Avid Technology, Inc. (AVID) CEO Jeff Rosica on Q4 2020 Results - Earnings Call Transcript

Avid Technology, Inc. (NASDAQ:AVID) Q4 2020 Earnings Conference Call March 9, 2021 5:00 PM ET

Company Participants

Whit Rappole - Vice President, Corporate Development & Investor Relations

Jeff Rosica - Chief Executive Officer & President

Ken Gayron - Chief Financial Officer & Executive Vice President

Conference Call Participants

Samad Samana - Jefferies

Steven Frankel - Colliers

Josh Nichols - B. Riley

Nehal Chokshi - Northland Capital Markets

Jack Vander Aarde - Maxim Group

Operator

Good afternoon, ladies and gentlemen, and welcome to the Avid Technology's Fourth Quarter and Full Year Earnings Conference Call. During today’s call, we will have a question-and-answer session. [Operator Instructions]

Now, let me turn the call over to Whit Rappole, VP of Investor Relations.

Whit Rappole

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

In their prepared remarks, Jeff will provide an overview of our business and then Ken will provide a detailed review of our financial and operating results followed by time for 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 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 for those non-GAAP measures that require reconciliation and also definitions for the operational metrics used on this call and in this presentation. Unless otherwise noted, all figures noted by management during the call are non-GAAP figures, except for revenue which is always GAAP.

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

Actual forward – 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 most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.

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

Jeff Rosica

Well, thanks Whit, and thanks to everyone for joining us to review Avid's fourth quarter and full year 2020 results. I'm here with our CFO, Ken Gayron, and we're happy to have this time with listeners to look back on Avid's performance.

Overall, we're quite pleased with our progress and our execution through the difficult environment of 2020. Driven by our ongoing transition to a subscription-focused business and our focus on profitability, this year we turned the corner to being a growing free cash flow story. Given the improving profitability and free cash flow that Avid accomplished in the face of all the unforeseen difficulties, I would characterize Avid's rapid pivot and successes as a remarkable outcome.

At this point, we remain cautiously optimistic in our outlook for 2021. While nobody can predict when the world will completely return to normal, we do see lots of upside opportunity for our business. We're now even more confident in our industry's eventual recovery, and we believe we have the ability to emerge stronger than ever in pursuit of the opportunities ahead of us. As the business climate normalizes, we expect we will continue to revisit our outlook and guidance for the full year.

Our decisiveness throughout 2020 has demonstrated the strength of Avid and our customer relationships as we quickly responded to the onset of COVID-19 by adjusting our spending and outlook, helping our customers to overcome the adversities they were facing, and continuing to bring to market significant software updates and new products that contributed to our Q4 and full year 2020 results. Okay. So there's a lot we want to share with all of you today.

So during the fourth quarter, we have seen continued strengthening in the end markets for our products and solutions, and we are assisting our customers as they adopt more distributed and flexible workforces and workflows.

First up is the continuing growth in subscription revenue, including strong performance across our tools for creative individuals, and further helped by the initial success we're seeing with the enterprise subscriptions for both our creative tools and our MediaCentral platform one of the key subscription growth categories we'll discuss during the call. The growth in subscription revenue together with sequential growth in maintenance revenue resulted in significant improvement in annual contract value.

Second, we're very pleased to report another quarter of sequential growth in our non-recurring product revenue from integrated solutions largely from new product introductions in our audio hardware for in-studio work, as well as modest contributions from our media storage and graphics lines, as those markets continue to recover gradually.

And third, among these performance trends we finished 2020 with strong profitability and record free cash flow resulting from stable gross margin, reduced operating expenses year-over-year, and improved working capital trends.

As we exited 2020, many of the important indicators of the health of our company and the validity of our long-term strategy were positive. As a result, our growth continued sequentially in the last quarter and so did our profitability, producing Avid's strongest free cash flow in more than a decade.

Now I'll take us through the key financial metrics for Q4, each underscoring Avid's overall performance and the success of our ongoing strategy and execution. We saw continued growth in recurring revenue and we also benefited from sequential recovery in non-recurring revenue from integrated solutions, which contributed strongly to quarterly performance.

Subscription revenue was up nearly 55% year-over-year. Total paid subscriptions for our creative tools continued to deliver strong growth, aided by our ongoing stream of product releases and enhancements. In Q4, we added 27,000 paid subscriptions, putting us just shy of 300,000 total paid subscriptions.

Growth in subscription revenue in Q4 also reflects the uptake, in subscriptions by our enterprise customers. Our maintenance revenue increased on a sequential basis in Q4. And along with the strong subscription revenue growth, we saw combined subscription plus maintenance revenue growth of 12.7% year-over-year.

