X

Avid Technology Inc (AVID) Q4 2022 Earnings Call Transcript

Avid Technology Inc (NASDAQ:AVID) Q4 2022 Earnings Call dated Mar. 01, 2023.

Corporate Participants:

Whit Rappole — Vice President, Corporate Development and Investor Relations

Jeff Rosica — Chief Executive Officer and President

Ken Gayron — Chief Financial Officer and Executive Vice President

Analysts:

Josh Nichols — B. Riley — Analyst

Jeremy Sahler — Jefferies — Analyst

Nehal Chokshi — Northland — Analyst

Paul Chung — J.P. Morgan — Analyst

Jack Vander Aarde — Maxim — Analyst

Presentation:

Whit Rappole — Vice President, Corporate Development and Investor Relations

Good afternoon, ladies and gentlemen, and welcome to Avid Technology’s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Whit Rappole, Avid’s Vice President, Corporate Development & Investor Relations. Please note that this call is being recorded today, March 1, 2023 at 5:30 P.M. Eastern Time.

With me this afternoon are Jeff Rosica, our Chief Executive Officer, 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 this 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 Relations 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, figures noted by management during the call are non-GAAP, except for revenue, which is always GAAP.

In addition, certain statements made during today’s presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this, call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcomes. 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 Report on Form 10-K 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 and President

Thanks, Whit, and my thanks to everyone joining us today to review Avid’s fourth quarter and fiscal year 2022 results.

There is a lot to talk about today, so let’s dive right into the details. We again realized solid overall business performance in the quarter, as we continued to see healthy market conditions, and strong customer demand for Avid Solutions, and ended the year with good momentum as we head into 2023.

I’m very pleased with the results for Q4, as the business continued to perform quite well, with the continued growth of our recurring revenue streams, driven by strong subscription revenue growth, and robust AR growth in the quarter. As we benefit from subscription becoming a considerably larger portion of our business, and the concurrent acceleration of enterprise subscriptions, as part of the normal financial closing process for 2022, in consultation with our independent auditor, we reviewed the assumptions and methodology we were using around standalone selling price or SSP, which is a key component used for determining the revenue recognition for subscriptions.

After reviewing, in detail, the various assumptions that we used historically for the SSP calculations across all of our subscription SKUs, we’ve revised our methodologies and we will be using these going forward. As a technical accounting matter, in line with these revised methodologies, we booked a one-time non-cash corrective adjustment in Q4, which trued up to the effect of these SSP calculations going back to 2022. The one-time adjustment adversely impacted reported revenue by $3.3 million, and adjusted EBITDA and non-GAAP net income by $2.4 million in the fourth quarter. Ken will explain in more details how these numbers are related to the impacted periods.

Now this purely accounting headwind was immaterial in the context of the entirety of the past three years. However, because the prior period true-up had an impact on reported Q4 results, you will see that our press release and earnings materials seek to allow investors to make what we believe to be an apples-to-apples comparisons for the relevant periods in 2022. If not for this accounting adjustment, we would have delivered revenue and non-GAAP EPS at the high end of our guidance, and adjusted EBITDA within our guidance.

In an effort to simplify our story for investors, given the complexity of ASC 606 accounting and SSP methodologies, we are pleased to introduce ARR as a guidance metric this quarter. As we have discussed with investors over the past year, we believe that this metric will be useful for investors in better understanding the real underlying growth trajectory of our subscription business. Ken will review all of this in detail in a few minutes.

We ended 2022 with terrific momentum, and Q4 was another strong booking quarter across all geographies and markets. One other important takeaway is that in the fourth quarter, integrated solutions revenue increased 55% sequentially, as we are beginning to make good progress and working to resolve the challenges of the global supply chain situation on our business. As a result of continued strong integrated solutions orders received during the fourth quarter, the backlog of unshipped orders was reduced during the quarter, but remained above normal levels at the end of 2022 at over $20 million.

