Avid Technology Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2021

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to Avid Technology's Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, let me turn the call over to your host for today's call, Whit Rypoll, to Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Christy. To the call. Good afternoon, everyone, and thank you for joining us today for Avid Technology's 3rd Quarter 2021 Earnings Call for the period ending September 30, 2021. To the call. My name is Whit Repwal, Avid's Vice President, Corporate Development and Investor Relations.

Speaker 1

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 to the call.

Speaker 2

We have prepared a slide presentation that we will refer to

Speaker 1

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 to hang on, sorry, wrong page. During today's call, management will reference certain non GAAP financial metrics and operational metrics. To the call.

Speaker 1

In accordance with Regulation G, both the appendix to our earnings release today, the appendix of this presentation and our investor Web 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. To the operator. 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. To the call.

Speaker 1

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 to the SEC. Please see our press release issued today and our most recent annual report on Form 10 ks and to 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.

Speaker 2

To the operator.

Speaker 3

Thanks, Whit, and thanks to everyone for joining us to review Avid's 3rd quarter results.

Speaker 1

We are pleased with our results and

Speaker 3

that we were able to significantly grow our revenue in to Q3 due to the strong performance of our subscription business and by the continued strengthening recovery of our end markets, which allowed us to continue to deliver strong profitability to the Q and A session and free cash flow. With this continued positive trajectory of the business, it is clear to us that our strategy is working and we are seeing the benefits. So let's get started as there's a lot we want to share with all of you today. During the Q3, there are 3 main takeaways for the business performance I would like to delve into with you. First, we delivered strong subscription revenue growth driven by both our creative tools and enterprise offerings.

Speaker 3

Next, we saw that the continued strengthening recovery of our end markets also contributed to robust overall growth. And finally, we continue to deliver consistent and healthy profitability with strong free cash flow conversion. Overall, we to the company with strong free cash flow conversion. Overall, we exceeded expectations for the 3rd quarter. And as we enter the 4th to the quarter, which is historically our seasonally strongest quarter.

Speaker 3

We believe we are well positioned to finish 2021 on a high note and our momentum gives us confidence as we look towards 2022. Now let me dig in a bit more and provide some more specifics on each of these areas. We saw strong growth in our overall subscription business in the 3rd quarter, including solid performance across our creative tools and strong enterprise subscription sales. We signed several multi year enterprise subscription agreements in the quarter with large media companies around the world, including with the BBC. And we continue to see sales of our MediaCentral and Media Composer Enterprise subscription offerings to both new and existing customers during the Q3, to the company, including Endymal Schein and Knoisseur.

Speaker 3

Our strategy for moving enterprise customers to subscription continues to pay off to the Q1. And enterprises are adopting our subscription products well ahead of our expectations, and we do not expect this trend to slow down. As we move these enterprise customers from perpetual and maintenance to subscription, we continue to see meaningful uplift in our annual contract value. As we're at the early stage of this transition, we believe there remains significant opportunity ahead of us in growing our enterprise subscription business. Our creative tools continue to be an essential piece of our subscription growth.

Speaker 3

And during the Q3, we continued strong net adds for creative tools. We believe that the Creative Tools year over year growth is recovering as the large COVID cohort of new ads from 2020 gets further behind us. Specifically with regard to Pro Tools, we saw an acceleration in net adds in the Q3 versus the prior quarter, and we like the direction we're seeing so far. These enterprise subscription sales and net adds from creative individuals led to both healthy subscription license count and strong revenue growth. During the Q3, the recovery of our end markets continued to strengthen benefiting all business areas and product segments.

Speaker 3

This strength combined with the strong performance of our subscription business and our stable maintenance revenue stream led to double digit revenue growth in Q3. We also realized an increase in annual contract value of over 20%, driven by the strong subscription revenue growth to the Q1 of 2019. And a significant increase in the value of our long term agreements from both new agreements signed and a significant increase in annual contract value to several agreements that were renewed in the quarter. The solid year over year growth of our integrated solutions business was driven by a slightly different mix this quarter. We saw strengthening of gross margins as volumes recovered and as management focused on improving the product mix overall.