Our e-commerce business continued to deliver good growth in Q4. We are continuing to enhance our digital marketing programs to ensure consistent growth of our web store as a profitable commercial engine for subscription sales and other offerings. We are also though seeing more significant contribution from the channel and the direct sales efforts towards our subscription growth.

Throughout Q4, we maintained our cost discipline and operational rigor which helped to contribute to robust free cash flow of more than $40 million in the fourth quarter, and we believe will contribute to continued strong free cash flow looking forward.

For the full year, Avid's solid execution across a wide range of strategic fronts went a long way towards offsetting the overall market headwinds from the pandemic, which was a driving factor in the revenue decrease year-over-year for full year 2020.

Nevertheless, subscription revenue grew 61% in 2020, surpassing 20% of total revenue. During 2020, gross margin increased from a higher mix of software and subscription sales, and operating expenses decreased from cost savings activities undertaken during the year, which together resulted in healthy adjusted EBITDA for 2020 and strong free cash flow which for 2020 was up 172% over 2019.

Now let me highlight a few of our accomplishments that contributed to overcoming, the extraordinary conditions of the business here. In our largest annual increase to-date, we added over 108,000 new paid subscriptions to Pro Tools, Media Composer, and Sibelius during 2020, representing the continued influx of new subscribers.

Increasingly, our enterprise customers are seeing the clear cost performance advantages of moving their teams over to more flexible subscription-based offerings for both our creative tools and now our MediaCentral enterprise solutions. This additional leg of our subscription growth strategy resulted in a number of new enterprise subscription agreements in the third and fourth quarters.

We are extremely proud of the accomplishments of our development teams who delivered numerous new software releases and major new product introductions throughout the year in spite of the challenges brought on by the pandemic.

During Q4, we reshaped our executive leadership team to drive the next phase of our strategic growth by hiring top business and technology talent with strong cloud and SaaS expertise. We sharpened our focus on our core audio and video business areas, and realigned our customer-facing functions to elevate go-to-market performance and ensure success for every customer.

In early 2020, at the onset of COVID-19, we moved quickly to enact cost-saving measures to successfully reduce operating expenses by 27% compared to -- excuse me $27 million compared to 2019, and we focused our strategy and adjusted our spending and R&D investment priorities to make money of these savings continue into 2021. And all of these accomplishments contributed to a successful debt refinancing that we executed in the very first few days of 2021.

Now with the continued strong growth in Avid's subscription business that has occurred over the past couple of years, including the substantial growth during 2020, it's important to understand the significant opportunity we still have ahead of us. And the efforts we are making to continue to drive growth in our creative tools business.

From continuing our freemium efforts with the first versions of our creative tools to monetizing legacy users who are no longer paying us for maintenance, from converting our enterprise customers to subscription offerings to expanding our efforts in education including a stronger focus on K through 12; and also from going after next-generation creators with enhanced solutions for professional video to pursuing a larger share of the music creation category. Taken together, we see a large addressable market for Avid's creative tools and enterprise software solutions with millions of potential new users still to be tapped.

The sequential recovery that started back in the third quarter and continued through the fourth quarter makes us confident in our trajectory and position as we enter 2021. We expect subscriptions to continue to grow in 2021, as additional creative professionals adopt our solutions and are able to create high-quality video and audio content using our creative tools. Further, we expect many more enterprises to elect subscription licensing as many customers are looking for the increased flexibility and the added features that these subscription offerings bring. And we have initial proof points that we can get a revenue uplift from these conversions of our enterprise customers to subscriptions.

We had strong bookings and billings across all of our products in Q4 and we are starting the year with a healthy revenue backlog positioning us well for the year ahead. We also started 2021 with a streamlined cost structure, as we have taken the actions to ensure that about 60%, or about $18 million of the cost savings achieved in 2020 will continue. We continue to focus our spending on the areas that best support our customers and allow us to deliver the new innovations to support profitable growth in 2021 and beyond. And the refinancing that we completed in January is expected to significantly reduce our interest expense, which should support free cash flow growth and provide us additional flexibility, as we plan for growth and focus on delivering shareholder value.

Now turning back to our innovation efforts. We're expecting continued benefits from our stream of new product innovations to drive both recurring and non-recurring revenue growth, from a full year contribution by the solutions we introduced in 2020, including MediaCentral Collaborate, Adobe integration with our MediaCentral platform and Pro Tools | Carbon; and from the new releases already during 2020, including our fully cloud-based Avid | Edit On Demand release just this week our MediaCentral | Stream content ingest solution and a significant update to our software for Avid's VENUE live sound systems for when the live performance market returns; and from the many more innovations planned for 2021.

So stay tuned. And now I'll turn it over to Ken to review more details. So go ahead Ken.