Let me now discuss some more specifics around our business performance. The recurring revenue components of the Company’s business, which are, obviously, quite strategic for the Company, remained strong during the fourth quarter, largely driven by the continued strong performance of our subscription business for both enterprises and creatives.

As I talked about previously, ARR has become a better metric for us, as the subscription and SaaS business continues to grow, giving us a more valuable measurement of performance. Subscription ARR was $141.3 million at the end of 2022, an increase of 37.1% year-over-year, and total ARR was $244.9 million, an increase of 10.2% year-over-year.

At constant-currency, subscription ARR increased 38.8% year-over-year, and total ARR increased 13.4% year-over-year. Subscription revenue during the fourth quarter was $42.5 million, an increase of 24.6% year-over-year. Constant-currency subscription revenue increased 29.6% year-over-year. Excluding the one-time accounting adjustment in the quarter that I spoke about earlier, subscription revenue increased 34.3% year-over-year and 39.2% year-over-year at constant currency.

New subscriber growth for both our enterprise solutions and creative tools continued to grow nicely, with paid cloud-enabled software subscriptions, increasing by 23,100 during the quarter. It is quite noteworthy that we exceeded 0.5 million paid cloud-enabled software subscriptions as of December 31, 2022, an increase of over 23% year-over-year. This is an exciting and important milestone for the Company. Our enterprise subscription business is a fast-growing and quite valuable part of our business today, and will be into the future.

The shift to subscription for our enterprise clients has been quite successful and we continue to outpace our own expectations. Our sales team continues to be very effective in moving our customers towards our enterprise subscription offerings, with over 50 new agreements signed just this past quarter, most of which are multi-year agreements with accounts like Globo in Brazil, Network 10 in Australia, and A+E Networks here in the U.S. Our enterprise subscription agreements are quite valuable for the Company, especially with the multi-year of contractual commitment with these enterprise customers, as well as a robust uplift, and increase in ARR that we are realizing. This has also motivated us to accelerate the end of our perpetual license options, which is the right business decision for the Company. Though, it does create a bit of a near-term comparative headwind.

With that said, our enterprise subscription agreements with the inherent multi-year contractual elements have different timing characteristics for cash conversion than annual or monthly subscriptions. This put some near-term pressure on our cash flow, due to the timing, or a J curve effect on cash billings. This pressure will ease as we complete the initial conversion of our enterprise customers to subscriptions, and does not change our assumptions in our long-term model. Ken will also discuss this cash conversion dynamic in more detail, during his remarks.

Overall, we continued to see healthy customer demand for MediaCentral and associated apps, with significant net new subscription adds during Q4, as enterprise customers continued to embrace our subscription offering, and have been investing in enabling new remote production workflows, and addressing the growing demand for content creation in television, and film production. In our creative tools segment, we saw a continued solid stream of net subscription adds both in Pro Tools and Media Composer, that contributed to our subscription revenue growth. We did experience a slight pullback in the number of net subscriptions for Sibelius in the quarter, though it was mainly in the lower price tears, so ultimately, we still ended with strong subscription revenue growth for Sibelius.

Our new Pro Tools tiered offerings continued to bring us new next-generation music creators, in support of our long-term strategy. We continue to see subscriber growth in the newer low-end artist tier, which shows our decision to offer a lower priced offering was the right thing to do. And Pro Tools Intro, the new free tier announced last September, has registered over 150,000 activations to date. It continues to become a strong new acquisition vehicle for future subscribers, as we’re seeing good initial conversion rates to paid subscribers. We expect this to be a great growth engine for us in 2023. And finally, recurring revenue was 84.5% of total revenue for 2022, which was up 650 basis points from the prior year.