Speaker 3

Our storage business continued to perform well as we see organizations continue to return to their facilities and productions head back towards normal globally. Demand for audio interfaces and control services was healthy and we continue to see strong demand for live sound solutions due to the return of many touring activities to live venues as COVID restrictions continue to be lifted. During the Q3 and for several consecutive quarters, we've continued to deliver consistent, healthy to profitability and free cash flow. Improving overall gross margins and revenue growth combined with the benefits from operational efficiency continued to deliver solid profitability with an adjusted EBITDA margin of 16.8% in the quarter. And while certain cost saving measures such as employee furloughs to the Q2 of 2020.

Speaker 3

We continue to remain diligent this year in our spending controls as we looked at smarter ways to manage our business. We did this while also investing in the digital transformation that is important for our future and also investing in innovation to fuel our growth plan. Both are important elements of our company's strategy that was presented at our Investor Day event back in May. And finally, we once again delivered strong and steady free cash flow of $14,000,000 in the quarter, which represented an over 150% increase quarter over quarter. Now let's talk about where we see things going forward from a business perspective.

Speaker 3

As we enter the Q4, we believe we are well positioned to finish 2021 strong and enter 2022 with good momentum. We expect a continued solid growth trajectory of subscription net adds for our creative tools and anticipate continued strong enterprise software subscription sales. We will continue to innovate with new technologies, to the company's strategic partnerships that will contribute towards our strategic plan and that we believe will contribute to our growth expectations. We also plan to deliver a constant stream of new software releases that are designed to fuel our subscription business and contribute to its growth. To the operator.

Speaker 3

And we expect continued expansion of our SaaS and cloud partnerships as we see the opportunity for adoption of more cloud based workflows with enterprise organizations in support of our customers' demand for better enabling remote workers and more distributed workflows. Also, we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on the past couple of years. However, as I mentioned a moment ago, we will also be making to strategic investments in support of our 5 year growth plan. In closing, we will continue to carefully evaluate how we deploy our capital to enhanced shareholder value while maintaining a healthy balance sheet and whether this is through continued share buybacks or making selective to strategic investments to accelerate our growth plan. With that, let me now turn the call over to Ken to review more of the financial details.

Speaker 3

Take it away, Ken.

Speaker 4

Thank you, Jeff, and good afternoon, everyone. We are pleased with our business and financial results for the Q3 of 2021. To our continued year over year revenue growth driven by an acceleration of our subscription business and strong performance to the Q1 of 2019. Our maintenance and integrated solutions revenues allowed us to deliver strong profits and free cash flow. To the operator.

Speaker 4

Our focus for the remainder of 2021 will be to continue building our subscription revenue, improve renewal rates in our maintenance business to the Q and A session and increase the non recurring portions of the business related to integrated solutions. We are confident in our momentum to the operator. We'll continue to invest prudently in R and D in certain areas of our back office to support our long term business plan to the Q1 of 2019. We are now focused

Speaker 2

on expanding our

Speaker 4

subscription business by approximately a 30% CAGR through 2025 and improving overall free cash flow and free cash to the Q3 financial results. We are encouraged by the continued growth of our subscription base, which reached a new high in paid subscriptions. To the call. This includes not only individual creative tools subscriptions, but also the addition of multi seat subscriptions that are being sold by our channel partners into educational institutions as well as our enterprise subscriptions. Our total subscription count reached approximately 389,000 to the Q3, an increase of 35% year over year.

Speaker 4

In the Q3, we added roughly 19,300 to net new subscriptions with enterprise subscriptions adoption on top of the continued growth in creative licenses, to the Q3, including an acceleration

Speaker 2

of net adds in Pro Tools

Speaker 4

in the quarter. As we closed our books for the Q3, we adjusted the numbers we are reporting for to cloud and native software subscriptions. As we discovered, there were certain multi seat licenses that will be counted as one subscription instead of the actual number of acted and paid seats under the multi seat license. The impact of this to the Q3 of 2020. The change is an increase in our subscription count of 6% or approximately 23,100 in the Q3 of 2021 to the Q3 of 2020.

Speaker 4

To the call. There was no revenue impact because of this change, and it did not materially alter the trends or growth rates to subscriptions as all quarters were understated by a relatively similar amount. Subscription growth was strong for all creative tools, to the company with Pro Tools up 29% year over year, Media Composer up 41% year over year and Sibelius up 35% year over year. Now moving to the composition of our revenues. The continued growth in the number of paid subscriptions for our creative tools to the call.

