact of the non-cash revenue, gross margin was up year-over-year driven by our various initiatives and better mix as discussed earlier which represents an improvement of 480 basis points versus 2017. GAAP gross margin was relatively flat but 2017 reported margin was helped by the significant amount of non-cash revenue at 100% margin.
Operating expenses were down for the year in keeping with our initiatives to deliver operating efficiencies through our smart savings. We expect to see continued improvement in our operating expenses in 2019 which Ken will cover in some more detail later on this call. Adjusted EBITDA for 2018 was basically flat compared to 2017 at 47.5 million which was above the high end of our guidance. More importantly when removing the impact of the non-cash revenue, the cash adjusted EBITDA was 2.3 times greater than the 2017 amount. Free cash flow for the full year was just under 6 million which was at the top end of our guidance. Well this was a rather modest result from a free cash flow perspective, this did deliver an increase of more than 5X over the prior year. We are confident that the free cash flow conversion can improve again significantly in 2019 as evidenced in our full year guidance.
Throughout 2018 Avid continued to make gains in improving upon our strategy to become faster and more efficient at innovating and delivering on our product portfolio. We have followed through on making available differentiated platforms, tools, and solutions that begin to factor into our 2018 results and also help us drive our 2019 performance. And given our progress on our plan and our evolving approach to our business, we believe that there are metrics that will more accurately deposit average financial performance which Ken will talk about shortly.
We have more to accomplish but with our continued focus on aggressively executing on the combined strategy with our operational improvement plans, we will continue to deliver performance improvements this year as we build on the positive momentum coming out of 2018. We will be executing on several fronts, the first is bringing to market more new innovative products and solutions that will delight and surprise our customers which will provide additional much needed growth engines for Avid. We'll keep our emphasis on further building and expanding our e-commerce activities which based on our results so far has quickly become a very valuable part of our business and a meaningful part of our revenue. We're quite optimistic that we will continue to be a highly profitable, sustainable growth engine for the company.
Additionally we are focused on finishing the transition of our supply chain activities which is well underway and moving along quite smoothly. This will help deliver lower cost, improve margins, and lower the working capital requirements beginning in the second half of 2019. Lastly, we will continue our execution and realization of our smart savings initiatives as well as delivering further operational efficiencies and performance improvements.
In addition I'll say that management continues to intensify its attention to deliver a more predictable financial model built on more recurring revenue from continued growth in our software subscriptions and our long-term agreement strategy. We are also moving to higher margin software and SaaS offerings that will provide a much higher return on shareholder value and driving sustainable and profitable growth through our innovation efforts combined with an optimized more effective go to market approach. These efforts are aligned to our goal to drive continued improvements in our key financial metrics, none of which is more important than free cash flow and adjusted EBITDA margin and ultimately with the goal to create much greater value for our shareholders. So with that I'll turn it over to Ken to give his remarks. Ken.
Thank you Jeff and good afternoon everyone. As Jeff outlined earlier we are making progress on our initiatives to improve our financial performance. We ended fiscal year 2018 with strong momentum evidenced by a return to revenue growth, improving gross margin, and strong free cash flow. We also see continued progress in our forward-looking metrics consisting of revenue backlog, annual contract value, and recurring revenue. With improving forward-looking metrics and our well defined plan to achieve 20 million in cost savings we anticipate favorable improvement in revenue, adjusted EBITDA and free cash flow in 2019. Let's now get into the details. In the fourth quarter of 2018 revenue, gross margin, adjusted EBITDA, and free cash flow were all ahead of last year. We also exceeded our guidance for our adjusted EBITDA and met the high end of guidance for free cash flow.
Now turning to the income statement, revenue of 112.7 million for the quarter was in line with our guidance and up 5% year-over-year and 8% sequentially. It marked the first quarter of year-over-year GAAP revenue growth since the second quarter of 2016. We continued to see good growth in our e-commerce and subscriptions for Pro Tools, Media Composer, and Sibelius. Storage was solid again for the quarter and we were pleased by the favorable results in graphics. We continued to see progress in our media central license revenue which grew both year-over-year and sequentially. We also saw a recovery in our Pro Tools integrated hardware business as a component supply issue we discussed last quarter was remediated.