Now, let me take a couple of minutes to discuss a few of the key outcomes from fiscal year 2022. I’m proud of how the team executed throughout 2022 and delivered growth in both revenue and profitability despite numerous macro headwinds, including unfavorable foreign currency exchange rates and a difficult global supply chain environment during the year. In 2022, we released several innovative new product releases, including NEXIS EDGE, MBOX Studio, NEXIS F-series subscription, Carbon Pre, VENUE Stage 48, and for our creative users, we delivered several important updates to Pro Tools and Media Composer, addressing shifting market requirements with the highly anticipated initial enhancements for picture and sound workflows and several new plug-in options for music creators.

With the market dynamics for our customers that they’ve experienced this past year, our priority was to shift and support their changing business and technology requirements. And we continue to address new competitive challenges and next-generation user requirements, while meeting our near-term growth and profitability objectives. For the full year in 2022, subscription revenue was $151.3 million, an increase of 37.1% year-over-year. Excluding the one-time adjustment booked in Q4, subscription revenue would have increased over 42% year-over-year and over 47% year-over-year at constant currency.

As I mentioned before, enterprise subscriptions performed well ahead of expectations, as we saw a high level of demand for our enterprise customers throughout the year, making the transition to subscription as seen in significant momentum with customers such as Amazon Studios, Fox, ITV News, Paramount Global, NFL Films. Creative tools also saw consistent growth throughout the year. We realized a total of 95,400 net additions for paid cloud-enabled software subscriptions in 2022, which was right in line with our long-term model and our strategic growth plan.

Total revenue for the fiscal year 2022 came in at $417.4 million, an increase of 5.3% as measured on a constant-currency basis. Excluding the one-time adjustment in the fourth quarter, total revenue would have increased over 6% year-over-year on a constant-currency basis. Most importantly, we continue to deliver improved profitability in 2022, delivering adjusted EBITDA of $81.6 million and adjusted and adjusted EBITDA margin was 19.5%, an increase of 110 basis points year-over-year. Excluding the one-time adjustment in the fourth quarter, adjusted EBITDA would have increased 11.3% year-over-year and 21.3% year-over-year at constant currency.

And finally, we continued our approach to strategic capital deployment to optimize shareholder value throughout the year and over the course of 2022. The Company repurchased 2 million shares for $52.8 million, including purchasing 360,000 shares for $9.3 million in the fourth quarter. As we enter 2023, we feel confident in the underlying performance of the business, as our product innovations continue to drive healthy market and customer demand. Like most organizations, we’ll need to be proactive in navigating global macroeconomic situations that may unfold during the year, but we have carefully considered that in our full year and first quarter guidance for 2023.

As you’ll see in our guidance, we expect to deliver continued growth in revenues, profitability and free cash flow for 2023. We anticipate continued strength of our subscription business for both creative tools and enterprises with additional contribution from new subscription solutions coming to market during the year. We expect to deliver sustained subscription revenue growth and a double-digit increase in both subscription ARR and total ARR for 2023.

In our creative tools business, we have additional exciting music creation innovations coming this summer that will contribute to Pro Tools’ growth. In enterprise, we’ve converted about one-third of our customers to subscription and we expect that the innovations we’ve delivered and have planned for later this year will contribute to drive enterprise subscription growth. The ongoing transition of our enterprise customer base to subscription will continue to impact free cash flow in the near term, but longer term, will stabilize, as I mentioned earlier with the J-curve effect of that business on cash flow.

Regarding our continued recovery from the impacts of the global supply chain situation, on top of our progress that we made in Q4, where we resumed volume shipments of our live sound and the control services, we do anticipate working through much of the remaining supply chain impacts we’re currently seeing by mid-year. Specifically, we expect to resume volume shipments for additional audio products in the second quarter that we do not foresee much additional progress during Q1. Again, this has been factored into our guidance.

As always, we will continue our efforts and remain disciplined to improve efficiency and carefully manage our cost structure, while we also continuing to make investments in new strategic innovations, as well as our digital transformation in support of our long-term strategic growth plan. As we’ve shown in the past few years, this team manages proactively with speed and tight controls to ensure we deliver year-over-year improvements in profitability, while we also focus on both near term and long-term growth.