Speaker 4

As well as new subscriptions for MediaCentral drove continued year over year growth in subscription revenue during the Q3, to the Q1 of 2019. We are now seeing a to the subscription model faster than we had previously estimated with several large enterprise customers moving from perpetual to subscription to the Q3 with a favorable uplift in overall revenue to Avid. Although Q3 was a strong quarter for converting enterprises to subscription, We continue to expect that the Q4 and Q1 of each fiscal year to provide the largest opportunity for enterprise subscription conversions, given the renewal cycle of enterprise maintenance contracts that have weighted more towards the calendar year end. To the operator. Maintenance continues to be a strong contributor to revenue despite the transition to subscription.

Speaker 4

Maintenance revenue was $30,700,000 to the Q3, down 0.4% year over year and up 0.9% sequentially. To the call. Maintenance revenue remained stable as we saw improving renewal rates on our maintenance contracts and contribution from the stronger product sales, to the Q1 of 2019, offset by the transition of certain enterprise customers from maintenance to subscription. Total subscription and maintenance revenue increased to the Q3 of fiscal 2019.

Speaker 2

We are pleased to report that we are reaffirming our outlook for 2019. We are pleased to report that we are

Speaker 5

pleased to report that we are in

Speaker 4

the Q3 of 2019. We are pleased to

Speaker 2

report that we are pleased to report that

Speaker 4

we are in the to the Q3. Our combined subscription and maintenance revenue came in above our guidance for the Q3. Perpetual license revenue was $5,700,000 to the Q3, down 37% year over year in the Q3 as we continue to deemphasize perpetual licenses and focus on strategic subscription revenue. To the call. Even with the declining perpetual revenue, total software revenue from combined subscription and perpetual licenses to the Q3 of fiscal 2020.

Speaker 4

Our integrated solutions business remained healthy to the call with integrated solutions revenue up $31,200,000 in the 3rd quarter, an increase of 16.3% year over year and roughly flat sequentially. To the Q4. The year over year growth was driven by recovery in audio hardware, control surfaces, live sound consoles and storage. To Pro Tools Audio hardware revenue increased year over year in the Q3, driven by sales of the Carbon interface. To the operator.

Speaker 4

Audio control services revenue increased nicely year over year as many large studios continue to add new capacity. To the live sound product revenue was up year over year as well due to the continued global market recovery as many venues and concerts have opened. To the Q1. Revenue from our storage products was also up slightly year over year as the end markets continue to improve. The balance of our revenue comes from our professional and learning services business.

Speaker 4

Professional service revenue was $6,100,000 in the 3rd to the quarter, an improvement of 2.7% year over year. Now moving to recurring revenue and annual contract value. Our strategy in recent years to focus on recurring revenue sources continues to pay off. In the 3rd quarter, LTM recurring revenue was 77 to the full year 2019 results. We are pleased to report that the full year results are in the quarter.

Speaker 4

The LTM recurring revenue percentage to the higher subscription revenue and revenue under long term agreements as well as from lower non recurring product revenue in the last 12 months to the prior 12 months. Annual contract value was $328,000,000 at the end of the quarter, up 21% year over year. To the Q1. ACV benefited from strong year over year growth in subscription revenue, stable maintenance revenue and improvement in contribution to our strategic purchasing agreements with our channel partners. During the quarter, we added 2 new strategic to the purchasing agreements, which added $3,500,000 of total contract value.

Speaker 4

And we successfully renewed 5 strategic purchasing agreements, to the sequential and year over year growth in ACV. Total contract value for the agreements we renewed in the 3rd quarter to the Q1 of 2019. We continue to expect that growth in the Q1 of 2019 increased 27%, signifying the improving conditions in the overall market and the confidence our strategic partners place in Avid to support their growth. Now let's look at the rest of our results for the Q3. Total revenue was $101,600,000 in the 3rd quarter, to the call.