Excluding non-cash revenue, revenue of 112.4 million in the fourth quarter was up 7% year-over-year and up 10% sequentially. Non-cash revenue includes maintenance and software license products that have been recognized on a ratable basis over many years under old revenue recognition standards even though we had collected the cash prior to 2016. Non-cash revenue was approximately $300,000 in the fourth quarter of 2018 down from $2.2 million in the fourth quarter of 2017.
Non-GAAP gross margin was 61% for the quarter up 480 basis points year-over-year and up 60 basis points sequentially. This was our fourth consecutive quarter of margin improvement which is being driven by a mix shift to higher margin subscription products coupled with an improvement in margin for hardware and integrated solutions. Our hardware margins were 710 basis points improvement year-over-year due to continued growth of a high margin storage and graphics business. With the pending move to our new supply chain vendor we expect to see continued improvement in hardware margins as we anticipate reductions in freight and related overheads moving forward. Overall we are making good progress in the transition to the new supply chain vendor and are on plan to complete the transition by the end of the second quarter of 2019.
Non-GAAP operating expenses for the quarter were 50.2 million down 3.2 million from Q4 2017 after adjusting for a $5.2 million legal settlement credit received last year. The improvement in operating expenses resulted from 1.8 million related to our operating efficiency initiatives with the balance from our bonus true up at year-end. Adjusted EBITDA of 21.3 million for the quarter exceeded our guidance and was up 42% year-over-year. Adjusted EBITDA margin of 18.9% was up 490 basis points year-over-year. Improvement in adjusted EBITDA and EBITDA margin was driven by the increase in revenue, gross margin, and better management of operating expenses mainly driven by our internal efficiency programs.
The increase in adjusted EBITDA contributed to the improved free cash flow which was 17.7 million in the fourth quarter of 2018 compared to 1.1 million in the fourth quarter of 2017. Adjusting for the $9.3 million bonus payment in the fourth quarter of 2017, free cash flow was up 7.3 million in line with the improvement in adjusted EBITDA.
Now moving to the performance for our fiscal 2018, overall 2018 saw stability in our GAAP revenue, non-GAAP gross margin, and adjusted EBITDA and our free cash flow was materially higher than the prior year. Revenue in fiscal 2018 was 413.3 million for the year, down 1% year-over-year. However, excluding non-cash revenue, revenue was 407.1 million in 2018 up 5% year-over-year. The impact of non-cash revenue was approximately 6.2 million in 2018 down from 30.9 million in 2017. We expect the amount of non-cash revenue in 2019 to be similar to the amount in 2018 which is disclosed in the footnotes of our 10-K.
Since non-cash revenue is now only a minor item in our financials equal to roughly 1.5% of revenue, we are confident Avid will see year-over-year GAAP revenue growth in 2019 as non-cash revenue will have not a material impact on a comparative basis. Additionally as Jeff mentioned we're introducing exciting new products in our core audio, video, and subscription product lines that should provide a foundation for future growth.
Coming in as a new CFO last year I have spent a lot of time looking at what metrics helped me understand the performance of the business. Based on this over the past two quarters we've added some new metrics in our disclosure to help increase our transparency to investors. These new forward looking metrics show the growing space of our recurring revenue as we build our subscriptions and long-term agreements along with our sizable maintenance business. One metric that we think is less relevant for understanding our business is quarterly bookings. Due to our focus on increasing our long-term agreements with our customers the quarterly bookings number can be volatile as the timing of a single multi-year long-term agreement to materially impact the quarterly booking results, making comparisons challenging. As a result moving forward we will focus our disclosure on more relevant forward-looking metrics for software companies such as total revenue backlog, annual contract value and recurring revenue, and add additional metrics over time to provide transparency to investors.
With that said I wanted to provide the annual bookings number for 2018 since we started the year reporting it. Bookings were 107% of GAAP revenue for the year which resulted in increasing year-over-year improvement in revenue backlog in ACV. Bookings of 440.3 million were down 17% year-over-year but excluding Greater China, bookings were flat with 2017. Non-GAAP gross margin was 59.8% for the year up 10 basis points over 2017. However when you exclude the benefit from non-cash revenue which has 100% gross margin we saw 270 basis point increase in gross margin in 2018.
