Avid Technology, Inc. (AVID) CEO Jeff Rosica on Q2 2019 Results - Earnings Call Transcript

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About: Avid Technology, Inc. (AVID)
by: SA Transcripts
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Earning Call Audio

Avid Technology, Inc. (NASDAQ:AVID) Q2 2019 Earnings Conference Call August 5, 2019 5:00 PM ET

Company Participants

Whit Rappole - Vice President of Investor Relations

Jeff Rosica - President and Chief Executive Officer

Kenneth Gayron - Executive Vice President and Chief Financial Officer

Conference Call Participants

Samad Samana - Jefferies LLC

Nehal Chokshi - Maxim Group LLC

Steven Frankel - Dougherty & Company LLC

Hamed Khorsand - BWS Financial Inc.

Operator

Good day, ladies and gentlemen, and welcome to today’s Avid Technology Second Quarter 2019 Earnings Call. I'd like to remind everyone that this program is being recorded.

And at this time, I’ll turn the floor over to Whit Rappole, Vice President of Investor Relations.

Whit Rappole

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for Avid Technology's second quarter 2019 earnings call. My name is Whit Rappole, Avid Technolog’s Vice President, 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. In their prepared remarks, 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 time for your questions.

We issued our earnings release earlier this afternoon and we have prepared a slide presentation that we will refer to on this call. The press release and the 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 reference certain non-GAAP financial metrics and operational metrics. In accordance with Regulation G, both the appendix to our earnings release today and our Investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational measures used on this call and in the presentation. Unless otherwise noted, all figures noted by management during this call are non-GAAP figures.

In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcome.

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 for the year ended December 31, 2018 as filed with the SEC.

With that, let me turn the call over to our CEO and President, Jeff Rosica, for his remarks.

Jeff Rosica

Well thanks Whit, and thanks to everyone for joining us today. Avid’s Q2 results show that we did face slight revenue headwinds due to some constraints from our supply chain transition. They were taken into account in our cautious Q2 outlook noted in our Q1 earnings call, which did bring our results in at the lower end of our guidance.

That said, in spite of these challenges, we are exiting the first half, fully in line with our own internal planning, and I am pleased that Avid is entering the second half better positioned than we have been in many years.

Today, along with CFO, Ken Gayron, will discuss the factors in our performance and the consistent indications of average strategic plans, and business execution have us on a good trajectory for the second half and the full-year. We'll also review progress on our major operational initiatives, success in new product introductions and momentum with customers and partners.

So let's start with my Q2 observations. The slight revenue headwinds that we encountered during the quarter impacted our results, yet we're confident these factors don't change what we see as the company is improving longer-term trajectory nor our view of the full-year 2019.

In fact, we are continuing to see significant year-over-year growth in average key financial metrics, including adjusted EBITDA, free cash flow and net income per share. In Q2, both revenue and gross margin were up year-over-year, but only fractionally. Towards the end of Q2, as I just mentioned, because of our supply chain transition, we did face some constraints due to order timing and product mix, which kept us from fulfilling orders for certain audio and video hardware products.

Our continued strong growth in software subscriptions and the addition of new and extended long-term agreements during Q2 give us confidence in our performance trajectory. We also continued to realize additional benefits from our Smart Savings initiatives and have achieved $13 million in OpEx savings on an annualized basis as of the Q2 close. We are looking forward to achieving the remaining $7 million in COGS savings in 2019 as we realize the benefits of our supply chain transition.

Avid has now completed the exit from our former supply chain partner in Asia and we are presently ramping up production at our new partner in the Americas. Inventory on hand will bridge to the new supplier and we are prioritizing bringing up the production lines according to forecasted demand. We'll have to carefully manage this process as we are seeing strong demand in certain audio products that could create some constraints as we ramp up.

While we have encountered issues that can be typical when undertaking such an extensive transition, we are starting to achieve our targeted cost savings and reduction in inventory and don't anticipate that any short-term disruptions if any are encountered in the near-term would change our outlook on a full-year basis.

We've also continued to make significant progress in our work with large media companies and studios to support their own efficiency initiatives, bringing their crucial workflows into the cloud, including in remote editing, backup of work in progress, archiving, and disaster recovery.

As discussed last quarter, the solutions for these major referenced customers include our cloud-based MediaCentral platform and NEXIS cloud storage, which are running on the Microsoft Azure cloud. While the revenue from these projects was small in Q2, we're looking forward to the revenue to ramp up in the second half of the year and beyond as we continue to bring more of these demanding media workflows into the cloud for these and other clients.

Additionally, Avid has recently secured additional long-term agreements with major customers and partners. Among these is the renewal in early July of our multi-year agreement with the organization of produces the live television, radio, and digital coverage of the most watch international sporting events.