Speaker 4

An increase of 12.4 percent year over year and a 7.1% sequential increase and was above the top end of our 3rd quarter guidance. To the call. Year to date revenue through the 9 months ended September 30, 2021 was 209,900,000 to the Q3 of 2019. We are pleased to report that we are pleased to report that we are pleased to report that we are pleased to report that

Speaker 2

we are pleased to report

Speaker 4

that we are pleased to report that we are pleased to report

Speaker 2

that we are pleased to report that we are pleased to report that we are pleased to report that we are pleased to report that we are pleased to report that we are pleased to report that we

Speaker 4

are pleased to report that we are pleased to report

Speaker 2

that we are pleased to report that we are pleased to report that we are pleased to report

Speaker 4

that we are pleased to 11% year over year. Non GAAP gross margin was 65.3% for the 3rd quarter, up 40 basis points year over year to the Q3 and a 140 basis points sequentially. The high margin subscription business made up a larger share of revenue in the 3rd quarter, to the Q1, which aided in delivering higher gross margin both year over year and sequentially. Non GAAP operating expenses for the quarter were 51,300,000 to a $10,000,000 increase year over year and $4,300,000 sequentially. Non GAAP operating expenses increased in the 3rd quarter to support continued innovation to the growth in the business and included a $2,000,000 bonus accrual true up, giving the improving performance of the business.

Speaker 4

To the company's strong recent performance, we slightly increased our R and D innovation expenses to help accelerate our growth plan, to the Q3 of 2020, non GAAP operating expenses benefited from a significant temporary cost savings initiative put in place due to COVID, including a $6,000,000 from temporary employee late furloughs to the Q1 of 2019, reflecting year over year comparisons. While many of the temporary cost saving efforts are no longer in effect, we have continued to exercise similar discipline to the Q1 of 2019 and managing our expense structure. We are targeting fiscal year end 2021 total non GAAP operating expenses of approximately $196,000,000 as we continue to benefit from the cost saving measures put in place at the end of 2020. Non GAAP non income per share was $0.27 for the 3rd quarter, to the Q1 of 2019. Flat year over year, reflecting the higher gross profit on higher revenue and $2,900,000 of lower interest expense this year, to the Q3 of 2018.

Speaker 4

Offsetting the benefits last year from temporary operating expense savings as described above. Adjusted EBITDA was $17,000,000 in the 3rd quarter, to the Q1 of 2019, down 11.9 percent or $2,300,000 year over year, reflecting the improved revenue and gross profit this year, to the Q1 of 2019, offset by the temporary operating expense savings last year. Adjusted EBITDA improved to $1,200,000 sequentially to the Q4 of 2018. And year to date to the 9 months ended September 30, adjusted EBITDA was $50,500,000 up 37% to the Q3 from $37,000,000 in the prior year period. Free cash flow was $14,000,000 in the 3rd quarter, down $1,500,000 year over year to the Q1 of 2019 and up $8,500,000 sequentially due to the improved operating results and favorable working capital trends.

Speaker 4

Year to date free cash flow was strong at $30,700,000 through the 9 months ended September 30, 2021, up from $3,200,000 from the same period last year. To the growth in our subscription business and increase in our recurring revenue percentage continues to make our free cash flow less variable quarter to quarter. Working capital was a source of cash of $2,900,000 in the quarter. We are continuing to see improvement in Avid's working capital cycle as our business moves to more to software and annual paid upfront subscriptions. Capital expenditures were $2,500,000 during the Q3, up slightly from the Q3 of 2020.

Speaker 5

To the call. As we have previously mentioned,

Speaker 4

we expect that capital expenditures will increase during the Q4 of 2021 as we'll be investing to improve our internal to our operations in support of our expanding subscription business. Now let's turn to the balance sheet. The cash balance at to the Q1 of 2019. September 30 remained strong at $50,500,000 down $2,900,000 from June 30. Cash benefited from the free cash flow during the quarter, to the Q3, but also reflects the use of $10,500,000 to repurchase shares during the Q3.

Speaker 4

Accounts receivable decreased to $1,600,000 year over year due to improved collections. Net inventory decreased $6,200,000 year over year to the shift in the business towards software and subscription. Accounts payable increased $8,900,000 year over year due to Q3 to 2020 cost reduction initiatives, coupled with a moderate spend increase associated with our revenue growth. Total debt decreased to 170 to $2,100,000 at the end of the 3rd quarter. Net debt was $121,700,000 at the end of the 3rd quarter.