We have continued to develop new management talent for our future, including hiring a new General Manager of our Audio & Music Solutions business last year. Among other initiatives, last month, we announced a voluntary retirement program that we believe will help to ensure that we are able to continue to drive cost efficiencies, while also infusing our organization with additional new talent and skills that we need to execute towards our future. In 2023, we’ll continue our emphasis on good execution and improving profitability, while remaining hyper-focused on driving growth in our recurring revenue, including subscription and SaaS.

I am excited about the talented team we have assembled here and strategic innovation, big bets that we have in development. I also have confidence in this management team’s proven ability to proactively manage any macro headwinds that we may encounter and continue our focus on delivering improved shareholder value.

So with that, let me now turn the call over to Ken to review more of the financial details. Over to you, Ken.

Ken Gayron — Chief Financial Officer and Executive Vice President

Thank you, Jeff, and good afternoon, everyone. Overall, we had a solid quarter with strong growth in our subscription business, including 37% growth year-over-year in subscription ARR and 10.2% year-over-year growth in total ARR. At constant currency, subscription ARR increased 38.8% year-over-year and total ARR grew 13.4% year-over-year, as FX was a headwind in the quarter.

As Jeff mentioned Avid booked a negative $3.3 million non-cash adjustment to revenue in Q4 related to a change in methodology for a standalone selling price for subscription term-based licenses. This is due largely to the evolving nature of assessing SSP and some of the new observable inputs that impacted our assumptions for SSP. The reason for the correction is that we saw our enterprise subscription business accelerate at a faster rate than anticipated in 2021 and 2022. And with this development, we updated our methodology for SSP in the fourth quarter of 2022. This adjustment is one-time and represented immaterial corrective change for prior periods, consisting of positive $100,000 related to 2020, negative $2.1 million related to 2021, and negative $1.3 million for the nine months ended September 30, 2022.

This one-time non-cash adjustment is immaterial in terms of our overall revenue, as it represents 30 basis points of total revenue for the period from 2020 to 2022. However, it did adversely impact our fourth quarter results as the adjustment negatively impacted revenue by $3.3 million and EBITDA by $2.4 million, respectively, as all prior period changes were booked in Q4 2022. However, when you exclude this one-time non-cash revenue adjustment and the associated bonus adjustment, we would have delivered revenue and non-GAAP EPS at the high end of our guidance range and adjusted EBITDA within the implied range.

As we look forward, the new methodology is expected to have an immaterial impact to our fiscal ’23 results, and we have factored this into our 2023 guidance. Given the corrected accounting methodology, we feel even more strongly that ARR, which reflects the actual annualized contract value for subscription and maintenance customer agreements, is the most important metric when assessing the health of our growing subscription business. As such, we are introducing ARR guidance to help investors evaluate the future trends for Avid subscription and maintenance business.

With that, let’s now turn to the details of our fourth quarter and fiscal year 2022 financial results. We are encouraged by the continued growth of our paid subscription base. Our total subscription count exceeded $0.5 million at the end of the fourth quarter, an increase of 23% year-over-year. Creative subscription growth was solid and enterprise subscription performance in the fourth quarter continue to exceed our expectations. We added approximately 12,800 new creative subscription users, reflecting growth of 15.7% year-over-year. At September 2022, we introduced Pro Tools Intro, a new introductory free version, aimed to capture aspiring music creators and further build the rapidly expanding Pro Tools ecosystem. We have seen more than 150,000 sign-ups to Pro Tools Intro to date, increasing the pool of users to potentially convert to paid subscriptions as we move forward.

Moving to our enterprise business, MediaCentral subscriptions grew to approximately 45,900, an increase of about 10,300 during the fourth quarter, representing year-over-year growth of 249%. The increase in enterprise subscriptions furthers our confidence in the transition of our existing customer base to subscription. We believe we have converted about one-third of the existing MediaCentral professional customer to subscription in terms of dollars during the first two years of availability, so we still have a lot of opportunity ahead. As our enterprise subscription business continues to become a more meaningful part of our subscription mix, it is positively impacting our overall price per seat as the price of an enterprise seat is a multiple of the price of creative seat.