Ken Gayron

Thank you Jeff, and good afternoon everyone. Overall, we are very pleased with our business and financial results as we exit 2020 as the gradual recovery that started during the third quarter continued through the fourth quarter. All of our product areas saw sequential improvement during the quarter. Recurring revenue continued to show strength with strong subscription growth and growing ACV. Non-recurring revenue from integrated solutions had strong sequential growth. These areas combined with a significant year-over-year reduction in operating expenses and improved working capital trends resulted in Avid generating strong profitability and exceptional free cash flow in the fourth quarter.

Our focus in 2021 will be to drive our subscription business, our high-quality recurring revenue streams and improve the non-recurring portions of the business related to integrated solutions. We expect these efforts to result in continued improvement in our key financial metrics, including stronger profitability and free cash flow in 2021 and subsequent years. With that, let's now turn to the details of our financial results.

We are encouraged by the continued resilience in growth of our subscription base, which reached a new high in paid subscriptions. In the fourth quarter, we added roughly 27,000 net new subscriptions for our creative software tools. Our total subscription count reached approximately 296,000 at year-end, an increase of 58% year-over-year. Subscriptions growth was strong for all of our creative tools, with Pro Tools up 66% year-over-year and Media Composer and Sibelius each up 44% year-over-year. Annual paid upfront subscriptions grew 169% year-over-year in the fourth quarter and now represent 26% of our total subscriptions, up from 15% a year ago.

When we look at our total users both paid subscriptions and active maintenance agreements, the total number grew 26% year-over-year to approximately 468,000 at the end of 2020, as the growth in paid subscriptions far exceeds decline in active maintenance contracts. During February 2021, we surpassed three million cumulative downloads of freemium versions of our creative tools with the third million occurring in just the last 11 months versus 18 months for the second million as freemium users continue to be a source of growth for our subscription business.

Also during the quarter, several of our enterprise customers signed enterprise subscription agreements, resulting in several million dollars of revenue in the quarter.

These agreements include our creative software solutions as well as our MediaCentral and NEXIS cloud storage. We believe that the addition of enterprise customers selecting our subscription offerings will provide another leg of growth as we move into 2021.

Now moving to the composition of our revenues. The continued growth in a number of paid subscriptions for our creative tools as well as new revenue from enterprise subscription and cloud drove continued growth in subscription revenue during the fourth quarter, reaching $24.5 million, an increase of 55% year-over-year.

We do note that in the fourth quarter of 2019, we had a large beneficial true-up to our subscription revenue reserve at year-end than we had in the fourth quarter of 2020, causing a $700,000 unfavorable revenue variance for the fourth quarter of 2020.

Normalizing for this reserve true-up difference, Q4 2020 subscription revenue growth was 63% year-over-year. For the full year, subscription revenue was $72.8 million, up 61% year-over-year.

Maintenance revenue continued to also be a strong part of the business, and it stabilized during 2020. Maintenance revenue was $31 million during the fourth quarter, down 7.3% year-over-year due to the transition of the model to subscription, but up 0.5% sequentially as a result of improved renewal rates and stronger product sales in the second half of the year.

For the full year maintenance revenue was $124.2 million, down 4.8% year-over-year due to the transition of the business to subscription and was roughly $31 million in each of the quarters of 2020.

Total subscription and maintenance revenue increased year-over-year by 12.7% in the fourth quarter and by 12.2% in the full year 2020, as the subscription revenue growth exceeded the maintenance revenue decline.

Perpetual license revenue was down 29.7% year-over-year in the fourth quarter and down 20.3% for the full year. Perpetual license revenue was negatively impacted in the fourth quarter by the adoption of subscription offerings by some of our enterprise customers in the fourth quarter, and also by reduced demand during the COVID-19 crisis.

Total software revenue from subscriptions and perpetual licenses increased year-over-year by 23.1% in the fourth quarter and by 25.7% in full year 2020 as the subscription revenue growth exceeded the perpetual revenue decline.

Finally, when looking at our revenue backlog, which is comprised of deferred revenue and other unbilled committed backlog, the total revenue backlog that is expected to convert to revenue in the next year, stood at $231 million at the end of 2020, up 16% from the end of 2019, benefiting from strong bookings and growing deferred revenue from subscriptions and maintenance.

The higher opening revenue backlog expected to be realized in 2021 provides us confidence that Avid should return to favorable revenue growth in fiscal year 2021.

Now moving to recurring revenue and annual contract value. In 2020, recurring revenue was 74% of total revenue, up from 62% in 2019. The percentage of recurring revenue increased due to higher subscription revenue and lower non-recurring revenue in 2020.

While we expect the recurring revenue portion of our business to continue to grow, we believe the percentage of recurring revenue has been elevated in the last few quarters due to the impact of COVID-19, which has caused volatility in certain nonrecurring revenue streams. As such, the recurring revenue percentage could be uneven during the next few quarters as those non-recurring revenue streams continue to recover.