Speaker 4

Our strong free cash flow and growth in LTM adjusted EBITDA resulted in net debt to LTM adjusted EBITDA of 1.7 times at the end of the quarter, to the Q1 of 2019, down from 2.7 times in the prior year period. Overall, we are pleased with the health of our balance sheet to

Speaker 2

the Q1 of 2019. As the reductions

Speaker 4

to long term debt and total leverage provide the company more flexibility to operate and grow its business and to to Explore Capital Allocation Alternatives to drive long term shareholder value. During the Q3, we repurchased approximately 412,000 shares for $11,200,000 Additionally, through November 8, we repurchased an additional 8,800,000 of our shares, to the operator to bring total repurchases to date of $20,000,000 under our $115,000,000 authorization we announced in September. We believe that share repurchases are an important method for returning capital to our shareholders and provide a good return given our confidence in the long term plan. Let's now turn to guidance. Given the continued market recovery, coupled with our performance in the 3rd quarter that was ahead of our to total revenue in our subscription and maintenance revenue guidance.

Speaker 4

We are raising our full year 2021 guidance for subscription and maintenance revenue. We are raising the high end and tightening the range for our full year guidance for total revenue. We are tightening the range towards the high end of guidance on to our full year 2021 guidance for non GAAP net income per share, adjusted EBITDA and free cash flow to the RAS revised on August 3, 2021. We are providing full year 2021 guidance as follows. We are raising our full year 2021 revenue guidance to $398,000,000 to $404,000,000 a range which represents to year over year revenue growth of 11.2 percent at the midpoint.

Speaker 4

We are raising our subscription and maintenance revenue guidance for the full year 2021 to $225,000,000 to $230,000,000 a range which represents year over year growth of 15% at the midpoint. To the call. We are tightening our non GAAP net income per share guidance for the full year 2021 to $1.18 to 1.26 to the Q1 of 2019, assuming 46,300,000 shares outstanding. We are tightening our adjusted EBITDA guidance for the full year 2021 to $73,000,000 to $78,000,000 We are also tightening our guidance for full year 2021 free cash flow to $52,000,000 to $57,000,000 as our year to date free cash flow performance and our trajectory gives us confidence in our 2021 free cash flow. With that, I would like to turn the call back to Whit.

Speaker 1

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

Operator

Thank to First, we'll take Steven Frankel from Colliers. Your line is open.

Speaker 6

Good afternoon, and thanks for the opportunity to ask the question. Just wanted to drill down on the subscription numbers a little bit. You guys have made great progress here. And Last quarter, you broke out the MediaCentral numbers. And so looking at what you to the close here.

Speaker 6

It seems like the creative ads were about 17,000 sequentially versus 38,000 in the prior quarter. Am I looking at this correctly?

Speaker 4

Yes, yes. Steve, it's that's correct. We did increase to our license count by, I want to 19,300 from Q3 to Q2. And the creative ads were roughly over 17,000 of that with the balance in Media Central.

Speaker 2

Okay. And

Speaker 6

if we look back to Q2 over Q1, was it was there any change to that 38,000 to the seats added in creative with the restatement or that's still the right number?

Speaker 4

No, the trends with our license count continue to be to the next question. Similar with the new reporting that we just provided at this point.

Speaker 6

So I guess another way to go at it is, is this kind of the to the new level we should think about for sequential growth for the creatives. I'll be through the COVID bump, obviously, and the organic to the ability of this business to add subscribers is somewhere here in the 20,000 a quarter pace at this point.

Speaker 4

In general, we feel good about the direction of the ads and especially I And if you look at the Pro Tools, which accelerated in terms of net adds, obviously, COVID did have an impact to the Q2, but that is now abated and we see an acceleration of those net adds. And we feel good about the direction of the business, at this point in the quarter for the Q4.

Speaker 2

And as

Speaker 5

a result of to the

Speaker 4

Q and A. Thank you. Thank you. Thank you. Thank you.

Speaker 4

Thank you.

Speaker 2

Thank you. Thank you.