Disagreement continues a successful relationship between our organizations, which started back in 2012 and it last until the summer of 2022 to provision production capability and services to support their international summer and winter sports events that are broadcast globally. Separately, also Avid - Avid also signed a new strategic purchase agreement in Q2 with one of the largest U.S. retailers of Avid music and pro audio products.

Now turning into Q2 performance. We believe Avid continues to demonstrate overall that our improvement plans and strategic changes are making a meaningful impact on our profitability and cash flow. Revenue was basically flat year-over-year in Q2. It benefited from continued growth of our software subscription business, which was up 17% year-over-year in the quarter and from certain hardware products including live, sound and storage.

However, as discussed earlier, revenue was slightly impacted by supply chain constraints. E-commerce and software subscriptions also continued to make major contributions in Q2. Revenue from e-commerce activities grew nicely and was up 19% year-over-year in the quarter. Software subscriptions continued their strong trend and paid subscription surpass 147,000 at the end of Q2, which is up 40% year-over-year.

Gross margin improved only slightly year-over-year. During Q2 gross margin was negatively impacted from an adverse mix as the large high margin storage deal, which was discussed in our Q1 call to not repeat during Q2 as we had expected. While certain lower margin audio and video hardware products were stronger in the quarter.

We're happy with the overall positive trajectory of gross margins and expect to see additional improvement in margins during the second half from shipping new higher margin products, normalization of the product mix and realization of savings from our supply chain transition.

Avid delivered improved profitability in Q2 as our operating expenses were down significantly due the success with our Smart Savings initiatives. We realized strong year-over-year adjusted EBITDA growth of 78% and had a positive net income per share in the quarter.

Finally, thanks to the improved cost structure and strong execution overall, we delivered improved free cash flow generation during the quarter versus the prior year. Although, it’s remind you Q2 cash flow with seasonally weak and included the normal 2018 bonus payment as well as expenses for our NAB show and Connect events.

Overall, we're on a good performance trajectory with consistent improvement in the key financial metrics of revenue, adjusted EBITDA, free cash flow and net income per share. Additionally, on the last 12 months basis, we are showing significant improvement in all of these metrics. We're encouraged that we're exiting the first half of the year on a trajectory to achieve our full-year guidance as we enter this seasonally stronger second half coupled with an improving sales pipeline and a more efficient cost structure.

Looking forward, we remain optimistic for H2 as we begin to realize the benefit of new products that we expect to drive growth later in the second half and beyond. We also anticipate completing our Smart Savings initiatives and fully realizing the benefit in the second half.

The entire OpEx portion is essentially complete and now we're well positioned to realize the benefits in COGS from ramping up a lien base supply chain over the next several months. Also, Avid is intensifying the focus on delivering a consistently profitable and predictable financial model built on growing recurring revenue driven by our growing subscription offerings and our long-term agreement strategy.

Importantly, Avid's product innovation is on a strong accelerating pace with several recent strategic introductions in video software and integrated solutions for pro audio and music. Our all new Media Composer 2019 dramatically strengthens our category leadership and better positions us to capture the emerging generation of film and TV editors and video creators.

Our next-generation cloud-enabled platform, MediaCentral 2019 addresses the needs of small to medium sized media organizations that have been seeking multi-site collaboration and greater connectivity for their news, sports and post operations. Both of these software products started delivery in late June.

In the second half, Avid begin shipping new audio mixing products, the Avid S1 and Avid S4, which bring the power of our category-leading higher-end systems within the reach of smaller studios and independent creators.

Our latest introductions have all been very well received by media creators globally and we're already experiencing pipeline improvement for the second half based on the new product momentum.

In summary, Avid's continued to focus heavily on optimizing our operations and driving technology and product innovation in order to support more profitable and sustainable growth, and thus deliver greater shareholder value that were really just getting started.

So with that, let me turn the call over to Ken to provide details on our financial performance for Q2. Go ahead, Ken.

Kenneth Gayron

Thank you, Jeff, and good afternoon, everyone. As noted above, Jeff and I are referring to non-GAAP figures unless noted.

For those new to Avid, seasonality impacts sequential comparisons, so it’s important to look at our year-over-year comparisons to assess the performance of our business. As Jeff outlined earlier, we are making substantial progress on our initiatives to improve our financial performance.

While we continued to see year-over-year improvements in adjusted EBITDA and free cash flow, we faced certain revenue headwinds during Q2 related to our supply chain transition that brought our Q2 results at the lower end of our guidance. With that said, our first half results for 2019 were in line with our plans and we enter our second half with a strong foundation to achieve our 2019 annual guidance.

Let's now get into the details. Turning to the income statement, GAAP revenue of $98.7 million for the quarter was fractionally up $100,000 year-over-year. We continue to see good growth in our e-commerce and subscriptions business for Pro Tools, Media Composer, and Sibelius and had a strong quarter in our MediaCentral perpetual software business.

Additionally, we saw favorable growth in our audio business related to our live sound product lines, but we had lower maintenance revenue in the quarter with our continued shift in our business model from perpetual to subscription.

