Avid (AVID) Q2 2022 Earnings Call Transcript

Avid  (NASDAQ: AVID) Q2 2022 earnings call dated Aug. 02, 2022

Corporate Participants:

Whit Rappole — Vice President, Corporate Development and Investor Relations

Jeff Rosica — Chief Executive Officer & President

Ken Gayron — Chief Financial Officer & Executive Vice President

Analysts:

Josh Nichols — B. Riley Financial — Analyst

Nehal Chokshi — Northland Securities — Analyst

Paul Chung — JPMorgan Chase and Company — Analyst

Steve Frankel — Colliers International — Analyst

Samad Samana — Jefferies — Analyst

Jack Vander Aarde — Maxim Group — Analyst

Presentation:

Whit Rappole — Vice President, Corporate Development and Investor Relations

Good afternoon, ladies and gentlemen, and welcome to Avid Technology’s Second Quarter 2022 Earnings Conference Call for the period ended June 30, 2022. My name is Whit Rappole Avid’s Vice President, Corporate Development and Investor Relations. Please note that this call is being recorded today, August 2, 2022 at 5:30 PM Eastern Time.

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 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 the Events and Presentations page of our Investor Relations website at ir.avid.com and shortly following the conclusion of the call, a replay will be available on our IR website for a limited time.

During today’s call management will reference certain non-GAAP financial metrics and operational metrics in accordance with Regulation G, both the appendix to our earnings release today and our investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational metrics used on this call and in the presentation. Unless otherwise noted all figures discussed by management during the call are non-GAAP figures except the 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. These forward-looking statements are based on our current beliefs and information available as of today. 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 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 — Chief Executive Officer & President

Thanks, Whit, and my thanks to everyone joining us today to review Avid’s second quarter results. So let me dive right in. Let’s start with the three main takeaways for Avid’s performance during the quarter. First, we delivered strong subscription growth including another good quarter for enterprise adoption where we added 3,800 Media Central Flex subscriptions in Q2 and we continue to deliver sustained growth with another solid quarterly performance from our creative tools subscriptions.

Next, we continue to experience strong overall market conditions and healthy customer demand for our software and integrated solutions. However, as expected, the global supply chain constraints that impacted our first quarter continue through the second quarter and we were not able to ship a significant portion of the customer orders that we received for integrated solutions in the first half.

And finally, even with these limitations, we still delivered year-over-year total revenue growth and expanding gross margin and adjusted EBITDA margin, which together drove continued year-over-year improvement in profitability. Overall, we ended the quarter seeing continued strong market demand for our solutions and we have a higher than normal level of unshipped orders for integrated solutions, which together give us confidence in our trajectory as we enter the second half.

Now let me dig in a bit more and provide some specifics on each of these areas. We sustained growth, — excuse me we have sustained strong adoption of our subscriptions by both new and existing customers for both our creative tools and enterprise offerings. We saw strong growth in our overall subscription business in the second quarter we realized net ads of 18,500 subscriptions and delivered year-over-year growth of 22% in the number of overall subscriptions. We continue to expand our portfolio of higher-value enterprise subscription offerings, which are contributing to revenue growth. We launched NEXIS FLEX with our virtual file system software as a subscription and saw initial success with dozens of customers in the second quarter.

The NEXIS virtual file system is a software solution that runs on either our NEXIS storage appliances or on our NEXIS cloud storage to deliver the same media storage performance whether using on-premises or cloud-based storage or both. We also launched the F-Series upgrade to our NEXIS appliances in July, and a per seat [Phonetic] pricing continues to improve as the higher priced enterprise subscriptions becomes a larger portion of the business. Our creative tools remain in central piece of our subscription growth and during the second quarter which is historically our seasonally weakest quarter for this part of our business, we had good net adds across all three of the creative tool product lines.

We continue to innovate and further grow this business to attract more next generation creators. In late April, we introduced protocols artist a new lower priced tier directed at the music creation community. Initial results from Pro Tools artists are encouraging and we look forward to continued growth from this new Tier. Together these factors all resulted in 58.7% year-over-year subscription revenue growth. Now during the second quarter, healthy demand from our customers and strong commercial activity continued across our businesses, resulting in year-over-year revenue growth in the quarter. Business activity with our enterprise customers remained strong and we continue to see healthy uplift when we convert customers to subscription. We closed 19 new enterprise subscription agreements, including with such notable brands as ITV News and Warner Brothers discovery.

Due to the ongoing global supply chain constraints that I mentioned earlier and as we discussed on our previous earnings call, we realized a year-over-year, 10.6% decline integrated solutions revenue in Q2 as we continue to face challenges in delivering customer orders for certain parts of our integrated solutions portfolio, while we continue to see strong demand for our products, the expected supply chain constraints that we’re facing are impacting production levels and our ability to meet this healthy demand. As a result of the lower shipments in the first half of the year due to these constraints unfulfilled contractually committed orders for integrated solutions, were than 20 million above typical levels of unfulfilled orders at the end of the second quarter.

We are making progress and working to resolve these issues and based on what we’re seeing today from suppliers, combined with the great work of our teams, we anticipate the impacts of the global supply challenges on our business, will be gradually resolved over the next several quarters starting during the second half of 2022.

Our third takeaway is our business fundamentals and profitability remains strong. Our subscription and maintenance revenue grew 19% year-over-year in the quarter to $62 million based on strong subscription growth across our businesses. As expected and as we have previously discussed, our success in converting enterprise customers to subscription is resulting in a reduction and maintenance revenue.