Annual contract value was $300.6 million at the end of 2020, up 7.4% year-over-year as -- and was seasonally high due to the impact of strong enterprise subscription revenue during the fourth quarter, which contributed disproportionately to fourth quarter ACV.

While we expect enterprise subscription sales to continue to grow overall, the greatest opportunity for conversion of existing customers to subscription is during the fourth quarter when many of our maintenance contracts come up for renewal.

During the fourth quarter, we successfully renewed 10 of 12 long-term agreements and we added four new long-term agreements. One of the non-renewals was the channel partner who served the live sound market. The largest new addition was a multiyear SPA with Adistec who was named our sole master distributor for the Latin American region.

Now let's look at our fourth -- results for the fourth quarter. Revenue was $104.3 million during the fourth quarter down 10.3% year-over-year, but up 15.3% sequentially. Combined subscription and maintenance revenue was $55.5 million up 12.7% year-over-year.

Hardware and integrated software or integrated solutions continued their gradual recovery that started in the third quarter, but remained below 2019 levels. Integrated solutions revenue was $35.9 million in the fourth quarter, up 34.1% sequentially as demand continued to recover, but was down 28.5% as these markets still haven't fully recovered.

The balance of our revenue comes from our professional services business. Professional services revenue was $6.1 million in the fourth quarter sequentially higher as we continue to improve our ability to complete services delivery in the current environment, but down 15.1% year-over-year as certain projects continue to be pushed out.

Gross margin was healthy at 63.1% for the quarter in line with year-over-year performance. Gross margin from software subscription, perpetual and maintenance was 84.2% for the fourth quarter. Gross margin for integrated solutions was negatively impacted by lower volume shipments during the year, but is recovering as volumes picked up during the second half of the year.

In the fourth quarter, integrated solutions gross margin was 34.2% a decrease of 890 basis points year-over-year, but increasing 390 basis points sequentially. Gross margin on professional services was 18.5% in the fourth quarter down 30 basis points year-over-year as we've adjusted our resources to bring utilization back to target levels and keeping gross margins above historical levels.

Operating expenses for the quarter were $46.3 million, an $8.1 million improvement. The year-over-year decrease in operating expenses was due to benefits from our cost savings efforts during 2020. However, operating expenses were sequentially higher due to the end of temporary furloughs at the end of the third quarter and a higher bonus accrual in the fourth quarter.

Adjusted EBITDA was $21.6 million in the fourth quarter, up 2% or $400,000 year-over-year due to lower operating expenses offset in part by lower gross profit dollars on reduced revenue. Adjusted EBITDA margin was strong at 20.7% in the fourth quarter, an improvement of 250 basis points from the prior year period.

Net income per share was $0.33 for the fourth quarter up $0.05 year-over-year reflecting the increase in operating income. Please recall that the fourth quarter of 2019 included a onetime tax benefit of $0.14.

Free cash flow was healthy at $30.6 million in the quarter up $13.7 million year-over-year due to lower cash interest expense and improved working capital trends. Working capital was a source of cash of $13.1 million in the quarter due to seasonality with accounts payable and deferred revenue. We are continuing to see improvement in Avid's working capital cycle as our business moves to more software and annual paid upfront subscriptions.

Now let's turn to fiscal 2020 results. Revenue was $360.5 million in fiscal year 2020 down 12.5% year-over-year as strong growth in subscriptions was offset by declines in other categories, primarily integrated solutions due to COVID-19. On a constant currency basis revenue in 2020 was down 12.6% year-over-year.

Combined subscription and maintenance revenue was $197 million up 12.2% year-over-year as the benefit from strong growth in subscription revenue exceeded the impact of a decline in maintenance revenue.

For the full year, integrated solutions revenue was $112.9 million in 2020 down 34% year-over-year, but improving in the second half of the year. Professional services revenue was $22.7 million in 2020, down $6 million year-over-year due to the impact of COVID-19.

Gross margin was healthy at 63.7% for the year up 220 basis points due to higher mix of higher-margin subscription revenues offset in part by lower integrated solutions gross margin. Operating expenses for the year were $179.5 million; $27.1 million lower than 2019. The year-over-year decrease in operating expenses was due to the benefits from our cost savings efforts we put in place in April at the start of the pandemic. We embarked on restructuring actions in the fourth quarter, so we can realize approximately 60% or roughly $18 million of these savings in 2021, consistent with our prior comments on expected permanent cost savings for next year.

Adjusted EBITDA was $58.6 million for the year, up 4.7%. Adjusted EBITDA increased as the benefits from higher gross margin and lower operating expenses, more than offset the impact from lower revenue year-over-year. Net income per share was $0.65 for the year, up 27.3% as the improvements in operating expenses benefited our non-GAAP net income.