Gross margin was 59.4% for the quarter up 20 basis points year-over-year. The Q2 increase is due to 140 basis point improvement in our software license and maintenance margin offset by 170 basis point decline in our hardware and integrated software gross margin from adverse product mix during the quarter. We expect to see more favorable gross margins moving forward from our supply chain transition in a more normalized products mix in the second half.

Operating expenses for the quarter were $51.8 million, down $4.2 million from Q2 2018. The improvement in operating expenses resulted primarily from the realization of $3.2 million from our Smart Savings initiatives that we began in the third quarter of 2018.

Through June 30, we have realized $13 million of annual operating expenses savings year-over-year and have largely accomplished the expected operating savings targets we set last year. We expect these lower levels of operating expenses to continue throughout 2019.

Net income per share increased to $0.02 in Q2 2019, up $0.12 from a loss of $0.10 in Q2 2018, primarily due to the improvement in operating expenses. Adjusted EBITDA of $9.4 million for the quarter was up $4.1 million or 78% year-over-year, primarily from lower operating expenses. Adjusted EBITDA margin of 9.5% was up 410 basis points year-over-year.

Free cash flow was negative $4.5 million in the second quarter of 2019, compared to negative $8.7 million in the second quarter of 2018, excluding the impact of cash bonus payments of $6.4 million in Q2 2019 and $8.3 million in Q2 2018, free cash flow would have been $1.9 million in Q2 2019, up $2.3 million year-over-year.

Now moving to annual contract value and recurring revenue. The percentage of our revenue that's recurring has steadily increased, providing us with more confidence in the predictability of our business. For the 12 months ending June 30, 2019, 58% of total revenue was recurring, up from 51% in the 12 months ending June 30, 2018. We expect recurring revenue to continue increasing over time given the growth we are seeing in subscriptions and our focus on adding new long-term agreements. We reaffirm our goal of reaching 70% LTM recurring revenue in the next two to three years.

ACV was $246 million at the end of the second quarter, up slightly year-over-year driven from our strategy to focus on higher margin software subscriptions and long-term agreements, offset by lower maintenance revenue. We expect to see continued growth in ACV over time given our strategy towards signing more long-term agreements and growing our subscription business, plus stabilization of the maintenance revenue.

The decline in maintenance was related to the ongoing transition from perpetual to subscription for our creative software products as well as the impact of lower maintenance from certain customers as they upgrade their storage systems. We expect maintenance is stabilized during the remaining quarters of 2019 as stronger hardware and integrated software revenues that started in the second half of 2018 should provide a catalyst to our maintenance business as these maintenance contracts start renewing.

Now moving to the composition of our revenue. In the second quarter of 2019, revenue from high-margin software licenses and maintenance, which includes both subscriptions and perpetual licenses, was $50 million, down $1.4 million year-over-year due to the decline in maintenance, partly offset by the increase in subscription and perpetual. Software licenses and maintenance was 51% of our revenue during the second quarter.

The gross margin for software licenses and maintenance was 85.2% during the second quarter, up 140 basis points over Q2, 2018 driven by the growth and subscriptions. We expect this category to grow modestly and continued to produce software gross margins of 85%-plus.

Moving to the next revenue line. Hardware and our integrated software, which we also called integrated solutions, had revenue of $41.7 million in the second quarter, up 6% year-over-year on the strength of our live-sound product. Hardware and integrated software contributed 42% of total revenue in the quarter.

These solutions, which combine hardware with high-value, high-margin software, generated attractive margins. In Q2, gross margins from hardware and integrated solutions was 36.5%, down 170 basis point from Q2, 2018, due to adverse product mix in the quarter with the higher mix of lower margin audio and video hardware sold in Q2, 2019 versus the prior period.

Although gross margins in hardware and integrated software were lower in Q2, 2019 versus Q1, 2019, we expect to see gross margin improvement in this area in the remainder of 2019 as a result of, one, a more normalized products mix; second, introduction of new products in audio and video in 2019 that have stronger margins; third, expected benefits from the transition to our new supply chain vendor that will result in cost reductions in freight and overhead.

The balance of our revenue comes from professional services, which is a smallest portion of our business. Professional services revenue was $7 million in the second quarter, down 10% year-over-year as we are more strategic and selective in the professional services business we take on. With that said, gross margin in professional services are 11% in Q2, up 810 basis points.

At June 30, 2019 we had cash of $51 million, down $9.2 million from June 30, 2018, primarily from the use of cash to repurchase our convertible notes. Our cash balance at June 30 excludes $9 million of restricted cash including the $8.5 million of cash that was used to collateralize a letter of credit issued in favor our former supply chain vendor.

As we discussed above, we completed the exit from this vendor during Q2 and we received the $8.5 million of cash back as unrestricted cash in July 2019. This will be reflected in our Q3 balance sheet. Cash balance is down $4.3 million from March 31, the negative free cash flow in the quarter, which was expected as this is our seasonal low point and free cash flow for Avid.