However, the significant growth in our total subscription revenue continue to drive double-digit subscription and maintenance revenue growth, and also resulted in strong 14% year-over-year growth in ARR and 46% year-over-year growth in subscription ARR. We continued our focused on proactively managing our costs while also investing in technology innovation and digital transformation to fuel our strategic growth plan. The revenue growth combined with year-over-year improvement in gross margin and sequentially stable operating expenses enabled us to deliver adjusted EBITDA margin of 17% for the quarter and we delivered non-GAAP, EPS growth of 4% year-over-year.

Now, let’s talk about where we see things going forward from a business perspective, we’ve seen the healthy demand for our products and solutions continue into the third quarter and we expect for this trend to continue based on the market signals we’re seeing. We had several customer events recently that have reinforced this view. In July, we had additional voice of the customer event in the UK, but dozens of European members of the Avid community association, these discussions help us inform us on our customers’ priorities and ensure that our product roadmaps will meet our customers’ needs and investment priorities.

In addition, during these recent meetings, we were happy to hear from our customers that they expect to continue to invest in the technology and solutions that they need to help deliver the increasing volume of high quality content that consumers are expecting and to drive their own strategic priorities including greater content supply chain efficiencies, which our solutions help clients address, while [Phonetic] we are today, we announced an important agreement between Amazon Studios and Avid to help advance Amazon’s content production in the cloud and to enable their editors and other content contributors to use Media Composer, NEXIS Storage and the Media Central platform in a globally scalable studio and the cloud solution running on AWS.

In the news release, Amazon Studios spokesperson stated that they see Avid as a central component of their studio in the cloud vision to provide a fully cloud-based tool set to their creative teams across the globe. We’re really excited about this new agreement with Amazon Studios as we believe they further demonstrates our unique position and the market leadership in helping move the immediate and entertainment industry to the cloud. We will continue to innovate with new technologies, develop new solutions and forge partnerships that will contribute towards our growth plan. I’m encouraged by the additional new products and key product enhancements in our development pipeline to meet the market and customer demands that we see and to help drive our growth.

As always, we will continue our efforts to improve efficiency and maintain the cost discipline that we have been so focused on in the past few years, while we also continue to make strategic investments in new innovative solutions as well as our digital transformation in support of our long-term growth plan. As I said earlier, we currently expect that the global supply chain conditions that have been impacting our integrated solution shipments will moderate over time and in fact, we are expecting the significantly increased production and shipments of integrated solutions in the second half compared to the first half.

However, based on the current healthy demand overall for our solutions, we don’t expect to fully catch up this year and we expect to end the year with some elevated amount of unfulfilled orders, that said this expectation is fully factored into our 2022 guidance. Our experienced supply chain, operations and hardware design teams continue to work to mitigate the effects of the global supply chain situation on our business and we will continue to be diligent in managing ongoing risk presence from the macro supply chain environment and the maximize our business performance in 2022.

Through all of this for the full year 2022, we expect to deliver continued revenue growth and healthy profitability. We expect continued strong performance from our growing subscription business, and as such we are maintaining our full-year 2022 guidance targets for a subscription and maintenance revenue. However, while on the one hand we are also seeing healthy market conditions and strong overall demand for integrated solutions. The impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full-year 2022 business plans.

As a result we are prudently widening our range for our full-year 2022 revenue guidance, while keeping the same midpoint to better reflect the range of possible outcomes for the year. We are adjusting our full year guidance for adjusted EBITDA and non-GAAP EPS to reflect this wider revenue range. We are also adjusting our free cash flow guidance for full year 2022 as a result of several factors. First, we’re seeing more rapid adoption of enterprise subscriptions globally, which are strategically important for the company and are positive for our long-term model, but they have different near term cash conversion characteristics than our individual creatives subscription business.

Second, the expected timing of the integrated solutions manufacturing recovery have been later in the second half will likely lead to some cash collections from these shipments falling into early 2023. And third, to the extent we can, our plan is to temporarily build up our inventories to a level that will provide us sufficient buffer and greater flexibility to better navigate the variability and anticipate supply chain conditions over the next several quarters and most importantly to better meet the stronger demand that we’re seeing.

With that, let me now turn the call over to Ken to review more of the financial details. Take away, Ken.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thank you, Jeff and good afternoon everyone. In the second quarter, we continued our profitable growth, driven by robust performance in our subscription business in our growing ARR. Our focus for the second half of 2022, will be to further build our high margin subscription revenue and continue to stay on track with our long-term model. We expect these efforts to result in continued improvement in our key financial metrics. With that let us now turn to the details of our second quarter financial results.

We are encouraged by the continued growth of our paid subscription base, our total subscription count reached approximately 450,000 at the end of the second quarter, an increase of 22% year-over-year. Growth in both enterprise subscriptions in creative tools, continue to be healthy and solid. Media Central subscriptions grew to approximately 231,000, an increase of about 380,000 during the second quarter, representing a year-over-year growth rate of 209%. The increase in enterprise subscriptions furthers, our confidence in the transition of our existing customer base to subscription. Subscriptions for our creative tools performed as expected in the traditionally seasonally weaker second quarter increasing by approximately 14,600. Subscription growth was solid for our creative tools with year-over-year growth of 18%.

Now moving to the composition of our revenues, the consistent growth in the number of paid subscriptions drove continued growth in subscription revenue during the second quarter which reached 34.1 million, an increase of 59% year-over-year. The shift to enterprise subscription customers continues to increase our per seat revenue, a trend we expect to continue. In addition, the launch of the new NEXIS FLEX subscription that Jeff discussed contributed a small portion of the subscription revenue growth.