Now let's turn to free cash flow, where you can see that Avid has now delivered three consecutive years of improved free cash flow and significant improvement in the conversion of adjusted EBITDA to free cash flow. Our strategy of driving higher quality recurring revenue, together with effective cost controls, favorable working capital trends and reduced interest expense continued the trend of growing free cash flow. The $33.9 million in free cash flow in 2020 is the highest annual free cash flow for the company since 2007 and was up from $12.5 million in 2019 and $5.9 million in 2018.

Additionally, during the year, Avid repaid $18 million of accounts payable and could have reported much higher free cash flow in 2020, if it had a lower payable position at the beginning of the year. Free cash flow conversion from adjusted EBITDA reached 57.8% in 2020, up from 22% in 2019 and 12.4% in 2018.

Looking forward, we believe, Avid is well positioned to drive further improvement in free cash flow and the conversion rate of adjusted EBITDA to free cash flow due to the shift in our business to more predictable and higher-margin recurring revenue streams, the reduced interest expense, following our January 2021 refinancing, a more favorable working capital position and effective management of the business.

Now let's turn to the balance sheet. The company ended the fourth quarter with $79.9 million in cash, due to the strong free cash flow during the year. Accounts receivable was up $4.8 million year-over-year on increased sequential billings in the fourth quarter. That should benefit collections in the first quarter of 2021. Net inventory was down $2.6 million year-over-year at the end of 2020, as we continue to see the benefits from the transition in manufacturing supply chain vendors completed in 2019.

Accounts payable was down $18.1 million year-over-year at the end of 2020. With the lower accounts payable balance, we are seeing improved pricing from our vendors that will allow for continued improvement and profitability. Deferred revenue was $99.3 million at the end of the fourth quarter, an increase of $1.4 million year-over-year, reflecting the increase in paid upfront subscriptions.

Now, let's move forward with respect to our JPMorgan credit facility in our credit metrics. In early January, we capitalized on the recent success in our business by refinancing our bank debt in order to decrease our total debt outstanding and significantly reduce our cost of debt, extend our maturities and provide additional financial flexibility and liquidity. The new JPMorgan lending facility consists of $180 million term loan and a $70 million unfunded revolving credit facility. The new facility improves our capital structure, building upon the retirement of our convertible notes in June 2020 and further reduces our outstanding debt by $21 million.

In addition, it provides a significant reduction from our prior interest rate. And with the initial effective interest rate of 3.25%, we expect our annual interest expense to be approximately $10 million lower in 2021 than in 2020. The strong free cash flow and year-over-year growth in adjusted EBITDA in the fourth quarter, resulted in a decrease in our total leverage to 3.2 times and our net leverage to 2.3 times, both as of December 2020 and pro forma for the new facility. Overall, we are pleased with the improvement in the health of our balance sheet, as the $43 million reduction in total debt during 2020, pro forma for the new facility should provide the company more flexibility to operate its business.

Now, let's turn to guidance. As Jeff said, we are confident in the underlying strength in our business as we enter 2021. We are providing guidance for the first quarter of 2021 and limited guidance for full year 2021. We expect continued growth in our subscription revenue from both additional paid subscriptions to our creative tools and year-over-year growth in enterprise subscription and cloud revenues. In addition, we expect continued gradual improvement in non-recurring integrated solutions revenue. Also we expect 60% of the cost savings in fiscal year 2020 to continue into 2021, as we have realigned our cost structure so that Avid exits the pandemic a stronger company that is well positioned to generate sustained improvement in profitability and free cash flow.

Given this for the first quarter of 2021, we are providing total revenue guidance of $88 million to $94 million, a range which would represent a return to year-over-year quarterly revenue growth. Subscription plus maintenance revenue guidance for the first quarter of 2021 is $50 million to $53 million. Adjusted EBITDA guidance for the first quarter of 2021 is $12.2 million to $15.8 million, a range that would result in LTM adjusted EBITDA at the end of March of $66.7 million to $70.3 million. Non-GAAP net income per share guidance for the first quarter of 2021 is $0.17 to $0.24 assuming 44.9 million shares outstanding.

At this time for the full year 2021, Avid is providing guidance for subscription and maintenance revenue and free cash flow. Our 2021 subscriptions plus maintenance guidance is $214 million to $221 million and our 2021 free cash flow guidance is $45 million to $52 million. We are planning to host an Investor Day in May following our first quarter earnings release. At the end of the Investor Day, we expect to provide further detail on the evolution of our strategy, our longer-term outlook and we currently provide additional guidance on full year 2021.

With that, I'd like to turn the call back over to Whit.