Speaker 6

And can you give us any insight on churn trends now that we're through

Speaker 4

to COVID. Yes, I would say the retention rate is actually slightly improving and as we're to the end of COVID. And we feel good about the direction of the business and the subscription business. And to the

Speaker 2

Q and A. That's why we feel confident about increasing our guidance

Speaker 4

in all of our key metrics.

Speaker 2

Okay.

Speaker 6

And then on the integrated solutions business, the whole world is talking Supply chain challenges, what's the supply chain like for your hardware business?

Speaker 3

Hi, Steve. This is Jeff. I think I'll answer that. Look, I think we're all facing a tighter component supply environment in the marketplace. So far, I'll say that our team is doing a very good job to navigate that and our team is staying ahead of it at this point.

Speaker 3

And so we're to the line of David. Quite pleased with what they've been able to achieve. We obviously are going to be careful on the long term horizon, obviously, keep a close eye, but right now, So far, the team has done a pretty good job to mitigate everything and so far so good. Great. I should say that also Component costs are going up.

Speaker 3

I mean, that is a real world situation. We are making appropriate price adjustments. We actually did a price increase to the public about a month ago. We increased our storage prices around 8% to 10%, both to protect margins, but also to be honest to optimize our margins in to product. And we'll continue to look at that very closely to make sure that we can again protect and even further optimize our margins of our integrated solutions.

Speaker 6

Great. And one last question. Just some insight into the lower gross margins in that software business on a year over year basis. Is that a mix issue towards enterprise or is there something else that's resulting in that?

Speaker 3

In to the call.

Speaker 4

In terms of gross margins, first of all, gross margins and software improved sequentially. And year over year, we did to the Q and A. I would say, professionals in customer care to help with driving improving renewal rates and driving the top line. To

Speaker 5

the Q and A. Those costs are in cost

Speaker 4

of sales and are impacting the gross margin slightly year over year. More investment was made this year in that effort.

Speaker 6

Okay, great. I'll jump back into the queue. Thank you.

Operator

And next we'll take Josh Nichols from B. Riley. Your line is open.

Speaker 7

Yes, thanks for taking my question. Great to see to such rapid acceleration in subscription growth

Speaker 5

for this quarter.

Speaker 7

I was curious if you could maybe help me frame it. Clearly, a lot of growth with enterprise contributing for the subscription base this quarter. But you mentioned 4Q and 1Q, There's supposed to be even bigger opportunities there. Could you kind of help frame how we should think about the opportunities and what you did in 3Q on the enterprise side relative to the potential for 4Q and 1Q.

Speaker 3

Yes. Hey, Joshua, thanks. I think, first of all, I think that Our general sense of things have been that Q4 and Q1 are always going to be the strongest, naturally the strongest quarters, especially for to enterprise customers that were converting from a maintenance and perpetual program to subscription and that will be true. I think what we found though is that in Q2 and definitely in Q3 again, we are seeing a really great adoption take up, way well beyond our expectations for enterprise customers And even new customers that we've either recaptured or have moved early. So we've got we've seen a lot of to the strength in that part of the business.

Speaker 3

That strength will continue, we think for quite a while. Clearly, it will be Q4 and Q1 will be to very strong too, we believe.

Speaker 2

Of

Speaker 3

course, I don't want to we're not giving specific guidance other than I think our guidance on the subscription revenue should probably be to subscription and maintenance revenue should probably be a pretty good hint of what we see going forward. I would also say just on the creative tools, Yes, we saw obviously as Ken talked about the cohort on Creative Tools, we've seen very good performance in Q3 on the Creative Tools side and especially Pro Tools, We did see acceleration of the number of net adds in Q3 that we saw versus Q2. So again, like we said, we see a good trajectory there.

Speaker 7

I know before you kind of called it out certain quarters like is how much of that is coming through like e are you seeing a lot coming from like to e commerce or other things. I'm just curious like on the sales channels and how some of these customers are coming in on the subscription side, whether it's like direct or whatnot?

Speaker 3

Yes, good question. I think we're continuing to see growth in our e commerce engine, our digital direct engine. But what's happening, we see is our channel partners are getting to the next question. And we're seeing really significant improvement in our channel performance around subscription. And then both our direct sales team and our higher end channel partners are play a big role in our enterprise subscription business too.