Maintenance continues to be a solid part of the business. During the second quarter maintenance revenue was $27.8 million down 9% year-over-year, as we continue to successfully convert our enterprise customers to subscription offerings at a healthy uplift in excess of 140%, we are seeing a reduction in the related software maintenance revenue from those customers. In addition, hardware maintenance was up 4% year-over-year, mainly due to price increases even as a lower integrated solutions revenue in the first half, also reduced a associated first year maintenance revenue.

Total subscription and maintenance revenue increased year-over-year by 19% in the second quarter, subscription and maintenance saw 15% growth for the first half of the year in line with our 2022 financial model and long-term plan. Total combined integrated solutions perpetual and professional services revenue was $35.8 million in the second quarter driven by lower integrated solutions in the continued transition away from perpetual software licenses. Integrated solutions revenue was 28 million in the second quarter, a decrease of 11% year-over-year. As was the case in the first quarter, despite continued robust market demand several integrated solutions products were impacted by the global supply chain challenges limiting our production capacity and our ability to meet customer demand at the end of the quarter.

We ended the second quarter with approximately $20 million more than normal of unfilled contractually committed orders for integrated solutions. The unfilled orders are primarily related to availability of certain ships and power supplies for our Pro Tools hardware, audio control services and live sound consoles. We expect to deliver significantly more integrated solutions revenue in the second half, but given the strong demand we’re seeing, we don’t expect to fully catch up on the production and shipments before the end of the year and as a result, we expect to have an elevated level of contractually committed orders at the end of 2022.

As we also indicated during our first quarter earnings call, risk remain from macro supply chain headwinds. So the recovery could be uneven and we have factored these risks as we understand them today into our Q3 and full year 2022 guidance. Perpetual licenses revenue was 2.7 million, a decrease of 53% year-over-year as we continue to the emphasize perpetual licenses and focus on strategic subscription revenue. We want to decline in perpetual revenue, total software revenue from subscription and perpetual licenses increased year-over-year by 35% in the second quarter as the subscription revenue growth significantly and exceeded the perpetual revenue decline.

Now moving to annual recurring revenue, LTM recurring revenue and annual contract value from long-term agreements. As our business model continues to rapidly move towards subscription, we introduce annual recurring revenue as a new key metric at our Investor Day in May. Annual recurring revenue based on the annualization of subscription and maintenance bookings was $231 million in the second quarter, an increase of $28.4 million or 14.1% year-over-year. Growth in AR was due to subscription ARR growth of 46% as we continue to drive a favorable conversion of maintenance revenue to subscription revenue plus adding new customers to our subscription business.

As expected subscription revenue growth is not always look going to track subscription ARR growth based on a few factors. First subscription revenue growth for a quarter can vary based on the size and number of enterprise subscription deals and we had a favorable comparison this quarter as the second quarter of 2021 had weaker subscription revenue on the enterprise segment. Second, as we discussed at our recent Investor Day, the revenue recognition of multi-years enterprise subscription deals under ASC 606 impacts the timing of the subscription revenue and create some unevenness that affects comparisons with ARR. Also the lower integrated solutions shipments in the first half, negatively impacted the maintenance ARR at June 30 as the unshipped orders would have contributed about $2 million to maintenance ARR from the first year of maintenance that is bundled with the product sale, impacting a 100 basis points of the ARR growth.

Our focus on growing our recurring revenue continues to drive healthier gross margin and greater predictability in our business. As of the second quarter LTM recurring revenue was 80% of total revenue, up from 76% a year ago and in line with our long-term model. The annual contract value from our long-term agreement was $96 million at the end of the second quarter, up 13% year-over-year excluding the subscription and maintenance portion, which is already captured in ARR. This growth is a result of increased ACV from strategic purchasing agreements with our channel partners. With the addition of ARR, we are going to de-emphasize the total ACV metric moving forward, though we have included in the appendix for reference.

Now let’s look at the operating results for the second quarter of 2022, total revenue in the second quarter was $97 million, up 3% year-over-year. We saw continued robust market demand but total revenue was constrained during the quarter as we ended the quarter with unfilled contractually committed orders for integrated solutions that were approximately $20 million more than normal. If we had ship all of these integrated solution orders, total revenue would have been in excess of $115 million for the second quarter.

Non-GAAP gross margin was 65, 5% for the second quarter, up 160 basis points year-over-year. Our high margin subscription business made up a large share of revenue resulting in the improved gross margin. We expect improving gross margin at our long-term model as we continue to drive robust growth in our subscription business. Non-GAAP operating expenses were 49.6 million in the second quarter, a $2.5 million increase year-over-year, due mainly to investments to support product innovation to drive our long-term business. Adjusted EBITDA was 16.5 million in the second quarter, up 4% or 700,000 year-over-year driven by the improvement in both revenue and non-GAAP gross margin. Adjusted EBITDA margin was 16.9% in the second quarter, an increase of 20 basis points compared to the prior year period. Finally, non-GAAP earnings per share was $0.26 for the first quarter, up $0.01 year-over-year.

Now let us look at the rest of our results for the second quarter of 2022. Our strategy of investing in innovation to drive higher quality recurring revenue together with the effective cost controls and reduced interest expense has resulted in a sustained trend of continued profitable growth. Free cash flow was 3.2 million in the quarter down 2.4 million year-over-year due to a 3.1 million increase in capital expenditures associated with our digital transformation and innovation investments as well as the pressure of lower product deliveries, which resulted in lower collections.