Whit Rappole

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

Question-and-Answer Session

Operator

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

Samad Samana

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

Jeff Rosica

Yeah. It's a good question Samad. So, thanks and good to hear you. So yeah, the -- if you remember, we talked about that we were going to gradually rollout enterprise subscriptions over the course of 2020 as new capabilities came online, and as we expanded the portfolio for creative individuals, it's Pro Tools, Media Composer, and Sibelius. For enterprises, it also includes a number of subscription offerings from our MediaCentral product line which is our enterprise-class software platform. So, as we started to roll those out and as the Media Composer enterprise product, which is a very subscription-based, enterprise-focused product as those rolled out and were made available in the second half of the year, and as we really started to bring up our go-to-market machine, I think we saw then obviously continued strength and building strength as it went through Q3 and Q4.

And so it -- and the results we're seeing from our customers, as I said in my prepared remarks, they like the flexibility. They like the features and functions or innovation that we brought into our subscription offering because for the enterprise customer, we do differentiate the enterprise products from our standard creative tool products for individuals. And we give them a lot more flexibility. So there's a lot of benefits to those models for enterprise customers. And I would say we're seeing success a bit better than we envisioned originally. So we like what we're seeing so far.

Samad Samana

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

Ken Gayron

Yes. So, I would say, obviously, maintenance will gradually come down as we move to subscription. In our model, we believe that the subscription growth will be higher than 30%, which is the number you mentioned. Not only are we growing our creative users, but as Jeff pointed out, the enterprise subscription offering is being well-received. So, we believe that that will be a healthier growth rate on the subscription side with maintenance coming down.

And if obviously the subscription business does better, maintenance may come down at a slightly more aggressive rate than our model, but we're very confident that we'll continue to have double-digit growth in subscription and maintenance, which is a real driver of higher gross profit and higher profitability for the business.

Samad Samana

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

Ken Gayron

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

Samad Samana

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

Ken Gayron

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

Samad Samana

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

Whit Rappole

Thanks, Samad.

Operator

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

Steven Frankel

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

Jeff Rosica

Hi, Steve, this is Jeff. So it really depends on the customer. I will say this as I said in my prepared remarks we are seeing very consistent evidence that as we move customers from a perpetual license and software maintenance program over to subscription, we're seeing a pretty significant uplift in the revenue from that customer. So we're seeing obviously better annual revenues from those customers and we're seeing better lifetime value.

It really depends though on the situation. Enterprise customers are in all shapes and sizes and have different types of needs. So it can be from low-double digits to very-large-double digit kind of growth in that from a revenue perspective. But it really depends on the situation as to how much flexibility they want and do they want more licenses, they want more capabilities? Are they looking for more functionality.

So it really depends, but I'll say that we've now done enough of these movements of customers over to enterprise subscription agreement that we're -- I think Ken and I are both very happy with the revenue uplift that we're getting on these agreements. And my guess is we'll probably share a bit more Steve when we get to the Investor Day. We'll probably show some specific models for people to show you some scenarios.

Steven Frankel

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

Jeff Rosica

No. I don't, because those are moving to a SaaS offering that we're -- again we're still in the very early days of that. I think we've talked about this before but I'll reiterate. Today our on-prem subscription -- on-prem NEXIS product is really in high-performance production storage for editorial and other types of production applications. So we're in a very specific market. We don't really have an offering for near-line storage or cold or archive storage.

As we go to the cloud one of the advantages of NEXIS because we actually have a product called NEXIS cloud that is on Microsoft Azure that is actually a multi-tier offering. So that is not just high performance. We also have super high performance with Azure and we also have near-line and very cold or archival storage. So as we move people to subscription, obviously, we're moving them from an upfront model to a subscription model but there is a very significant -- we've seen already a very significant expansion of the opportunity with those customers because we're taking them to more than just high-performance storage. We're taking them to multiple tiers of storage.

So we -- even though we are, obviously, cannibalizing partially that storage, we're moving them to a high-margin recurring revenue stream that's got real long-term value to it. Also I think Steve we're seeing people really go in pieces. They're not really going overnight. It's not like they're just stopping their on-prem storage and going all the way to cloud. It's an evolution that will happen over many years for many customers. So we're going to be able to transition this I think in a very orderly, but more important very profitable way.

Steven Frankel

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

Ken Gayron

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

Steven Frankel

Okay, great. Thank you.

Ken Gayron

You're welcome.

Operator

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

Josh Nichols

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

Jeff Rosica

I think both. I can add a little bit -- hi, Josh, this is Jeff. I can add a little color here but also you're right, we’ll probably continue to add color as we get to Investor Day. As Ken and I both said, we're optimistic but we're also going to be cautious in -- especially in the first half of the year just as the markets are -- as we said are recovering. We're starting to see recovery. We saw a good sequential recovery in Q3. We saw again in Q4. We like what we're seeing so far as we look into 2021, but it will -- in some markets it will be gradual as things come together.