We ended the second quarter with $58.6 million of accounts receivable, up $10.9 million from June 30, 2018, signifying the growth in the business. Our DSO is 54 days at June 30, 2019 due to the timing of billings later in the quarter. We expect our DSO to normalize back to the mid-40s as we’ve move further into 2019.

Inventory was $34.1 million at the end of the second quarter, up $2.3 million over June 30, 2018. The inventory levels remains elevated as we are completing the supply chain transition and are expected to decline the second half of 2019 as we burn off the remaining inventory from the prior supplier.

Contract assets totaled $18.5 million at the end of the second quarter, up from $15.5 million at June 30, 2018 as a result of growth in our subscription business. Deferred revenue was $93.5 million at June 30, 2019, down $4.2 million from June 30, 2018 due to the amortization of $5 million in non-cash revenue.

Contractually committed backlog was $351 million at the end of Q2, up $1 million year-over-year on increase long-term agreements. Contractually committed backlog was down $7 million from the end of Q1 as our billings from backlog exceeded new agreements.

We expect that the strong pipeline of new long-term agreements including the ones Jeff mentioned earlier, which have already been signed during the third quarter will contribute to increase contractually committed backlog going forward.

At the end of the second quarter, long-term debt was $200.2 million, down $30.5 million from June 30, 2018 due to the repurchase of convertible notes from the additional term load proceeds from the May, 2019 refinancing. Additionally, long-term debt was further reduced by $29 million as the convertible notes due 2020 were reclassified as a current liability as of June 30, 2019.

As we are previously disclosed during the second quarter, we completed a tender offer to repurchase $74 million of principal value of our convertible notes due 2020 through the additional term loans that mature in May 2023. These refinancing transactions result in a small increase in our total debt principal of about $5 million while reducing the term loan interest rate.

At the end of the quarter, we were compliant with our leverage covenant ratio and have significant cushion with our required covenants. We expect to retire the remaining 29 million in convertible notes due June, 2020 when they mature, and we have sufficient cash on hand plus $22.5 million of undrawn revolver capacity in additional free cash flow that's expected. So we are comfortable with that level of maturity.

As we finish the second quarter of 2019, we are pleased with the progress we are making. With that said we are completing the supply chain transition and that transition contains inherent risks. So we remain appropriately conservative in our third quarter guidance.

In the third quarter, we expect GAAP revenue to be between $101 million to $109 million, showing year-over-year growth at the midpoint. In the third quarter of 2019, we expect adjusted EBITDA to be between $13.5 million to $18.5 million.

We're also reaffirming our 2019 annual guidance. 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.

Also, as our business strategy is showing clear signs of improved profitability, we are adding guidance for a full-year 2019 non-GAAP net income per share of $0.60 to $0.72, assuming 43 million shares outstanding.

With that, I'd like to turn the call back to Jeff for closing commentary.

Jeff Rosica

Actually, I think we turned it back to the operator, right.

Whit Rappole

Thank you. Actually, that concludes our prepared remarks. We are now happy to take your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And first from Jefferies, we'll hear from Samad Samana.

Samad Samana

Hi, good afternoon. Thanks for taking my questions.

Jeff Rosica

Hi, Samad.

Samad Samana

Maybe I'll start-off with thanks for all the color on the supply chain transition and I think it's really helpful for us to understand and if you guys did caution us last quarter that there could be some risks around it. But maybe if we can double click on it a little bit more just to understand.

So there's no more risks related to the legacy partner, but as you think about what the risks are as you ramp with your new partner? Could you maybe just highlight that a little bit more for us and maybe what parts of the product portfolio might have risk associated with that as well? That would be helpful as we think about the back half of the year.

Jeff Rosica

Yes. I think I'll take this one. So I think when we look at the back half of the year, I don't think we see overall risks in the back half. Obviously, there could be some timing characteristics between Q3 and Q4 as you bring up new production lines. But there's – we don't foresee any risk today that would risk our second half in totality. That's why we made the comments we made.

And really what we're talking about is we did as we've said before, built up inventory to handle the transition from one supplier to another. The risks are really only that, it's pretty normal to have some production supply chain. I don't call them issues, but as you could bring in the new product lines up, we can encounter things that we have to deal with.

But more importantly, we forecasted our audio products strength and to be honest, audio is performing better than we expected. So it will ultimately put pressure on inventories, because we are selling at such a good clip on the audio products.

But it's being managed and we'll manage through it and it will be – we don't see any issues in the second half. That's why we've still got good confidence in our trajectory to delivering on our full-year guidance. And the products that are affected are basically audio, not all audio products, but certain audio products. That's the only lines we were moving over between June, July and August.