Speaker 7

And then last question for me. Just so it sounds like good acceleration that you're seeing to the creative tools space and enterprise tracking ahead of expectations. If you kind of want to hit on, I was curious for like the to potential ARPU lift that you see as you move some of these people over from perpetual. I would expect that would more than offset any decline that you're seeing there. Then is Is there any kind of margin profile benefit that you get, when you move people over to subscription or them versus creative?

Speaker 4

So as we move the enterprises from perpetual to subscription, we're getting a bigger share of wallet. To the Q and A. We are providing more value, but we are getting an uplift on the total revenue dollars. We've seen up to the next question. I think in general, 120% to 140% is probably the average that we've been discussing with the market and we continue to reaffirm that in our models.

Speaker 4

And as those dollars come in, they provide very strong margins. And you can see to the nice uptick that we've been having as we move more of the revenue dollars to subscription, given the historical performance, to the company's gross margins. And we see that continuing as we think about our long term plan in terms of driving more of the revenue dollars to that to the subscription line. We're very confident in that outlook.

Speaker 7

Thanks, guys.

Speaker 3

Thanks, Josh. Thank you, Josh.

Operator

And our next question comes from Nehal Chokshi from Northland Capital Markets. Your line is open.

Speaker 5

Thank you and congrats on the strong acceleration of subscription results and well above guidance results. You guys both have mentioned multiple times that you saw an acceleration in Pro Tools net adds, but I don't think you have provided to the driver behind why that happened. Any thoughts there?

Speaker 3

I think a couple of things. I think number 1, we're seeing, I think the team is doing a really good job on both very important metrics. 1 is net add or gross adds, to the people that are attracting to bring in our digital marketing efforts and our marketing efforts overall have been going well. Also, our channel has been performing better in this space. Combined with the fact that we've been doing, as I've said before, a lot of work on making sure that we minimize churn.

Speaker 3

And obviously, we have a big churn metric as we talked about the cohort from to 2020's terrific numbers. And that's starting to get in our rearview mirror now. But I think in general, the team has done a great job in continuing to focus and we will not to Focusing on acquisition and churn reduction.

Speaker 5

Excellent. Great. And then So you had an implied 4Q 'twenty one guidance for maintenance and subscription, and now you have more or less explicit 4Q 'twenty one guidance for maintenance to subscription. The way I read that is you got about $1,000,000 increase on that on the maintenance and subscription despite a huge 3Q beat to about $6,000,000 at the midpoint. So is this due to basically you have a higher base of subscriptions exiting Q3 than expected?

Speaker 5

And then you're also looking at a pull forward of enterprise deals that got recognized into Q3 rather than in Q4?

Speaker 4

I would say, hey, we're pleased with our Q3 performance as we look at our guidance for Q4. To the Q1. If you look at kind of our performance, what we set out as guidance, we typically see that as an area that we want to overachieve. So At this point, when we look at Q4, we feel good about what we've laid out publicly, and we're going to work very hard to to the overachieve the midpoint and get to the towards the higher end. But at this point, this is where we feel is reasonable for the market to assume.

Speaker 4

And We're going to work to continue to drive over performance on those numbers.

Speaker 5

Okay, great. And then my final question is that You also did mention that you're seeing increasing value of long term agreements. What is the primary driver of that increasing to value of the LTAs.

Speaker 3

Hi, Gail. This is Jeff. So I think as Ken said in his prepared remarks, to Sandeep. Also a previous question is that, we've seen really great success with our strategic partner agreements and these to purchase agreements we have with some of our largest most strategic channel partners. The program has been very successful for us, but it's also been successful for them and it's helped to grow their business and to having them focus strategically on NAV, it's been a real benefit again for both of us.

Speaker 3

And so as that program has been delivering success, It's allowed our commercial team to really drive big increases in the commitments year on year and to basically grow the business with these partners. So it's I would say it's just great success of the program and it's good to see these renewals come in very strongly as they come in.

Speaker 5

Okay, great. Just to be clear, is it a reflection of your enterprise customers adopting increasing functionality?

Speaker 3

No, it's all the above. I think channel partners our channel partners sell to all levels of customers. They sell to large enterprise, they to all the small and medium sized businesses and they also sell the individual creatives or creative teams. And we're seeing that success and growth across all those segments. I think the partners are I think it's 2 things.