But we are seeing -- all the indicators we see around -- as we talked about the bookings and billings were very strong in Q4. Even though not all of that turned to revenue in Q4, it did turn to revenue backlog. And as Ken said our opening revenue backlog this year is I think 16% higher than last year. And remember last year was pre-COVID. It was before COVID hit. So it's really a comparable comp. And so to see that strength we -- on top of the strength we saw in the revenues and EBITDA and cash flow in Q4, we did see these real strong billings and bookings revenues, which is giving us nice visibility across -- or better visibility across 2021.

So I think the markets are continuing to recover. As Ken and I said all along, it's going to be a gradual recovery into the first half of 2021. Live sound hopefully will start to come back also maybe this summer. I don't know. Fingers crossed. We'll see, but we're being careful right now. But as I said in my remarks we'll continue to keep an eye on things. We'll continue to revisit and look at where we -- our outlook and what we look at. And I'm sure Ken and I will give some updates during Investor Day in May. Did I lose you Josh?

Operator

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

Jeff Rosica

Okay.

Operator

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

Nehal Chokshi

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

Jeff Rosica

Thanks.

Nehal Chokshi

So within that 12% year-over-year guide growth for subscription plus maintenance for the quarter and then it looks like that you have a slight tapering off of that in growth as the year continues given the about 10% year-over-year growth for the full year which is consistent with what we've seen over the past year, but it's off of a much, much tougher year ago comps.

And I presume the tapering is slightly because of that tougher year ago comp, but I mean it's still a really impressive growth that you're implicitly guiding to in the back half on the subscription off of really tough comps. So what gives you the confidence to provide that implied strength in the back half on the subscription business?

Jeff Rosica

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

Ken Gayron

Yes. So I would say first when we -- as we think about the business it's improving. It continues to do -- to gradually improve. As we think about guidance we're -- this is -- we're cautiously approaching it. And when we think about our guidance for subscription plus maintenance, last year we guided roughly 8% and we did over 12%. We're guiding here a little over 10% subscription and maintenance for 2021.

In terms of the license growth so far this year we feel good about that that we're seeing and in terms of that pattern. We believe that the creative tools granted have -- we have higher base. We see continued improvement in that area. We have new features and functionality coming out in different areas whether it be Pro Tools Sibelius or Media Composer.

And we think there's a real strong opportunity to continue to grow the creatives at very aggressive growth rates in those areas. And really we think we'll see that through Q2, Q3, Q4 throughout the whole -- all four quarters. And then the enterprise subscription as Jeff pointed out earlier we're just getting started and we're seeing nice uplifts as we move those customers. So we feel very comfortable that we will achieve if not exceed the guidance that we provided on subscription and maintenance.

Nehal Chokshi

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

Ken Gayron

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

Nehal Chokshi

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

Ken Gayron

Yes. No. We'll get some benefit of working capital and free cash flow, but really it's -- we're going to improve profitability. There'll be some savings on interest expense, obviously, from what has occurred. So those are really going to be the two drivers.

We should get some benefit on working capital, but we're also going to be investing in the business and like we have a little bit more capital expenditures, as we look to invest to support our rapidly growing subscription business. So those are the areas that we're investing.

Working capital will become a source of cash, but it's not a huge source that's driving the improvement. It's really profitability that's going to be driving the improvement.

Nehal Chokshi

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

Ken Gayron

Thanks, Nehal.

Operator

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

Jack Vander Aarde

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

Jeff Rosica

Hi, Jack.

Jack Vander Aarde

Solid, very impressive free cash flow and subscription growth momentum is just great to see. So I'll start just with a question for Jeff. Hoping you can speak to -- and you've kind of touched upon this already a little bit, but hoping you could speak to any interesting kind of changes in the sentiments and overall tone of maybe what you're hearing from your customer discussions of the nonrecurring product categories, which were under pressure in 2020, but gradually improving.

So maybe as it relates to storage, live events and graphics and servers, are you surprised by any of these categories and customer discussions that -- more positive in sentiment over the last three months ,relative to today? Anything of note there?

Jeff Rosica

Yes. It's a good question, Jack. I think that -- look, overall, I think we're seeing -- customers are still being a little bit cautious, but they're all pretty optimistic on also their investment plans for the upcoming year for this year and quite frankly for the next couple of years.

And so, I think there is -- look, there is a bit of pent-up demand, in that people didn't execute on projects or on plan so that there will be some benefit from that. I don't think it's going to be -- I don't think the flood gates are going to open, but I think it's going to help really bring some strength to the business.

Nobody's really put aside plans completely. I think a lot of people have updated their plans and what we're generally seeing from people is that, they do see continued strength in the markets. I'll address live sound separately.

But, in general, when we're talking about storage or graphics or servers or even the audio consoles for the larger studios, we're seeing those markets continue to strengthen. We're seeing that, as we look into the early part of this year too. So, again, we've got -- again, we're being cautious, but we're optimistic on what we see. And the sentiment we're seeing from customers is quite good.