Samad Samana

Okay, great. And then Ken maybe a financial question for you or more numbers related, but as I think about the – you noted that there is a couple of things that were headwinds to maintenance, the transition to subscription and then some customers taking lower maintenance.

Could you maybe help us understand the magnitude of those too? And then just as we think about the transition to subscription, should we see the benefit of that in the contractually committed backlog number or where should we start to see that entity in the metrics that Company is reporting?

Kenneth Gayron

Yes. So maintenance revenue was down approximately $4 million on Q2 2019 versus Q2 2018. The shift to the business model from perpetual to subscription is one of the leading drivers of that plus as we move from ISIS to NEXIS. That said we still believe that maintenance is going to be a better performer for us in the second half, and the reason is we've had stronger product sales.

The integrated solutions business has performed well for us over the last year, and as that maintenance comes up, the first year is free as those products come up for renewal with those stronger volumes, that will be a tailwind to our maintenance business. And also we're starting to see stronger renewal rate overall in certain areas. So those two will be tailwinds to our business, and it will help us, I would say have better revenue from maintenance in the second half of the year.

Samad Samana

Great. And then if I could squeeze in maybe another one. How should we think about the strength of the product refresh cycle from the new products? Should we think about that as a six months type of product cycle, 12-month or longer duration? And maybe could you help us understand what the kind of percentage uplift is in moving over to the new storage product and then your products that you released?

Jeff Rosica

Well, so I'll try to answer it. When you say product cycle, you mean the cycle between announcement, our launch and when we see revenue or awarded. How do you mean on the cycle question? Let me first clarify that.

Samad Samana

Yes. So from the release to when we start to see the impact to the business.

Jeff Rosica

So, on the software products, it depends on where it is, on the enterprise product, like MediaCentral that does have a few months kind of germination before it becomes revenue, one because when we get the orders, we've got to actually delivered on the system, and then we've got to obviously turn that to revenue, which can take some time.

So I'd say – things can happen as fast as two or three and some things it can take as long as a year on big project. So it depends. Though there has been a lot of project work going on, even though the product wasn't released yet.

So I think it gradually starts delivering results. It will. I mean MediaCentral will deliver results in the second half, the new MediaCentral. On the new Media Composer example, that will start having results right away in the second half.

On the hardware products, it converts to revenue fairly quickly because that's heavily channeled. So as soon as the product started shipping, we start delivering the channel and they start taking delivery and delivering them to other customers. So the churn there can start within the quarter, it really is about how fast we can ramp up production on the new products.

Samad Samana

Great. And then the last one and I'll hop out. Just today was clearly there's a lot of noise going on from a macro perspective, software earnings have been a little bit mixed at least as far as what we've seen. I'm just curious if there's any change in behavior at your customers from a high level or there's any increased either caution or if it's business as usual just as from a macro view that you've gotten in terms of feedback from customers?

Jeff Rosica

I wouldn't say that it's any different. I think we – it's pretty much like we've said all along, I think the video creative, the content creation business is really doing quite well and people are really adopting those tools pretty quickly. The enterprise customers as we’ve said before, is a bit lumpy quarter-to-quarter. So I don't think there's any change in trajectory on that, it’s about the same.

We actually benefit from having a couple of dozen customers in our facility last week who was on the strategic summit with us and talking about market dynamics and are they looking at our product plans, and I can talk about this because we’re very public with this on social media. So it's not like people wouldn't see that we’re promoting it.

And so our feedback from Melissa sample of our customers is pretty fresh, and I think we've got a pretty good views. I wouldn't say anything significantly has changed in our views from what we've talked about the last couple of quarters.

Kenneth Gayron

Our software business is very healthy Samad, and you can see that in the user base continues to be up over 40% in the growth and we're obviously seeing a lot of demand and that's one of the reasons why we actually took an action to increase prices that will also benefit us in the second half.

Jeff Rosica

Yes. Good point. Thanks Samad for your questions.

Operator

Next from Maxim Group, we have Nehal Chokshi.

Nehal Chokshi

Yes. Thank you. So I think there's typically September quarter seasonality and that seems what you're guiding to. Can you just remind us what are the drivers of that seasonality?

Jeff Rosica

Well, I mean, you've got both good and bad. I mean, you've got on that tailwind side, a lot of our products, not all of them, but a lot of our products are announced in the first half and so Q3 benefits from those products. At the same token, it's summer in Europe, so there’s headwind, obviously we’re managing through summer in Europe.

And then finally, we have our big European Convention, IBC in September, which actually does help us because it allows us to bring a lot of the stuff we've unveiled in the first half and clean it. NAB and Connect allows us to put it in front of a lot of the media enterprise customers in Europe in the month of September.

So again, there is seasonality, it goes both ways, but we pretty much know our seasonality of the business and obviously Q4 is a very big quarter for Avid. It is always going to be that way, it's never going to change.