Given Avid's progress transitioning to higher margin software subscriptions and the visibility we have for improving hardware margins, we are optimistic about continued gross margin improvement in fiscal 2019. Non-GAAP operating expenses were 211.7 million in 2018 down 3.2 million from 2017 and down 8.4 million after adjusting for the 5.2 million legal settlement credit received in 2017. The 8.4 million decline in OPEX results from 3.6 million from our publicly announced internal operating efficiency programs in areas such as T&E facilities, outside services, and consulting fees with the balance from a reduction in legal fees and 2.9 million in FX. Adjusted EBITDA of 47.5 million for 2018 exceeded our guidance. Adjusted EBITDA was down 2% from 2017 primarily from the inclusion of 24.7 million of more non-cash revenue in 2017 than in 2018. Free cash flow of 5.9 million in 2018 was a high point of our guidance.
Now moving to recurring revenue, as you can see the percentage of our revenue that is recurring has steadily increased providing us with more confidence in the predictability of our business. With the 12 months ending December 2018, 56% of our revenue was recurring up from 49% a year earlier. We expect recurring revenue to continue to increase over time given the growth we are seeing in subscriptions and long-term agreements. We will reaffirm our goal of reaching 70% recurring revenue in two to three years. I do want to point out that we have modified the recurrent revenue presentation to reflect LTM and we plan to use LTM methodology moving forward. By moving to LTM it removes the quarterly seasonality of our business as we typically experienced in the fourth quarter more products shipments not under LTA.
Now turning to annual contract value, this graph shows our ACV has also increased over the prior year. ACV has grown to 248 million at the end of 2018 up 15% year-over-year driven from our strategy to focus on higher margin software subscriptions and long-term agreements. We expect to see continued growth in ACV over time given our strategy towards more long-term agreements and subscriptions. At the end of the fourth quarter our ACV was down $1 million sequentially due to the timing of certain long-term agreements. In particular there was one new enterprise agreement that shifted to the first quarter of 2019 that has now been signed and one strategic purchase agreement that was not renewed at the end of 2018. We are still in discussions with this partner on the renewal of the strategic purchase agreement and if which we achieve our desired margin threshold we may renew this quarter.
On our last two calls we discussed plans to introduce a refinement of our revenue categories to provide a more detailed view into Avid's revenue streams that are better aligned to our business today. In 2018 revenue from software licenses and maintenance which includes both subscriptions and perpetual licenses was 52% of our revenue. We expect this category to continue to grow modestly and continue to produce software gross margins of 80% plus. From a GAAP reporting perspective the non-cash revenue we had in fiscal 2017 resides in our maintenance and perpetual revenue lines. Excluding non-cash revenue we had $3 million in revenue growth and software licenses and maintenance despite the ongoing transition from perpetual to subscription. Although we continue to focus on driving subscription offerings, in the second half of 2018 we did see more stabilization in perpetual license revenue that leads me to believe we should have more growth and software licenses and maintenance in 2019.
Moving to the next revenue line roughly 40% of our revenue comes from integrated hardware solutions. These solutions which combine hardware with high value, high margin software generate attractive gross margins. We believe the introduction of new products in the audio area and video in 2019 and the transition to our new supply chain vendor will we will see continued gross margin improvement in fiscal 2019. The balance of our revenue comes from professional services which is the smallest portion of our business and where we were driving programs internally to increase the gross margin contribution moving forward. Again we expect to start using this presentation of revenue in our filings with the SEC starting in the first quarter of 2019 which will provide a better view into our business and strategy moving forward.