Now moving to annual revenue — recurring revenue and LTM recurring revenue. Annual recurring revenue based on the annualization of subscription and maintenance bookings was $245 million in the fourth quarter, an increase of $23 million or 10% year-over-year and 13% year-over-year at constant currency. Growth in ARR was due to subscription ARR growth of 37% as we continue to convert maintenance customer to subscription at healthy uplifts plus add new customers. At constant currency, subscription ARR increased 39% year-over-year.

Our focus on growing our recurring revenue continues to drive greater predictability in our business and results in improvements in gross margin over time. As of the fourth quarter, LTM recurring revenue was 84.5% of total revenue, up from 78% a year ago and in line with our long-term model.

Now, let’s look at our results for the fourth quarter of 2022 beginning with the components of our revenue. The consistent growth in the number of paid subscriptions drove continued growth in our subscription revenue during the fourth quarter, which reached $42.5 million, an increase of 25% year-over-year and 30% on a constant-currency basis. Excluding the one-time non-cash revenue adjustment of $3.3 million in the quarter, subscription revenue would have increased 34.3% year-over-year and 39.2% year-over-year at constant currency.

Maintenance continues to be a solid part of the business. During the fourth quarter, maintenance revenue was $26.5 million, down 16% year-over-year. As we continue to successfully convert our enterprise customers to subscription offerings at healthy uplifts in excess of 140%, we are seeing a reduction in the related software maintenance revenue from those customers.

Total subscription and maintenance revenue increased year-over-year by 5% in the fourth quarter and 9% on a constant-currency basis. Excluding the one-time non-cash revenue adjustment in the quarter, subscription and maintenance revenue would have increased 10.3% year-over-year and 14.3% year-over-year at constant currency. In the fourth quarter, integrated solutions revenue was $40.8 million, a decrease of 4% year-over-year, but 55% higher than during the previous quarter as we continued to resolve supply chain issues through finding alternative sources of supply, selective redesigns and other means.

Total combined integrated solutions, perpetual and professional services revenue was $47.2 million in the fourth quarter. Total revenue in the fourth quarter was $116.1 million, down 2.5% year-over-year and up 2% at constant currency. Excluding the one-time non-cash revenue adjustment in the quarter, total revenue would have increased 0.3% year-over-year and 4.4% year-over-year at constant currency.

Non-GAAP gross margin was 64.6% for the fourth quarter, down 160 basis points year-over-year and down 30 basis points at constant currency. We were successful at shipping a large portion of our live sound backlog in Q4, but this did impact our overall gross margins for the quarter. Also, the one-time non-cash revenue adjustment in the quarter adversely impacted non-GAAP gross margin by 80 basis points in the quarter.

Non-GAAP operating expenses were $52.5 million in the fourth quarter, a $3.3 million decrease year-over-year. The impact of FX favorably impacted our operating expenses in the quarter as our global cost base does provide a partial hedge against currency fluctuations. Also, our bonus accrual was reduced by $700,000 in the quarter as a result of the one-time non-cash accounting adjustment.

Adjusted EBITDA was $24.8 million in the fourth quarter, down $150,000 year-over-year. When adjusting for the FX impact to both revenue and cost, adjusted EBITDA was negatively impacted by approximately $2.1 million in the quarter. Excluding the one-time non-cash revenue adjustment in the quarter and the adjustments to the bonus, adjusted EBITDA would have been $2.4 million higher than the reported results at $27.2 million in the quarter and on a constant-currency basis, adjusted EBITDA would have been $29.2 million in the quarter.