Speaker 3

One is that I think they're getting more strategic with Avid and they're getting more focused on delivering results for Avid, which It's good again, good for us, good for them. They also though are more and more embracing the move to subscription, and that's really allowing them to go out and drive business and not just to convert customers but drive new business for Avid. So I think it's been real successful for them. So I'd say it's all the above now. It's across.

Speaker 5

Great. Okay. Thank you for that clarification.

Speaker 3

Okay.

Operator

And next we'll go to Jack Vander Aarde from Maxim Group. Your line is open.

Speaker 8

Great. Hey, guys. Thanks. Great results. Thanks for taking my questions.

Speaker 8

A lot of my questions have been answered, but let me just touch on you guys each spoke kind of in your prepared remarks about integrate to the Company's Q and A. Thank you. Thank you. Thank you. Thank you.

Speaker 8

First, I guess, is this a fair takeaway, not much negative across any of those categories? And then 2, for greater context, can you maybe just compare how the recent revenue to performance from storage, live sound, audio control. Some of these categories that were Maybe struggling during COVID, how that compares to levels pre COVID, or are they just improving or are they above those levels? Thanks.

Speaker 3

Yes. Hey, Jack. So I think it's all the above. I think we have remember that last year we talked about our strategic pivot and part of what we did too to improve margins and just as we're Working through what happened in the world in COVID, there are some product lines that we actually, as we've talked about, reduced or deemphasized in that. So it's hard to do an apples to apples comparisons.

Speaker 3

I would say though that the businesses are returning to not all of them, but most are returning to pre COVID levels as much as you can compare them because again we've trimmed some of those product lines a bit and really did focus on the most profitable growing parts of that business going forward. But I'd say in some categories, we're seeing it back to pre COVID levels, other like live sound, still have a little bit of a ways to go. So it's kind of the I'd say, look, I think it's been our expectations, which is great. Things are returning in a very robust way now. So we're happy I'd say overall we're happy with directionally where it's going.

Speaker 3

But remember that we are being more careful with that part of our business on a go forward basis because we want to to really maximize the opportunities that are more margin better margins and higher growth potential. We've been deemphasizing those things that don't fit that picture.

Speaker 8

Okay, great. And then maybe just kind of an unrelated topic, but given the recent buzz to the market with all the announcements of the metaverse and NFTs prior to that and how kind of all this is to creating new worlds and new opportunities to create content, create all sorts of creative innovations. How are you guys? Are you guys involved at all? Is there a place for Avid in the metaverse and all the new stuff that's being created in the blockchain universe as well?

Speaker 8

So are you guys involved in this at all? Is there an opportunity there? Or are you guys staying in the physical world?

Speaker 3

Well, yes, I mean, well, I'd say we are in the virtual world too. I mean, a lot of Content that's created virtually is created with Avid Tools. I'm not sure I can answer it directly on the metaverse, and I think that's obviously a very new subject. I think clearly, Where they are using high quality content in those areas, it gives us an opportunity to participate. So I'm not sure Avid is squarely in the middle of that space.

Speaker 3

As far as NFTs know, today we don't see that space. I will say that from Things like blockchain, etcetera, those technologies are important for us as we look at security and some of the strategic areas we're looking at as a company. But I wouldn't say that we're necessarily right in the middle of, let's say, the NFT movement. It is interesting to see, I'll say, people like Fox to others who've been implementing NFTs associated with some of their content to create opportunities. That's a good trend.

Speaker 3

Hopefully, that's very successful for Fox and others that do that because that obviously makes the content itself more valuable too. Got it. I appreciate the color.

Speaker 8

That's it for me, guys. Thanks.

Speaker 1

Thanks.

Operator

And with no further questions, we'll turn it back to Jeff Rosica for closing remarks.

Speaker 3

Well, thank you again for your participation and all of to questions. As I mentioned before, let me leave you with the message that we believe we're well positioned to finish 2021 strong and our momentum gives to confidence as we look out to 2022 and beyond. So with that, thanks again, and goodbye for now.

Operator

And that does conclude our call for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Avid Technology Q3 2021
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