Moving to the balance sheet, in December 31, 2018 we had cash balances of 56.1 million. The balance excludes the 8.5 million letter of credit issued in the first quarter of 2018 in favor of one of our supply chain vendors and is reflected as restricted cash. We expect the restricted cash to come back as unrestricted cash beginning in the second quarter of 2019 as we will be making the transition to our new supply chain vendor at that time. Including the restricted cash, our cash is up $7.4 million over December 31, 2017 and up $5.6 million from the September 30th. We ended 2018 with 67.8 million of accounts receivable up 16.8 million from September 30, 2018 and up 6.6 million from 61.2 million at December 31, 2017 on an ASC 606 adjusted basis.
our DSO increased to 55 days at December 31, 2018 due to the timing of billings that were weighted more towards the back half of the quarter. We expect our DSO to normalize back to the mid 40's as we move into 2019. Inventory was relatively flat sequentially in year-over-year but we continued to expect to see an increase in the first half to 2019 due to the planned new product releases and our supply chain vendor transition. Deferred revenue was 99.6 million at December 31, 2018 up 11.4 million from the balance at September 30, 2018 and up 1.6 million from December 31, 2017 on an ASC 606 adjusted basis.
As expected deferred revenue increased in the fourth quarter of 2018 similar to historical patterns as we've built a significant portion of our annual maintenance revenue in the fourth quarter. Contractually committed backlog was 357.2 million at December 31 and has grown by 22.3 million or 7% over the past year on a 606 adjusted basis. Our backlog is a significant asset and we remain focused on continuing to harvest it to contribute to revenue. Adjusted EBITDA, free cash flow, and moving forward. Total revenue backlog was down slightly from September 30, 2018 due to delay in signing and apprise deals that is now signed in the first quarter of 2019. I'm confident we should see a backlog increase in 2019 given our market opportunity, brand, and new product introductions as we add more LTAs.
At the end of Q4 long-term debt was 220.6 million down 8.8 million from the balance at September 30th. Debt was reduced due to repurchases of $11 million of convertible notes in the quarter offset by the accretion of the value of the remaining convertible notes. Long-term debt was up $16 million year-over-year due to the additional term loan drawn under the amendment in May and the reduction in short-term debt offset by the repurchase of convertible notes during the year. We were compliant with the leverage covenant ratio at the end of the fourth quarter and have significant cushions with our required covenants.
And finally to strengthen our ability to achieve our business objectives we are continually working to establish a more prudent long-term capital structure for the company, being aware that our convertible bonds mature in June 2020. We intend to address these maturities in the near-term by opportunistically reevaluating refinancing alternatives in a manner that provides the best outcome for the company and our shareholders. However at this time we will not be making further comments on sharing more information on our capital structure plans.
Now turning to free cash flow, we achieved the high point of our free cash flow guidance for 2018 with 5.9 million in free cash flow for the year. This is the fourth quarter of -- the fourth quarter of 2018 was the strongest free cash flow quarter in seven years. After normalizing for the 9.3 million off cycle bonus payment in the fourth quarter of 2017, free cash flow was up 7.3 million in the fourth quarter over the prior year which is consistent with the improvement in adjusted EBITDA. Working capital is typically a source of cash for Avid in the fourth quarter due to seasonality of maintenance billings. For the fourth quarter working capital was a source of 6.9 million which compares to a source of cash of 3.2 million in Q4 2017 when you normalize for the bonus payment.
With that review of Q4 and the full year 2018 let's turn to guidance. As we exit 2018 with good momentum we are pleased with the progress we're making. At this -- including the first quarter of year-over-year GAAP revenue growth since 2016, strongest quarterly free cash flow in seven years, four consecutive quarters of sequential non-GAAP gross margin improvement, early proof points that our $20 million internal operating initiatives are helping to lower operating expenses and our continued improvement and forward-looking metrics. At this time we are providing the following guidance for the first quarter of 2019. In the first quarter we expect revenue to be between 96 million to 104 million. Our first quarter revenue is seasonally lower than the fourth quarter which accounts for the sequential decline. But we expect to maintain year-over-year growth for the first quarter of 2019.
In the first quarter of 2019 we expect adjusted EBITDA of between 7 million and 12 million. We are also reaffirming our full year 2019 guidance we provided at our Analyst Day in November 2018. Our 2019 revenue guidance remains 420 million to 430 million. Our 2019 adjusted EBITDA guidance remains 60 million to 65 million, our 2019 free cash flow guidance remains 12 million to 17 million. With that I'd like to turn the call back to Jeff for closing commentary.