Finally, non-GAAP earnings per share was $0.45 in the fourth quarter, down $0.01 year-over-year. When adjusting for the FX impact to both revenue and costs, non-GAAP earnings per share was $0.49. Excluding the one-time non-cash revenue adjustment and bonus adjustment in the quarter, non-GAAP earnings per share would have been $0.51 and on a constant-currency basis, non-GAAP EPS would have been $0.55.

Next, let’s look at the results for our full-year 2020 [Phonetic], beginning with the components of our revenue. For the full year, subscription revenue was $151.3 million, up 40% year-over-year and 45% on a constant-currency basis. Excluding the one-time non-cash revenue adjustment in the fourth quarter, subscription revenue increased 43% year-over-year and 48% year-over-year at constant currency. For the full year, maintenance revenue was $109.8 million, down 10% year-over-year. Subscription and maintenance revenue saw 13% growth for the full year 2022 and 16% at constant currency, which is in line with our long-term plan. Excluding the one-time non-cash revenue adjustment in the fourth quarter, FY ’22 subscription and maintenance revenue would have increased 14.6% year-over-year and 17.8% year-over-year at constant currency.

Perpetual license revenue was $11.1 million for the full year 2022, a decrease of 53% year-over-year as we continue to de-emphasize perpetual licenses and focus on strategic subscription revenue. Integrated solutions revenue was $123.3 million in full year 2022, down 6% or $7.8 million year-over-year, due to the supply chain headwinds related to certain parts of our audio business. Although we are seeing improvements in our backlog in the quarter as anticipated as we resolved certain supply chain issues, we continue to see strong orders. And as a result, we ended the year with over $20 million of backlog at 12/31/2022.

Total revenue for the full year 2022 was $417.4 million, up 2% year-over-year and 5% at constant currency. Excluding the one-time non-cash revenue adjustment in the fourth quarter, total revenue would have increased 2.6% year-over-year and 6.1% year-over-year at constant currency. As reported, we were in the low end of our guidance range for revenue, but we would have delivered revenue at the high end of the range when you exclude this one-time non-cash revenue adjustment.

Now, let us turn to the rest of the P&L for the full year 2022. Our strategy of investing in innovation to drive higher quality recurring revenue together with effective cost controls has resulted in sustained trend of margin expansion and continued profitable growth. Non-GAAP gross margin was 66.2% for the year, up 90 basis points compared to 2021 as our high-margin subscription business made up a larger share of our revenue. We continue to expect improving gross margin in our long-term model, as our subscription business continues to be a bigger piece of our overall mix. Excluding the one-time non-cash revenue adjustment in the quarter, non-GAAP gross margin would have increased 120 basis points year-over-year and 230 basis points at constant currency.

Non-GAAP operating expenses were $203.3 million for the full year 2022, a $2.9 million increase year-over-year. Non-GAAP operating expenses were 48% of revenue in 2022, down from 48.9% of revenue in 2021. For the full year 2022, adjusted EBITDA was $81.6 million, up 8.1%, driven by the improvement in both revenue and non-GAAP gross margin. When adjusting for the FX impact to both revenue and costs, adjusted EBITDA was negatively impacted by $7.4 million in the year and would have resulted in a 17.9% growth at constant currency. Excluding the one-time non-cash revenue adjustment and the associated bonus adjustment in the fourth quarter, adjusted EBITDA would have been $84 million, an increase of 11.3% year-over-year. And on a constant-currency basis, adjusted EBITDA would have been $91.6 million, an increase of 21% year-over-year.

We ended ’22 in a strong financial position with net debt to EBITDA of 1.8 times. Finally, non-GAAP earnings per share was $1.41 for the year, up 12.8%, reflecting the improved operating income during full year 2022. When adjusting for the FX impact to both revenue and cost, non-GAAP earnings per share would have been $1.56. Excluding the one-time non-cash revenue adjustment and bonus adjustment in the fourth quarter, non-GAAP earnings per share would have been $1.47, an increase of 18% year-over-year and at constant currency, $1.62, an increase of 30% year-over-year.