During the second quarter, we repurchased approximately 560,000 shares for $14.1 million, bringing total repurchases to 1.8 million shares for $50 million under the $115 million authorization announced in September 2021. We will continue to deploy capital prudently in the most responsible way to drive long-term shareholder value. We ended the quarter with a strong financial position with net debt to EBITDA of 1.8 times and a healthy liquidity profile of $95 million consisting of our cash balances and unused borrowings under our revolving credit facility.

Finally, let’s now turn to guidance. As Jeff said, we are confident in the underlying strength in our business, including the healthy market conditions and strong market demand for our solutions that we are seeing. We expect continued growth in subscription revenue from expected strong performance and enterprise subscription and solid performance from our creative tools. We expect contribution from recent new subscription product introductions, including the first full quarter of Pro Tools Artis plus our new NEXIS subscription offerings.

For the third quarter of 2022, our total revenue guidance is a $100 million to $112 million, a similar size range as was provided for our second quarter of 2022 solely related to the supply chain risk to integrated solutions revenue we discussed earlier. Our guidance for third quarter 2022 subscription and maintenance revenue is $67 to $70 million representing at the midpoint, 16.7% year-over-year growth in the third quarter. Our guidance for third quarter 2022 non-GAAP earnings per share is $0.27 to $0.39 assuming 45 million shares outstanding.

Our guidance for third quarter 2022 adjusted EBITDA is $17.5 million to $25 million at this time. We are also reaffirming our full-year 2022 guidance for subscription and maintenance revenue based on the strong demand we are seeing for these solutions, while we are seeing — also seeing healthy demand healthy market conditions and strong demand for our integrated solutions, the impact from the global supply chain challenges on our integrated solutions business and the expected timing of the recovery from these challenges are adding variability to our full-year 2022 business plans.

As a result, we are keeping the same midpoint but widening the range for our full-year 2022 revenue guidance to better reflect the range of possible outcomes for the year. Our guidance for 2022 total revenue is now $425 million to $455 million. Our guidance for 2022 subscription and maintenance revenue remains 266 million to 274 million, a range which represents year-over-year growth of 17% at the midpoint. Our guidance for 2022 non-GAAP earnings per share is now a $1.37 to $1.53 assuming 45.2 million shares outstanding reflecting the wider revenue range.

Our guidance for 2022 adjusted EBITDA is now $83 million to $95 million reflecting the wider revenue range. We are adjusting our guidance for 2022 free cash flow to 45 million to 59 million due to the factors that Jeff mentioned previously, which include, first, we’re seeing more rapid adoption of enterprise subscriptions across our global customer base while enterprise subscription is strategically important for the company and as a positive for our long-term model, it does have different near term cash conversion characteristics than our individual creative subscription business.

Next, given that we expect the recovery in our integrated solutions to be later in the second half. We currently expect that some of the cash collections from these shipments to fall into early 2023. And third, where we can, we plan to temporary build up inventories to add buffer stock and provide us greater flexibility to better navigate the variability in anticipated supply chain conditions over the next several quarters and most importantly to better meet the strong demand that we’re seeing for our products.

With that, I would like to turn the call back to Whit. Thank you, Jeff. Thank you, Ken. That concludes our prepared remarks and we are now happy to take your questions.

Questions and Answers:

Whit Rappole — Vice President, Corporate Development and Investor Relations

Our first question is from Jack Vander Aarde from Maxim to be followed by Josh Nichols. Jack, please go ahead. Hold on. Hang on Jack, we’ll come back to you.

Our next question will be from Josh Nichols from B.

Riley to be followed by Jack if we can get him. Josh, please go ahead.

Josh Nichols — B. Riley Financial — Analyst

Yeah, thanks. How’s it going? You can hear me okay?

Jeff Rosica — Chief Executive Officer & President

Yes, we can. Thanks, Josh.

Josh Nichols — B. Riley Financial — Analyst

Look, it seems like the subscription business is doing as good or better than people kind of thought, right, just some lingering headwinds on the supply chain side, but before we dive into that, I just wanted to know if you could provide a little bit more color on the company SAAS business. I know, it’s relatively small, but it’s been growing and I think you said at the Investor Day it was around like 7 million on a trailing 12-month basis. How is that growing so far? And what’s the opportunity to build that up over the next 12 months, is like a third leg of growth for the subscription SAAS piece.

Jeff Rosica — Chief Executive Officer & President

Hi, Josh. This is Jeff. Good question. I don’t think we’re going to unveil any more numbers than Ken already estimated at the Investor Day, but I’ll say this.

If you saw today’s announcement, you saw — you might have saw and it came out earlier today that we’ve signed a multiyear agreement with Amazon Studios, that is not in our numbers yet, that’s where we won’t be turning that system on too late this year, but I think we’re still, as you know, we’re on the early cusp of this third leg of growth for us.

We see some pretty robust growth in this part of our business over the next three years and so, we’re very happy with where it’s going, and we’re pretty excited about the agreement with Amazon Studios today because that’s going to be a pretty — I think it’s a pretty big deal in the eyes of Hollywood and the entertainment community.

Ken Gayron — Chief Financial Officer & Executive Vice President

Yeah, and just to add to that, obviously, the growth algorithm we put publicly with — related to our cloud business, as well as our subscription business, the growth algorithm for our creative business, our enterprise business, and our cloud businesses still holds and as Jeff pointed out, the Amazon announcement will likely accelerate the cloud evolution. So, we’re obviously pleased with the performance of that high-margin subscription business.