Alright, thanks Ken. So we're excited excuse me -- we're excited about our opportunity in 2019. Management remains committed to and will focus on continuing to deliver better business and financial performance and thus enhancing shareholder value. We will continue to deliver on our strategy which includes enabling growth in our software and subscription business with our focus on the e-commerce business and enhancements to our accretive products suites. These efforts are expected to improve the overall performance of the business with revenue growth, increased gross margin, and reduced operating expenses resulting in improved adjusted EBITDA margin and improved free cash flow generation in 2019.
The ongoing industry disruption requires new technology innovation to solve problems for all types of our customers. The [indiscernible] maintain is intense focus on innovating the media creation, content management, and media delivery technologies they need to improve their opportunity. External factors including continued consolidation in the media industry and macro growth concerns pose potential risks. But we believe that the continued growth in content demand by consumers globally, our ability to capture larger wallet share as the industry consolidates, and our continued innovations will benefit us.
Next month we will host the 6th Annual Connect 2019 Conference in collaboration with the Avid Customer Association which by the way has grown to over 30,000 members. We plan to unveil several new product innovations that will surprise and delight our customers and the industry. Right after Connect is the NEB Show, the largest industry event of the year. We anticipate our introductions will help Avid build further sustainable and profitable growth as we progress through 2019 especially in the second half of the year. I hope some of you will take the opportunity to witness the energy of Avid and its community at these events as we work to move our industry forward technologically. Even if you can't be there you'll see lots of new information about our activities during the month of April. We will continue to make smart R&D investments needed to drive innovation that will keep Avid at the forefront of the industry and enable future growth with also further enhancing Avid's unique differentiation. All this is done as the leadership teams continue to focus on improving our operational execution to drive better financial results. So with that I'll turn the call back to Whit.
Thank you Jeff and Ken. That concludes our prepared remarks and we are now have happy to take your questions. Operator, please go ahead.
Thank you. [Operator Instructions]. We will go first to Samad Samana with Jefferies.
Hi, good afternoon, thanks for taking my questions, and a nice finish to 2018. Few questions on our end, maybe if first to get, I think the company mentioned new products coming to market soon, and I know I don't want to steal your thunder from the upcoming conference but maybe could you give us some idea of where you're focused and are these prices going to be continuing the trend for more subscription based pricing and maybe just help us think about how it expands the opportunity, is it new SKUs, is it something that moves into a different direct -- new markets, any color will be helpful?
Yes sure, obviously I don't want to unveil what the products are. We want to save that for the event. I will say this because I hinted to it in the remarks, so I'll maybe be a little more crisp about it. You are going to see some things coming out of our creative tools suite, some of our iconic products like Media Composer and Pro Tools. You're going to see some interesting things coming out of the show that will give us some new SKUs. It will also give us vastly improved products in that area, and we think it's going to help us really expand on the opportunity and that includes subscription offering for that business. We will also be talking about some areas around cloud and SaaS that are going to be pretty exciting. And with our partnership with Microsoft, one of our major innovations we have been working on for last 18 months with them is going to be unveiled at the show. And then in general, there will be a number of new products that are going to help us continue to expand our SKUs and really as I said help us -- give us additional growth engines to add to the company.
Great, and then maybe a couple for Ken. The company has done a good job of executing against the operational initiatives and I was just curious it seems like you guys are tracking ahead of maybe some of the internal part of the targets provided at the Analyst Day. As we think about 2019, how much of a line of sight do you have on the 20 million and do you think that ultimately there's more room to drive greater efficiencies, and are there any examples that you can provide us of what you think could be a next wave of additional cost synergies to drive?