Now moving to free cash flow. Free cash flow was $18.3 million in the quarter, down $6.7 million year-over-year, due to a smaller contribution from working capital and timing of receivables collections at the end of Q4 as more of our quarter’s billings were at the end of the quarter compared to the fourth quarter of 2021. For the full year 2022, free cash flow was $32.8 million.

The following factors account for the change in our free cash flow generated in 2022 versus 2021. First, on a positive note, higher adjusted EBITDA in 2022 from strengthening our enterprise subscription offset by unfavorable foreign exchange rates. Second, greater use of cash and working capital in 2022, primarily from timing of cash billings related to multi-year enterprise subscriptions. And third, higher capital expenditures and prepaid expenses in 2022 due to temporary DTI investments and capitalized software development to support our long-term growth plan. Free cash flow as adjusted for the exclusion of cash cost restructuring was $33.7 million for full year ’22. Free cash flow conversion from adjusted EBITDA was 40% in 2022.

Avid’s management is focused on improving its free cash flow conversion in 2023. We will continue [Technical Issues] growth initiatives to drive our subscription revenue, but we’ll be very prudent in overall expense management as we look to reduce investments in other areas to improve our free cash flow in 2023. Also, we expect working capital to be more of a benefit in 2023, which should assist free cash flow along with the improvements we see in our profitability. We expect to incur restructuring costs of $7 million in the year and our guidance will reflect the add-back of those costs.

Finally, we continue to execute corporate actions to enhance long-term shareholder value. During the fourth quarter, we repurchased 365,000 shares for $9.3 million, reflecting an average price of $25.45 per share. For full year 2022, we repurchased 2.04 million shares for $52.8 million, reflecting an average price of $25.95 per share. Additionally, during the first quarter of 2023 through February 28, we also repurchased 14,500 shares for $400,000, bringing the total repurchases to 2.9 million shares or $78.3 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.

Let’s now turn to guidance. As Jeff said, we are confident in the underlying strength in our business, including the healthy demand for our solutions that we are seeing. We expect continued strong growth in our subscription revenue from continued solid performance in our creative tools and enterprise subscription business. We also expect to see improved performance in our integrated solutions beginning in the second quarter of 2023 as we expect a more meaningful reduction in our backlog at that time.

Before I go through the guidance numbers, our assumption on FX rate is a pound-USD exchange rate of 1.2 to 1 and a euro-USD exchange rate of 1.05 to 1. In terms of guidance, for the first quarter of 2023, our guidance for ARR at the end of the period is $247 million to $251 million. For first quarter 2023, our total revenue guidance is $97 million to $105 million. Overall, our guidance for Q1 assumes a small improvement in our backlog of integrated solutions orders as we believe at this time we will be resolving the remaining supply chain issues in Q2 and ultimately converting the backlog to revenue in Q2 and in Q3 of 2023.

Our guidance for the first quarter 2023 subscription and maintenance revenue is $63 million to $67 million. Our guidance for first quarter 2023 adjusted EBITDA is $16 million to $20 million. Our guidance for first quarter 2023 non-GAAP earnings per share is $0.21 to $0.19 assuming 44.2 million shares outstanding.

At this time, we are also providing guidance for the full year 2023. Our guidance for 2023 ARR at the end of the period is $270 million to $280 million, a range which represents year-over-year revenue growth of 12.3% at the midpoint. Our guidance for 2023 total revenue is $447 million to $472 million, a range which represents year-over-year revenue growth of 10.1% at the midpoint. Our guidance for 2023 subscription and maintenance revenue is $292 million to $302 million, a range which represents year-over-year growth of 13.7% at the midpoint.

Our guidance for 2023 adjusted EBITDA is $95 million to $105 million. And our guidance for 2023 non-GAAP earnings per share is $1.53 to $1.75, assuming 43.5 million shares outstanding. And our guidance for 2023 free cash flow as adjusted is $50 million to $60 million, which includes $7 million in cash restructuring. Our 2023 free cash flow guidance reflects the improvements in profitability and improvement in working capital, slightly offset by higher cash interest cost due to the higher base rates and higher cash restructuring costs.