Josh Nichols — B. Riley Financial — Analyst

And I was going to follow up about the Amazon deal, congratulations, great to see a win like that multifaceted. Are you able to find any a bit more detail on the color as far as like this, there’s sort of the sizing, the breakdown, right of the revenue better or, if not, do you think the deal is really more emblematic of opportunities to grow across other platforms, given how dominant it’s become over the last few years as far as a media and entertainment company and production company?

Jeff Rosica — Chief Executive Officer & President

Yeah. look, we were not revealing with Amazon the size of the project or the size of the deal. I will say it’s substantial. It’s not just symbolic, it actually has a meaningful agreement that we have with them directly, because what we’re doing is actually helping them outfit their own production capabilities to be deployed globally for a lot of their productions they’re doing for Prime Video.

It is going to be — I think of fuel to help — fuel to Hollywood transition, obviously, it’s a big piece of news that Amazon Studios has made. It also, obviously, it’s Amazon. So, we are going to deploy it on the AWS environment, we’re working together with Amazon to do that deployment.

They actually are helping invest in that cost of that deployment. So, we’re in the midst of working on that now that developments been going on for several months and — but now, we’ve publicly announced that this has been going on and later this year, as I said — in this release said, our plan is to start to bring that system live for Amazon Studios, but it is a multi — it’s a sizable multiyear agreement that we’ve signed with them.

Josh Nichols — B. Riley Financial — Analyst

Thanks to that. Last question, honing in on the guidance a little bit, again, wider range, understandable, given what’s going on the supply chain for the hardware piece of the business, at least, could you help quantify like, what’s the delta as far as that you’re kind of factoring in for potential hardware range for the second — for the third quarter? And do you have a lot of visibility into how long it’ll take to get this right sized, or at least largely rightsized? Because historically, you’ve done a lot more hardware business like late in the fourth quarter and is that kind of still the expectation for this year, it’s likely going to be even more heavily fourth quarter-weighted?

Ken Gayron — Chief Financial Officer & Executive Vice President

I would say that, at this time, our seasonal pattern that the fourth quarter is strongest for the company will continue. We also will have much stronger integrated solutions and hardware revenue in that quarter, just given the seasonal pattern, we did widen the range on revenue, given the current supply chain conditions. We do expect gradual recovery and I would say that the recovery is more weighted toward the second half of the year. Hence, the change in the guidance, we still feel strong about the market demand for our solutions, but we need to temporarily bring up some inventories, if we can, to meet that demand, which along with the timing of the recovery on integrated solutions, plus the growth that we’re seeing in enterprise which has — totally different shorter cast characteristics is the reason why we’re changing the cash flow guidance.

Again, we feel good about our long-term model, we’re right where we want to be in terms of our subscription and maintenance business, and we feel good about the long-term cash flow of the company in terms of the conversion rate.

Jeff Rosica — Chief Executive Officer & President

Maybe I can just add, Josh. You asked the question about the timing, we are always fourth quarter-loaded for a lot of reasons. We will see that this year, for sure and we’re not necessarily laying out exactly what the numbers are the variability we see, I think you can see by the implied change in guidance, what the variability is that we see in the business, you can kind of see the numbers pretty clearly. The team is making good progress, we’re seeing some great results and we’re seeing some good plans for the second half. But we’re going to be careful, again, this is not about our suppliers and our factories, our factory production capacities, are there what we need, it really is about getting the ample chip supply and other components supply that we need to meet the demand we’re seeing. And we are to be clear, we are seeing healthier demand, and we originally expected this year.

Josh Nichols — B. Riley Financial — Analyst

And it does provide some help, but just to maybe simplify my question, if you have a $20 million backlog right or above normal at the end of 2Q, is your expectation at the end of the year, that’s more like a $5 million backlog or a $10 million backlog or any type of estimate that you had built into your guidance for here just to get an idea for how much that may flow through?

Jeff Rosica — Chief Executive Officer & President

Well, I wouldn’t say that we would necessarily give that number, Josh, because it really depends on bookings. Our commercial team can book more than we expected, and we could take an even bigger backlog into 2023. What we have modeled is our expectation for increased production, that’s going to happen in the second half, that increased production will be a lot more closer to our normal levels of production. It will be heavily weighted to Q4, but there will be improvements in the second half from a total production at the end of the semester, but the combination of just catching up to what our normal production levels are is not enough. We’ve got to try to go beyond that because supply or the demand is running even harder than our original expectation for supply requirements.

Josh Nichols — B. Riley Financial — Analyst

Thanks, then. I will hop back in the queue.

Whit Rappole — Vice President, Corporate Development and Investor Relations

All right. Next, we have Nehal Chokshi from Northland Securities to be followed by Paul Chung. Nehal, please go ahead.

Nehal Chokshi — Northland Securities — Analyst

Thank you, guys. And nice strong subscription revenue growth, as well as AR growth, both of them accelerate that’s awesome. And it sounds like it’s — enterprise subscription that’s driving that and that’s a little bit surprising given what you guys have described in the past typically seasonally weak conversions from maintenance subscription during the June quarter for enterprise and then also a weakening macro backdrop. So, given these negative tailwinds, what’s driving these really strong enterprise results?

Jeff Rosica — Chief Executive Officer & President

Well, I think first of all, I think the offering we’ve put together — Nehal. This is Jeff. The offering we’ve put together is very competitive and I think it’s really helping solve a lot of business problems and operational problems that our customers have.