Yeah, so I will say that we are slightly ahead of the plan that we provided at the Investor Day. We have about 3.6 million of the $20 million of savings initiatives identified in our P&L from the second half, so on a run rate basis slightly over $7 million. So on the OPEX side, there are continued initiatives that we're driving that occurred in the first quarter of 2019 that will improve our OPEX spend and we should be able to achieve the $10 million run rate that we expected by the end of the quarter. The next wave of savings is on the cost of sales side which is the supply chain transition. We do expect some benefit starting in the first quarter but most of the benefit will be towards the end of the second quarter on the supply chain once that transition is completed. So really those are the main items that we're looking forward to. At this point, we're confident on the $20 million. As we make more progress, we'll revisit that number but at this point we're committed to the $20 million program.
Got you and then, on the -- thanks, I think there is a lot of helpful color in terms of the enterprise deals and how that impacted ACV. I guess maybe just taking a step back and looking at it from a high level as far as guidance goes, how many as you think about the 2019, how often or is that -- when you factor in guidance, how much do you factor in deals potentially moving around or slipping, I guess how much visibility is there today into the guidance that you've given and how much volatility can deal timing create just as we think about our models and factoring that into our model for that year?
Yeah, I would say that we have very good visibility as we start the year in terms of what revenue should come in. I mean, we started the year with $460 million in terms of backlog. The ACV is roughly $250 million, so that backlog is turning into revenue in about 20 months. So, I feel good about kind of 60% to 65% of the revenue in terms of what we start the year with. As we go into the quarters, you get more visibility. So for Q1 given the backlog and then kind of deals that the teams are working on as we start the quarter, it's more like 75% for Q1, 80% so that's kind of the visibility we have. I would say for the year certainly there are deals that could slip quarter-to-quarter, but our yearly guidance we feel really good about the yearly guidance, given where we start the year and kind of where we saw our cash revenue growth last year, the new products that we have coming out. And really I think the momentum the whole team has going into 2019. So I feel like the guidance we have is achievable and I'm really excited about our results going into 2019.
Great, and then last question for me Jeff for you, I guess when you think about it from just a macro spending environment most staffers [ph] do pretty well. I'm just curious how the pulse is with customers and what the view and the end market spending looks like for Avid end markets? And thanks again for taking my questions.
Absolutely, no problem. So overall I think that on a macro level it's all holding up pretty well. And there's obviously, I guess I can say there are always winners and losers as things progress from an industry perspective and overall it's holding up quite well. There is consolidation going on for us, obviously we have to manage our way like any company does through consolidation but for us that's actually pretty much a good thing. Because when we look at consolidation and what people are trying to do in driving better operational efficiencies Avid has a pretty unique proposition with the media central platform and our whole strategy around deploying enterprise platform and the whole concept of that is to help companies really look for operational efficiencies. So because we've got a set of solutions that are very much around how we help media companies and just enterprise in general who have media requirements, how we help them really create more efficient workflows, more efficient operations -- for us that plays well for us because we're one of the companies helping to do that. So I think it's on one side. Your side is just generally content creation is continuing to grow pretty rapidly and so that really is helping us from everything around our creative tools but also a lot of the solutions that we sell around creative teams and production teams. So it's still a pretty vibrant market in content creation in general.
And we'll go next to Steven Frankel with Dougherty & Company.
Good afternoon and I know you want to get away from talking about quarter-to-quarter bookings because of volatility. That said, unless you're going to tell me that business has changed typically Q4 was a big bookings period for your business. Your end customers tended to buy a lot that way and I see bookings ex-China down 22% year-on-year, how much of that was the two deals that slipped out of the quarter versus maybe some demand headwind with your tier one customers in general, start there?
Yes, so I think it's two components, the two deals are a large component of the -- when you say 22% decline, a large component of that decline.
Would you give ballpark what those two deals accounted for and what would have accounted for in bookings?
Roughly $18 million one of which is already signed in Q1. The other one we made the decision not to re-sign because it wasn’t at the margin threshold that we felt was right for our shareholders. And that customers are now buying at full list price so it's better margin for us in Q1. So at this point we're still in discussions with our partners. So $18 million of it is just with those two events. The other part of it is when you have multi-year bookings that occurred last year and on a few maintenance agreements they SKU the numbers and that happened in Q4 and they were signed for multi-year so it didn't renew in Q4 2018. And that was a headwind for us in terms of the bookings number. Again, there is going to be quarterly fluctuations in bookings. We are more focused on creating backlog that improves every quarter. There could be a quarter that could be a quarterly fluctuation and that is why we're focused on kind of looking at recurring revenue, backlog as our key forward-looking metrics in ACV. So I think that's really how we're positioning -- the metrics that Jeff and I look at to judge how we're doing on a forward-looking basis. And that's kind of how we think we should be communicating to our investors.