There is some change in how they're going to spend. There are people who are going to make big on-prem investments. Now they're looking for more kind of hybrid environments, where they still have to make investments on-prem, but they're also looking for cloud-based solutions to create a more adaptable workforce that is more work from anywhere and is more flexible.

So I think there's definitely different conversations, but great conversations and they're going well. And the funnel that we see looks very good. The funnel is stronger this year than when I was looking at last year.

As far as the live sound market clearly it's predicated on the return of events and not just big events, but also the return of people into churches and into other types of end use. I will say this; we did see a nice improvement in Q4. We didn't expect any improvement in live sound sequentially. We did see a bit of an improvement in Q4.

And again as vaccines get out there and as people get more comfortable and people start reopening, we'll start to see small and medium-sized venues open up. And there's some benefit in that for us including churches.

And then obviously, the larger concert tours will take a little bit longer to come live again, but we do see them starting to plan. We're even seeing some festivals in Europe start to talk about opening up in July and August. So, again, we're optimistic, but we're going to -- Ken and I will plan carefully.

Jack Vander Aarde

Great. Thank you for that. That's a great answer. And then maybe I'll follow up with a question for Ken. The 2021 guidance for subscription and maintenance revenue $214 million to $221 million that was ahead of my forecast at least and so clearly a positive as I view it.

Can you maybe provide some additional color on what's embedded in that guide of the subscription portion? Maybe like how much of a role does yesterday's latest enterprise subscription product offering play into that? And any other factors I guess as it relates to subscription between enterprises and creatives?

Ken Gayron

I would say that I think in general the growth will continue to be very strong as we think about the subscription business. I think our creative base is much -- is higher than enterprise.

So, just the growth rates will look lower on the creatives because the base is so much higher. But we expect the dollar growth to be very, very solid across all segments Pro Tools Media Composer and Sibelius for the creatives as we're adding product functionality. And those will be in excess of in aggregate, the 30% that one of the analysts indicated earlier. So, we expect that to be more solid.

And then really the enterprise will have stronger growth rates just because of the base and we expect that to be a significant contributor to the total subscription revenue. So, we believe we outperformed our strategic revenue guidance last year. We believe these numbers -- although they're attractive, we think that we'll continue to execute this potential for outperformance. But at this point this is what we feel comfortable in guiding. We think we'll have solid double-digit strategic revenue performance with subscription being the leading category driving that.

Jack Vander Aarde

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

Ken Gayron

Thanks Jack.

Jeff Rosica

Thank you.

Operator

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

Nehal Chokshi

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

Jeff Rosica

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

Now I will say this: not all of our subscriptions come from the freemium conversion. So I would say our conversion rate is not at that 10%, but I will say that our conversion rate is at very – it depends on the market you're talking about. But I would say they're very much in line with what people see at the high end of what people see in conversions for software products like this. So our conversions are very strong there but it's not the only source of conversions.

That said, we're getting better, better at that conversion. In fact, as Ken mentioned, there are some capital expenditure actually that we even made in late 2020 and we're going to be making in 2021 to continue to put more strength in our internal machines, if I can call them that to be able to really drive conversions and drive that revenue. So it's a very strong element of our growth but it's not the only part of our growth.

Nehal Chokshi

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

Jeff Rosica

I will say this: I don't want to steal the news from the Investor Day. We're going to go with this in some detail with market data during Investor Day. But I'll say this Nehal: It is tens of millions of creative users between audio and video that are out there. And we've only really scratched the surface I think and the opportunity we see.

That's – as you saw in my remarks and the slide we put in there that's hinting a little bit to what we want to talk about at Investor Day. But we see a really large TAM here. And as we look at our strategy and we look at our innovation plans, we see an opportunity to really go after a lot there from a market opportunity.

Nehal Chokshi

Okay. Great. Thank you very much. Congratulations.

Jeff Rosica

Yes. Thanks, Nehal. Appreciate it.

Operator

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

Jeff Rosica

Okay, thank you, operator. So I'll close by saying that Avid is today a much stronger company than we were at the start of 2020. Our intention on this call has been to give our investors and others ample additional insights that proves Avid's ability to skillfully navigate the future, keep growing and remain consistently profitable.

We look forward to engaging with you again during Avid's annual Investor Day, which we expect to take place virtually during May. Today we only touched briefly on the widening horizon of Avid's total market opportunity. We'll continue to explore this in detail during that event. So I hope you can join us.

As Kenneth pointed out earlier, Investor Day details are coming soon. So on behalf of everyone at Avid, I extend our best wishes for the continued safety and health of everyone who follows and collaborates with us. We are deeply grateful for your support throughout this very challenging past year. Goodbye for now. Talk soon.

Operator

Once again, that does conclude our conference.