When you say the macro, obviously we can all read the news and see the opinions on the macroeconomic conditions. We’re not seeing anything yet ourselves in the customers buying patterns that is weakening across the enterprise customers. We’re seeing still continued strength with them and I think the offering that we’ve put forth on our enterprise subscription offering is very attractive for enterprise customers because they’ve got their own challenges of trying to be more efficient with their content supply chains, how they’re going to produce more content for basically not the same amount of money for sometimes less or same amount of money.

So, they’ve got their own strategic priorities that they’re dealing with as the models are shifting. I think we have a very attractive toolset that has got a very attractive offering for them and our commercial team is — I would say that our commercial team has built a really great engine on how to take customers to a subscription and I think it’s all showing up to be great success for us.

And you’re right, typically, maintenance-to-subscription conversions are best in Q4 and Q1 period, but I think for all the reasons I just said, we are seeing strength throughout the year lately, and that’s, again, for all the reasons I laid out for you.

Nehal Chokshi — Northland Securities — Analyst

Okay, second question. The supply chain constructions extended different product lines within the integrated solution.

Jeff Rosica — Chief Executive Officer & President

Well, its — so the situation has been hitting across the board. I can’t say that there isn’t. Our team is dealing with issues across almost every product we make. Some of those issues are able to be mitigated quickly and resolve quickly others are tougher to solve for us.

So, I don’t want to leave you with — our team is dealing with issues across the board, but again, some are slower to recover, some are more difficult to recover from.

Nehal Chokshi — Northland Securities — Analyst

Perfect. And what was actually the unfilled all level above normal levels for the March quarter?

Jeff Rosica — Chief Executive Officer & President

Well, if you remember we said it was in excess of 10 when we left Q1, and when we left Q2, we’re making clear that it’s in excess — its well over 20 million today.

Nehal Chokshi — Northland Securities — Analyst

Great. Thank you very much.

Jeff Rosica — Chief Executive Officer & President

Yeah.

Whit Rappole — Vice President, Corporate Development and Investor Relations

All right. Thank you, Nehal.

Our next question is from Paul Chung at JPMorgan, to be followed by Steve Frankel. Paul, please go ahead.

Paul Chung — JPMorgan Chase and Company — Analyst

Hi, thanks for taking my questions. So just on the enterprise adds, is there any kind of seasonality that impacts adds here? I assume they can be lumpy at times, but how do you think about that pace it adds through second half of ’22 and kind of respective impact on pricing? I know, it’s still a small percentage today but any insight on enterprise trends as we move into ’23?

Jeff Rosica — Chief Executive Officer & President

I think, yeah, Paul, good question. I think I would say from a business perspective, I’ll let Ken maybe speak to more of the financial element, but from a business perspective, traditionally for customers we’re converting from maintenance to subscription, Q4 and Q1 are traditionally the strongest quarters that we seasonally have to convert them to that model. What the team is finding is that because customers are looking at their business and looking at their strategic priorities, we’re finding that we’re getting customers to move anywhere in the year and our team has been very, very good at coming to them with offers that can expand our footprint in these customers.

So there will always be seasonal strength in Q4 and Q1 but I think we’re seeing some goodness across the year. I mean Q2 was great, we saw great conversion. I think as we look forward, we see strength in this part of our business for sure. And Paul we’re also expanding the offering and it originally started with just MediaCentral, we have expanded to now — we can add to that MediaCentral subscription around NEXIS, we’re going to be soon adding graphics products into that offering. So we’re continuing to expand that offering as we go.

Paul Chung — JPMorgan Chase and Company — Analyst

And then, can you expand on the cash impact? What kind of determines the different cash timing I guess, do certain enterprises pay during certain quarters and how has that evolved?

Ken Gayron — Chief Financial Officer & Executive Vice President

Yeah, so we typically obviously bill, if it’s a — let’s say a two year deal, one year we build, the first year and there’ll be a second on the second year so for example, on a two year deal. So we’re getting the cash over two years versus a creative which we may be built on an annual basis where they’re paying upfront annually. So as strategically we move to the enterprise, which is important from a strategic element because it’s stickier revenue higher ARPU as we built the business there is the near-term cash characteristics are longer than a creative individual that is signed in a year and then you typically is paid upfront in the year.

So that’s what we’re seeing in the cash.

Paul Chung — JPMorgan Chase and Company — Analyst

Then, once you start to get some visibility into the multi-year agreement with Amazon, I mean the impact on revenues and margins, sounds pretty material and provide some nice kind of upside to sales and margins and cash flows, I assume so does this start to accelerate in Q4 or early next year?

Jeff Rosica — Chief Executive Officer & President

I wouldn’t say that. I mean, obviously Q4 is always a strong quarter for us, but it’s — when you say material I mean look, it’s a sizable contract. I think like many of our enterprise customers they are sizable contracts, it’s similar to some of the other bigger agreements that we have for the enterprise subscription business. This will be similar to that, again, we’re not stating numbers, but it’s an important contract. I think also, it’s another example that I think it’s going to help move the industry, help motivate the industry to move faster.

From what I’ve seen just today from the responses I’m getting myself even on email or text from customers, it resonated in a big way today across the entertainment business.

Paul Chung — JPMorgan Chase and Company — Analyst

It’s awesome. And then, lastly any FX impact in the quarter and for the year? Thank you.

Ken Gayron — Chief Financial Officer & Executive Vice President

Yeah, so FX was a headwind of $1.5 million in the quarter — for this quarter, in terms of revenue and at this point it is impacting us negatively in Q3 as well. So, it is a headwind on revenue. I would say we do get the benefit on opex, on FX, but from an EBITDA net income perspective, it is negative.