But unless I am looking to stronger product bookings were down, I understand multi-year maintenance but product bookings were down almost 40 million year-on-year in Q4?
So, maybe I can add a little more color Steve, this is Jeff. Look the thing you have to be careful of in looking at quarter-to-quarter bookings now and I know bookings in the years ago was treated as a proxy for revenues. Today no longer -- there's no correlation between the two anymore on a direct basis within the quarter. We've moved -- as you know we've been talking about this for a couple of years, we've been moving to long-term agreements with a lot of our business and those long-term agreements are by nature lumpy because they're large and they're multi-year. The average is two to three years on some of these agreements. And so when you look at bookings as just an isolated number in a 90 day period you're not going to get the right picture of what's going on, that's why we have to look at things on LTM basis or a full year basis to do the proper comparison from that regard. And I'll say this, product bookings couldn’t have been down like that if we delivered the result we did. The bookings that came-in in the quarter for the billings in the quarter were strong obviously because of the result we delivered.
Okay, different subject, how about an update on the China agreement you signed last year, how has that customer done relative to the metrics that were put in that agreement, the quarterly goals and annual goals?
So, doing relatively well as far as -- there's actually two partners there. One does the tier one level in China and one we know the big enterprises, you know, CCTV as example. And then one does the rest of the business for the country including the music and audio business and we call tier three of individual creators [ph]. The one partner that does the general market did very, very well in the year. The partner that did the tier one business had a little bit of a miss for that tier one business but we see that getting made up here in the near-term and their performance in general has met our needs for the business level in that market. So we're not -- we're happy with the results so far and we're not concerned about the progress of that market for us.
And in aggregate our minimum revenue commitments for our SPAs and EAs were above 100%. So I just want to make sure that what we put in, in terms of ACV we deliver always over 100% in our commitments and they generally average 105% to 1007% as people typically order more than the commitment.
Okay, great. And I think I heard you make some comment during your prepared remarks about perpetual demand among the tier one customers and could you clarify that a little bit?
Well, I think that I mean in general obviously as we move from perpetual to subscription, you know, subscription is obviously a lot of the business is going to subscription that has not really happened that much yet in the big enterprises Steve. It is starting, there are some customers who have started to sign kind of an enterprise EULA with us on a subscription basis. And that's just in the early stages, we've signed a handful of very large media companies to those agreements. So subscription is starting to come, we'll see a subscription being launched officially from us during 2019 where we will have actually a formalized enterprise licensing program for what we call teams and enterprises, not just the individual creative. So I think the remark was just about in general how we see perpetual -- the move from perpetual subscription. So far it's really held its own. I mean our subscription is growing so fast that it has really kept software revenues that you can see from the information it can share and the data is pretty well. And I will say that you may have also been talking about the media central enterprise platform, that product actually has a very strong Q4 and that was the strongest quarter we've had for the media central platform since 2016.
And that was the platform Steve that we introduced the revised platform in July. We had a very good Q3 and in Q4 the growth rate on media central was over 24%. So that's all perpetual licenses today. So, my comments that perpetual has stabilized, a lot of it is from that media essential growth that we have.
Okay, great and then in terms of your free cash flow guidance for 2019, how should we think about the seasonality of that, is that going to principally come in Q4 of next year or given more recurring revenue might we see free cash flow on a more ratable basis through the year?
You'll see free cash flow more geared towards Q4 but we should have more free cash flow in the first half of this year than last year just because of the better profitability in terms of better cash EBITDA and we expect to have better performance really across every quarter. But most of it will be more weighted to the second half. Although we expect you know improvement right away in Q1 2019 from where we ended last year.
And just a clarification because it's moved around over the last couple years, will bonus payments be made in Q1 this year?