Nehal Chokshi

Okay. So the reason why I ask is that I think that the guidance in a typical level of seasonality that you see from June quarters, September quarter. And given that the supply chain transition is now over, I would have expected that the little bit softness that you saw in the June quarter due to the supply chain transition would produce and above seasonal September quarter at guidance. So that's what I'm really trying to drive out here. So any color on that potential concern there?

Jeff Rosica

No, just other than what I want to clarify. One point there is that the transition out of the partner in Asia is complete. And in fact, I know Ken mentioned that we've actually even returned our letter of credits been released. So that $8.5 million put back we'll be back on our balance sheet in Q3. We already received it in July, but it will be in our Q3 balance, when we report Q3.

So that's done what the ramp up of the production and the move to lean supply chain is a several month activities. So there is still activity we'll be doing, bringing up new production. As I mentioned before, supply chain Q3. We're just going to be - we're going to continue to be as we were before cautious on the current quarter. But as we all said, we still are our feel good about our full-year guidance and we're on the right trajectory to deliver on them.

Nehal Chokshi

Got it. I understood. And then Ken you already pointed out once that we saw very good software license revenue growth up 20% year-over-year that is a significant acceleration relatives from March quarter where it was flat in the prior quarter. Is there a narrative behind that acceleration?

Kenneth Gayron

Yes. Just on the subscription side, the nice – more growth in the subscription side, across all areas, Pro Tools, Sibelius and the new Media Composer and Media Composer, which was announced at NAB had a nice uplift in June. So we're excited about that as we look at the second half. And also we had a very good growth in the perpetual side related to MediaCentral, with that new release. So those are really – that's the really the color behind the better growth in Q2 versus Q1.

Nehal Chokshi

Okay, got it. And then you guys talked about, you have a very nice pipeline for your long-term agreements. It sounds like though, that in the current quarter there wasn't significant progress in terms of new long-term agreements being signed, A) Is that correct and B) Can you give us some color as far as, how big is that pipeline perhaps maybe relative to what's already in your contractually committed backlog?

Jeff Rosica

Well, I don't know if I could share with you kind of a ratio off the top of my head, but I mean the pipeline is a bit better than we track the pipeline every quarter, year-on-year. So the pipeline is better. I would say comfortably better. We like what we're seeing from a trend.

We did not get all of like – I noticed, I commented about one of the renewals of agreements that we did in July. As we said before, we're really not focused on bookings. We're focused on really the deliveries and the revenue and the other metrics around the company.

We do look at the bookings from the standpoint of the business we need for a quarter, and we also obviously look at the booking when it's time to renew an agreement. In the case of the agreement, I mentioned on the call about that was signed in early July. We didn't push for it to be signed in June because as I think I've shared before in the call, we want good behavior from the sales team.

And so we're not incentivizing them to get stuff in early. We're making sure they get it on time. But we're not using critical boundaries for contract negotiations. That's a bad place to be putting ourselves as a company. But we are making the progress. We want to see. We saw a slight uptick in the ACV and recurring revenue this quarter. If you remember last quarters, a little bit, dip down, we saw a little bit of an uptick this quarter. We're happy with. We'll keep focusing on hopefully delivering an uptick in the second half?

Kenneth Gayron

I would say we feel good about the forward-looking metrics, first our LTM results through June 30 show were really close to the low end of our annual guidance, so the trajectory of the business. But when we look at the new product releases, both at NAB in April, I talked about Media Composer having a nice benefit in June. That's moving forward.

We have new products that were just introduced at the Summer NAMM conference. We have price increases. We have the improving pipeline that Jeff mentioned, which I'm very optimistic on granted, it's not in contractual revenue, but pipelines are growing. So we feel very good about the second half and the annual guidance that we reaffirmed.

Nehal Chokshi

Okay. A couple more questions just follow-on here. One is that the pipeline is that consists of largely existing customers or is new customers a significant portion of that pipeline?

Jeff Rosica

No, it's both. I mean, we were running about the same percentage we have been from a new customer's standpoint. The pipeline is all the above. Its upgrades with existing customers, its new project existing customers, its new customers, its also new products that we're unveiling, which give us the additional pipeline and a lot of our channel business is new customers, not all of it. There's a lot of recurring customers there, but a lot of our channel business does deliver a lot of the new customers to the company.

Nehal Chokshi

Okay. And then Ken you mentioned a couple of times on the call raise prices. What's products to these referred to?

Kenneth Gayron

These are our creative cloud products and – on the creative-software. This is Pro Tools, Media Composer and Sibelius.

Nehal Chokshi

This is basically in response to Adobe having raised prices for creative cloud.

Jeff Rosica

Yes. Well, wasn't not really response to them, obviously they did something similar a couple months before us, but it wasn't responses looking at, the business model was we move forward. We are trying to also make it very attractive for people to get on subscription and off perpetual.