Paul Chung — JPMorgan Chase and Company — Analyst

Thank you.

Ken Gayron — Chief Financial Officer & Executive Vice President

You’re welcome.

Whit Rappole — Vice President, Corporate Development and Investor Relations

All right. Our next question is from Steve Frankel at Rosenblatt Securities to be followed by Samad Samana.

Steve Frankel — Colliers International — Analyst

Hi, good afternoon and thank you. Jeff on the hardware backlog, are you missing or losing some opportunities or market share from customers that need this equipment around advance?

Jeff Rosica — Chief Executive Officer & President

No not yet, Steve. I think it’s a good question. The team has done a great job. First of all, this problem is hitting a lot of — if you’re talking about the event business, if you’re talking about like live sound and some of the event business all of the suppliers are facing issues across the board on this. So I think it’s kind of an even situation with the big suppliers.

I’d say that we are starting to see some movement of production on the live sound as an example for events business for the summer and so we’re starting to move some of that you see more of that moving in Q3, but it’s so far, I’d say we’ve seen really strong demand and demand continues, we’re building a pretty significant contractually contracted backlog for immediate delivery as soon as we can build. So far, we’re comfortable with it and as I’ve talked to our Head of Commercial, if they’re losing business, it’s a minuscule there’s nothing major they’re losing at this point.

Steve Frankel — Colliers International — Analyst

Okay. And then, on the perpetual business which dropped much faster than at least I had modeled, is that the new normal? And that reflects these enterprise conversions or was there something else going on in the quarter that caused a significant sequential drop in the perpetual?

Ken Gayron — Chief Financial Officer & Executive Vice President

Yeah, so I would say that on the perpetual business in terms of moving forward, I would say that the level that we have there is probably likely in that range within $1 million per quarter $0.5 million per quarter in terms of that range. We will be looking to optimize price in perpetual to minuscule to subscription. There was one, I would say product area that we did in the perpetual that had a little bit of a headwind this quarter.

We don’t expect any big end of life for the perpetual in the next couple of quarters. So that’s why I think this area, you’re going to see within $0.5 million to $1 million.

Steve Frankel — Colliers International — Analyst

Okay. And then to just drill down on the creative net adds were the smallest number in quite a while, are you confident that that’s the bottom and do you have marketing programs and other things in the works to help make sure that snaps back in Q3 and Q4?

Ken Gayron — Chief Financial Officer & Executive Vice President

Yeah, so first, I think on the creative net adds there, if you go back several years, I’m going back to even 2019, Q2 is typically a downturn in terms of the net adds versus Q1 and that’s related to the education cycle. We actually saw in Q2 the lowest sequential drop when you look back three years and so I just want to put that in perspective. That said, we are looking at driving, I would say we did a re-tiering on Pro Tools that we mentioned, we’re optimizing our go-to-market to drive better performance and I do expect that the creative net adds will improve in the second half of the year versus the Q2 performance.

Steve Frankel — Colliers International — Analyst

Okay. Great. Thank you.

Ken Gayron — Chief Financial Officer & Executive Vice President

You’re welcome. Thank you, Steve.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Next, we have Samad Samana from Jefferies, to be followed by Jack Vander Aarde. Samad, please go ahead.

Samad Samana — Jefferies — Analyst

Great. Thank you, Whit. And it’s good to hear from you, Jeff and Ken. Hope you’re doing well. Maybe first, on the Amazon deal, I totally hear you on the timing as far as how it impacts your business but maybe, is there anything else under the hood there in terms of will Avid be using AWS for your own hosting? Are you already using it? Is there a potential gross margin tailwind that we could see, as part of this? I don’t know if there is anything else involved beyond just the Amazon Studio side of the deal?

Jeff Rosica — Chief Executive Officer & President

Yeah, no, this is just a deal between Amazon Studios and Avid. We are deploying the Avid Technology stack in the AWS environment. As you know, today Microsoft Azure is our strategic partner, they continue to be our partner, our preferred partner, they are our partner for all of our SAAS offerings like add-on demand run from the Azure environment, but certain customers are going to want to deploy in an AWS environment.

Obviously Amazon Studios wants to deploy in an AWS environment, no question there. So we’re working with them to get these systems that they want to deploy, which are basically our core production environment, whether its Media Composer or MediaCentral or NEXIS that’s all being — as you know NEXIS was being — is running — NEXIS file system is running in the Azure system when we’re done here with Amazon Studios, the NEXIS file system, and the MediaCentral platform will be running natively in the AWS environment for Amazon Studios.

There’ll be other customers that want to deploy in AWS environment but no, it doesn’t change our strategic partnership with Azure, which Azure is who hosts all of our enterprise environment runs in Azure.

Samad Samana — Jefferies — Analyst

Great. And then, maybe Ken I wanted to double click on that FX question? I know you gave the consolidated amount, can you just for, our focus tends to be on the subscription line most and so as I think about where that FX exposure actually hits you, how much of that is maybe isolated to subscription like may be what’s the geo mix there versus the overall revenue mix, which we know from the filings?

Ken Gayron — Chief Financial Officer & Executive Vice President

Yeah. So $1.5 million is the total, the subscription is likely in the $400,000 range of that $1.5 million, $350,000 to $400,000 range.