We're going to actually -- our plan is to spread it half of them in Q1 and half in Q2.
Okay, great. Thank you.
That will provide more what I would call smooth out the cash flow streams, that's our plan.
And we'll go next to Hamed Khorsand with BWS Financial.
Hi, could you just first talk about what you're seeing on the ordering front from your enterprise customers in regards to M&A activity in the industry? You got broadcasters or do you have studios especially these last couple of quarters now so if you could just clarify?
Well generally let me say this that we called the tier one business or enterprise you can kind of use that interchangeably for us. The tier one enterprise business has been recovering quite well. Last couple of quarters it's been on improving trend versus prior year, so I'd say in general we're seeing a much better situation in tier one. We saw that in Q4. So I think you know from that standpoint we're seeing improving trends. As far as you had mentioned the mergers acquisitions, I'm assuming you're referring to some of the deals going on, the mergers of some of the bigger media broadcast companies. As I said to Steve earlier, Avid is in a fairly unique position because we've got these platforms as you saw about helping customers arrive operational synergies. And our footprint is pretty big in most of these companies. So a lot of our work with these companies when they consider merging is really helping them look at their facilities and infrastructure and how we can bring them together. And often for us this is actually an opportunity as a company allows us to come in and really position, meet the new media central platform as a way to help them you know look at how they're going to create operational efficiencies or synergies. So, so far I would say it's been good for us, this activity but again we got to watch it very, very closely. Obviously on a grand scale some of these big companies if they're doing an acquisition they will sometimes pause for a moment. But that generally flushes the stuff out pretty quickly.
The industry is moving pretty quickly on that and so there's a lot of competition around content creation, a lot of competition about OTT services as I'm sure you read every day in the paper. And so they really can't pause too long any of them because they'll be in a competitive disadvantage if they do. Things are just moving that quickly.
And then the comments you are making about tier one rebounding in Q4, is that catch up or is that normalized what you saw in Q4 from tier one?
Well, it was better than Q4 in the prior year. So I would say it's better than the trend we saw in the prior year for Q4. Just in general I think there's two things helping that, one is I do think there was a little bit of hesitation in 2017 and early 2018. I think the hesitation is kind of subsiding a little bit. I wouldn’t say it's completely gone but it's subsiding. We've been able to secure some pretty important tier one pieces of business, we are talking about Q4 right now but specifically in Q4 we see that continuing in 2019.
Obviously we are cautiously optimistic in what's happening and on the studio front it's still moving pretty quickly. Netflix is driving things pretty hard on the content creation front and for someone like Avid that actually helps us.
And could you just clarify during the statements you were making here, you guys said that you are expecting Q1 to be up but your guidance implies there's a chance they could be down $2 million. So why the confidence in that commentary when the numbers don't show that kind of confidence?
Well I think if you look at the midpoint you'll see that it's up just in terms of how we view it. But I'm just showing a range and we're confident that we're going to get I would say more in the midpoint but we show a range just for purposes of managing risks.
Again, I mean so what's the risk that you think it could be down year-over-year, what's not going to get signed?
At this point I think it's just timing. I mean I think obviously tier one is a lumpier business, that enterprise business is lumpier. Look as we said we are really optimistic, cautiously optimistic but optimistic about our 2019. We've shown guidance on a full year that's going to have a positive growth on basically on all key metrics. And so just as we are giving guidance quarterly we're trying to be prudent and we're trying to be careful on how we are giving guidance because tier one accounts timing wise on contract negotiations can shift one quarter to another. And I'll tell you this, we're very interested in continuing to improve the economics of our contracts and our relationships and I would quite personally rather have something slip if we're still in negotiation, trying to get the right outcome for the company. And so -- but that said we're obviously being prudent but I agree with Ken that I think we're feeling good about how things are going to progress this year.
Okay, thank you.
Yes, thanks Hamed.
At this time I will hand the call back over to our speakers for any additional or closing remarks.
That concludes our remarks for today. We look forward to speaking to you all again soon. Thank you very much and good evening.
That does conclude today's conference. We thank you for your participation.