And just general some adjustments that we made based on, lessons learned on the business. But those price adjustments that we made, I shouldn't say they're all increases. So I'm actually, there are some neutral, there are a couple of went down or a few of them went down. We basically adjusted, but we will see, it tailwind in our software revenues for the creative tools because of those price adjustments.

Nehal Chokshi

Gotcha. Thank you.

Jeff Rosica

Yep.

Kenneth Gayron

Thank you.

Operator

Next from Dougherty, we have Steven Frankel.

Steven Frankel

Good afternoon. Thank you. I'm trying to connect a couple dots. So you've seen this maintenance revenues decline and you're hoping it bottoms and you talk about the storage products that were bought last year coming into a year or two and helping to turn that around. And I look at the gross margin that you talked about was a mix issue in Q2, does that say that the new storage cycle has quieted down for the moment?

Jeff Rosica

No. Steve…

Steven Frankel

And that's why we didn't see a lot of high margin storage in Q2. And what's the outlook for storage between now and the end of the year?

Kenneth Gayron

So let me take that. So in the first quarter, we specifically called out there was a large storage deal that was high margin that occurred in the first quarter of 2019, those multi-million dollars in that likely wouldn't reoccur. So as a result, our margin was slightly higher in Q1.

In Q2, with that storage deal not reoccurring, the margin declined, but we're still optimistic on storage. It just a mix issue. Some quarters you sell more higher margin product like we did in Q1 and Q2. The mix was less – higher margin storage and more live-sound audio, which typically has lower margin.

And as you know, the live-sound businesses related to the concerts and that's related to the summer. So Q2 tends to be a bigger quarter for that. But we are optimistic on the storage business and we're optimistic in the second half on storage, but also, on all other elements of the business.

Steven Frankel

Was storage up year-on-year in the second quarter?

Kenneth Gayron

Storage year-on-year was up about, yes, it was up actually – Q2 year-on-year was slightly down, but for the first half, we're up double-digits.

Steven Frankel

Right. And then there was a comment early in the call about maintenance being impacted by the shift to subscription. I understand that in the Tier 3 side, but could you give us a flavor for kind of where is the Tier 1 core long-term Avid customer on shifting from perpetual to subscription?

Jeff Rosica

Hey Steve, this is Jeff. So on the Tier 1 level, let me say Tier 3 obviously is doing a lot of subscription. Tier 2, it's growing in subscription in that space too. That's more the small to medium size enterprises. It could be production companies or post production companies. That is also growing pretty well. We are launching a new team offering, which we've announced, which will be delivered in the second half, which will make team subscriptions, which will help be a more attractiveness in the kind of the Tier 2 markets.

And really big in the enterprises in Tier 1 that has started – as we've said before, there was a few customers that have gone to subscription. We've only taken a few customers into subscription in that area, mainly because our back office systems aren't ready for it, but we have taken a few big customers there and we will probably continue to take a few more, but we haven't really launched aggressively in that space as of yet.

Steven Frankel

Okay. And Ken, in the past you've given out a subscription software number and I didn't see it on the data sheet this quarter?

Kenneth Gayron

In terms of the user base? I just want to make sure.

Steven Frankel

No revenue number.

Kenneth Gayron

Yes. So we have it in the earnings slides that we do breakout subscription, actually on the earnings side is with software license and maintenance. On the earnings – on the IR data sheet, it should be there. We'll make sure it's posted for you, Steve.

Steven Frankel

Okay. I didn't see it. It could be there, I didn’t see it.

Kenneth Gayron

Within the 10-Q, that will be coming out, I think in the 15 minutes as well.

Steven Frankel

Okay. And then in terms of – the ACV is kind of stalled out. Is it your proposition that when you get the console cycle of running in the back half of the year, we should start to see ACV growing again?

Kenneth Gayron

I think we'll see ACV growing for a couple of reasons. Hopefully, ACV is heavily driven by subscription growth and the second half is first of all, seasonally strong. The second point is that of course the holiday season is important for us to grow that because a lot of our music customer, that's a heavy time for music with the holidays. We also – as we're working to sign long-term agreements at the high-end in Tier 1 and of course renewal of SPA agreements near the end of the year that will also help. We thought that's what our anticipation is.

Steven Frankel

Okay. And then what's the biggest risk factor to your free cash flow forecast for the full-year?

Kenneth Gayron

I feel very good about the free cash flow forecast. On a last 12 months basis through June, we're at $10.7 million in free cash flow. The guidance is $12 million to $17 million. Given the new products that we have, given the improved cost structure and given the fact that with the supply chain conversion, we're going to be able to reduce inventory. I feel like our free cash flow will be better positioned in the second half than in the prior year. So I think there's a lot of clear visibility to improve free cash flow for the full-year and achieving the guidance if not beating the guidance.

Steven Frankel

Okay. Thank you.

Kenneth Gayron

Thank you, Steve.

Jeff Rosica

Thanks Steve.

Operator

[Operator Instructions] Next from BWS Financial, we have Hamed Khorsand.