Samad Samana — Jefferies — Analyst

Okay, great. And then maybe just one more, and then I’ll pass the baton, but just, Jeff, when I think about the changes — the premium model, and I’m curious what you’re seeing now we’ve had enough time, is there a change to maybe the top of the funnel that’s worth calling out? Is there a change in maybe the retention of who you are converting just anything that you can share, now that we’ve had enough time to maybe see some patterns there?

Jeff Rosica — Chief Executive Officer & President

I’d say convert numbers, the conversion numbers are still looking very good for us and they’re quite good and I’d say retention is still what we expect in the business. On the freemium model, it is an acquisition tool and we have been leaning into trial. I would say somewhat, what I can say publicly is we’re looking at all that very carefully to understand what our strategy is on the freemium level. I would just say stay tuned maybe some more news coming on that.

Samad Samana — Jefferies — Analyst

Understood and I will stay tuned. Thanks, gentlemen.

Jeff Rosica — Chief Executive Officer & President

Thanks Samad.

Whit Rappole — Vice President, Corporate Development and Investor Relations

All right and next, we will come back to Jack Vander Aarde. Jack, are you there?

Jack Vander Aarde — Maxim Group — Analyst

Hey, Whit. Jack’s here. Can you hear me okay?

Whit Rappole — Vice President, Corporate Development and Investor Relations

We can. Thank you.

Jack Vander Aarde — Maxim Group — Analyst

All right, great. Sorry for fudging the microphone earlier but thanks for the update. So, maybe just a quick question for clarity on integrated solutions back orders. Those are about I guess $20 million at the end of the quarter and I think I recall similar dynamic last quarter I think it was about $10 million of backlog.

Jeff Rosica — Chief Executive Officer & President

Yeah, true.

Jack Vander Aarde — Maxim Group — Analyst

Is this an apples-to-apples comparison — did this accumulate? Did you recognize some of that $10 million during the second quarter? Or just — was that $10 million of ores [Phonetic] building up?

Jeff Rosica — Chief Executive Officer & President

Yes, it’s building up but it’s, remember it’s kind of like a bucket where you’ve got water coming in one side and water going out the other. Obviously, a lot of what we carried over from Q1, some of that was resolved during Q2 but we also got a lot of new orders in Q2. So the demand, the best way to think about it is the demand is moving faster than our ability to move the supply up. That’s it why it went from $10 million aggregate to $20 million, it built over the course of Q2 because the demand for the product was coming in faster than we could ship.

And so that’s good news and that demand is very high obviously we don’t like carrying over $20 million in unfulfilled contractually obligated orders that — these are customers who want immediate delivery. This is not backlog for future deliveries, this is stuff that traditionally Jack we carry about $1 million or $2 million that we can’t fulfill in one quarter to another that’s about our traditional pattern. This is obviously significantly more than that because of the production levels.

Jack Vander Aarde — Maxim Group — Analyst

Okay, got you. That’s helpful. Since I fudged the microphone to start a lot of my questions were already asked, so I’m going to try more of a fun question or bigger picture topic, given your creative focus, so NFT blockchain web, not sure if you’ve given the idea any meaningful thought or seeing the obvious compelling opportunities that would make sense. But just like to hear your perspective because in a vacuum or at least on paper, I think the idea has led to when concerning the core competencies and damage technology and product offerings and your target customer basis are technically creative. Is there a place for NFTs or Web 3.0 design with your business and given your young creative base a Pro Tools users, may they want to create an NFT to market themselves? Just wondering if that is a place in your product portfolio?

Jeff Rosica — Chief Executive Officer & President

Well, I wouldn’t necessarily address that directly. I’d say this, our teams are looking at all of these things, including, I mean the deep fake subjects, AI. I mean, there are so many subjects we’re working on, including things like Web 3.0, et cetera. But I think that that’s — those are innovation plans our team is looking at what our role is and what, how we could leverage those technologies, but I think a lot of those workflows are still being kind of figured out as an industry. We’re in that looking at what our role is, I wouldn’t give you a direct answer today, but I would say it’s an interesting space in that there are so many developments technologically that give us some opportunity out there.

Jack Vander Aarde — Maxim Group — Analyst

Got it. And then just to be, one more just to be crystal clear, the long-term plans in May Investor Day recently, that is completely unchanged, you’re still on track and this Amazon announcement is not baked into that at all is that correct?

Jeff Rosica — Chief Executive Officer & President

No, the Amazon say — not baked into it. We consider a lot of things when we look at the — when we look at the forecast and where the business is going. Amazon, a lot of customers, are considered in our forecasting of things. Look, we’ve known about Amazon as a company for several months, we’ve been doing the R&D with them for over six months. So we’ve known about this a while. This is really just more public information that is now finally coming out.

Jack Vander Aarde — Maxim Group — Analyst

Okay, got it. That’s helpful. Well, I appreciate the time. I’ll hop back in the queue.

Jeff Rosica — Chief Executive Officer & President

Thanks, Jack.

Whit Rappole — Vice President, Corporate Development and Investor Relations

And that concludes the Q&A session. I’ll now turn it back to Jeff for concluding remarks.

Jeff Rosica — Chief Executive Officer & President

All right, Whit. Thank you for your participation and your questions. In closing, I do want to reiterate that we believe we will continue to see strong demand across the end markets of our solutions, including our growing subscription business. And we are managing through this temporary supply chain headwinds to enable Avid to continue to achieve our company strategy and our long-term growth plan and profitability targets as we move forward through 2022 and beyond. And with that, I just want to say, hope everyone has a nice evening. Thanks again. Thank you. You may all now disconnect.