Hamed Khorsand

Hi. So first off, on the hardware side of the business. The last few years it's usually been the – the first half of the year has been seasonally weak and then you get this ramped in the second half of this year. The first half is much stronger than prior years. So is there a change in the seasonality or is this going to be a steady kind of performance? And what are you expecting from hardware in the second half with a continued this kind of trend that you're seeing this year?

Jeff Rosica

As we've said before, I think Hamed – and hi by the way. We had talked about back in Investor Day and we’ll continue to talk about it is we've been expanding all of our portfolio around the solutions, the integrated solutions that we are selling around the creative process.

And as we expand that portfolio as we did with the remember the original S6L live-sound expansion, which we unveiled late last year, that really was a big benefit in the first half of this year because we put a lot more live-sound products out in the concerts and festivals and in fixed facilities. And as we continue to expand those also storage has been performing quite well.

And then the second half we have more of those solutions with the expansion with the S1 and S4. So I think as I foresee it, we're going see even if there maybe very near-term headwinds from supply chain transition, what we look at the second half and we look at the full-year and even in the next year, we're encouraged by how those products are going to contribute. We're really getting more of the economic relationship from those customers now than we were before.

Hamed Khorsand

And then could you just talk about some maintenance revenue has it declined? What's the customer mix like when you go into subscription? How much of your enterprise customers have switched over from maintenance to subscription?

Kenneth Gayron

Yes. So again, on the enterprise side, I would say we're – as Jeff pointed out, we're kind of in the earlier days to move people on to subscription. That said, we have some big opportunities that we're working through that that we'll be able to talk about – as we think about the second half of the year. Those are things that we're working on today.

In terms of the actual maintenance decline, the two things that we talked about was, we are still moving on the other sides of the business on the creative side from perpetual to subscription. So that's been a headwind as well as, on the storage, as we move from ISIS to NEXIS that's also a headwind, so that resulted in a decline, year-on-year on maintenance.

That said, when we look forward, Hamed on maintenance. Our product revenue, we had – and as you pointed out, we've started to have very strong product sales. Our product sales over the last year have been fairly strong and as a result, as those product sales come up for maintenance renewal, because the first year we provide maintenance free, that will be a tailwind for us to drive more maintenance revenue as we look forward.

So we did decline and we talked about the reasons for that, but with the strong product sales that will help us moving forward. And also we're starting to see a tick up on, some of the renewal rates that we're looking at carefully here across the tiers.

Hamed Khorsand

So are you seeing a decline in enterprise customers that because now you're seeing more subscription coming in from individual professionals?

Jeff Rosica

Our subscription today is mainly the creative professionals. We are working or in the early innings of moving enterprises to subscription, we have some big opportunities. So that will become more part of the company's revenue streams as we move forward.

Kenneth Gayron

Maybe I can add. There may be confusion Hamed. So, maintenance didn't just come or doesn't just come from media enterprises. Individual creatives have a maintenance stream because when they had a perpetual license, we had an annual support program and software maintenance program.

So when they – if somebody comes on subscription and goes off of perpetual, their revenue moves from maintenance over to subscription, right. And it's not just big enterprises. We're not losing big enterprises, but we're not – I don't know of any significant or major, even sizable of any kind media enterprises moving off of the maintenance on our product or off of Avid. It really is just about that part of the maintenance headwind is all about the move to perpetual subscription.

Hamed Khorsand

Okay. And last question is how do you plan to payoff the remaining convertible debt that's now short-term?

Kenneth Gayron

Well, we had a $51 million of cash in the balance sheet. We just got back $8.5 million that was restricted. So we've got close to $60 million of freely available cash. We expect to have strong cash flow in the second half of the year, plus we have $20 million – $22 million of undrawn revolver. So I have multiple sources to pay it off. I'm just going to use cash in the balance sheet. I feel very comfortable doing that and reducing that liability.

Hamed Khorsand

Okay. Thank you.

Jeff Rosica

Thanks.

Operator

And at this time, it looks like we don't have any further questions from the audience. I'd like to turn things back to Jeff Rosica for any additional or closing remarks.

Jeff Rosica

All right. Thank you, operator, and thanks everybody for attending the questions. So as you've heard, Avid has exited the first half of 2019 on a positive performance trajectory and it is entering the second half with some confidence. We're encouraged by the progress we've made in our operational improvements and Smart Savings initiatives to-date.

We're also excited about our recent new product releases and deliveries, which we anticipate will make an important contribution to our performance in the second half as we worked to deliver the results laid out in our full-year guidance.

Thanks again to everyone for joining us today and we look forward to our next call in the fall when we report our Q3 2019 results. Until then, have a great rest of your day or evening and enjoy the rest of the summer. Thanks, everyone.

Operator

Once again, ladies and gentlemen, that concludes our call for today. Thanks for joining us. You may now disconnect.