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

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thank you, Jeff. Thank you, Ken. That concludes our prepared remarks. And we’re now happy to take questions.

Questions and Answers:

Whit Rappole — Vice President, Corporate Development and Investor Relations

Our first question is from Josh Nichols at B. Riley, to be followed by Samad Samana. Josh, please go ahead.

Josh Nichols — B. Riley — Analyst

Yeah, thanks for taking my question, and walking through the one-time adjustment. It seems like everything was in line or a little bit better after adjusting to the non-cash items. Looking forward though, I’m just kind of curious, have you seen any change in either adoption, or the sales cycle within the prosumer of the enterprise market? I know that’s a big concern for a lot of people given what other tech companies have reported with a soft new macro environment.

Jeff Rosica — Chief Executive Officer and President

Good question, Josh, and this is Jeff. So, I think as I said in my prepared remarks, we have looked out at this landscape, and we’ve been very careful in our guidance and what we’ve set for 2023, so we have taken that into consideration. I’d say it’s, I think, you’ve seen from our guidance, it’s still very — I think it’s still very solid. I think overall, we’re not seeing a significant change. We’re seeing the sales cycles slow down a little bit, and of course, we have modeled in our guidance a little bit of being careful about the assumptions for ’23. But I think so far, we’ve seen really good momentum and a lot of our customers, subscription is a real benefit for them to move to it and to move to some solutions. So, I think we’ve talked about this before. I think we’re going to see on our subscription software business that will continue to perform, I think, very strongly. We may see little less capital investment this year, which really more hurts our hardware business. Though, again, we’ve factored that into our guidance.

Josh Nichols — B. Riley — Analyst

Thanks. So, [Indecipherable] in line even though you’re using a little bit more conservative outlook on things like subscription adoption, but I kind of want to take a step back here. I know you mentioned you plan on working through that $20 million backlog, but other opportunities as we think about later this year, particularly things like AWS commercialization with cloud storage, like what’s factored into that for later this year, this summer, as that turns on. Is there upside potential there?

Jeff Rosica — Chief Executive Officer and President

Yeah. I think on anything SaaS, we’ve been fairly conservative on our assumptions for SaaS. We’ve seen the industry migrate pretty carefully. Our software subscription is one thing. They have been very quick to move to that. They can in real SaaS, Software-as-a-Service where we’re serving that all up in the cloud. That was coming onboard later this year. And so, we’ve modeled some of that in, Josh, but we’ve been very careful about what we’ve modeled in. So, I hope there’s some upside. I think we’ll speak to that later, but at the moment, I think we’ve been pretty prudent in how we’ve modeled that. So, I think there’s going to be some great opportunities as we look forward in converting customers.

Josh Nichols — B. Riley — Analyst

Great. And then, last question for me. You had a press release last month, right, about how you’re now enhancing the interoperability of Media Composer with Pro Tools. Could you talk a little bit about what’s the long-term opportunity, the gap that that fills, how long it may take for you to fully finish out, and how that could differentiate you from peers?

Jeff Rosica — Chief Executive Officer and President

That’s a good — very good question, Josh. So, the work is just in the first deliverable. We actually have three phases or three horizons we call it on the work that we’re doing there. So first of all, what this is, Avid is pretty much the industry standard in especially at the high end of TV and film in both picture media, video editing with Media Composer and sound, which is the audio portion, which is Pro Tools of the film or TV show. But one thing is that as complexity of productions have increased, and as they’re producing a lot more deliverables a lot faster in today’s world with media, there’s a lot of complexity in how they work back and forth between the picture elements and the sound elements of these TV shows or films, and it’s just a lot of workflow working, a lot of intense work that they do.

So, what we’re doing is, innovating in new ways on how these two areas work together between our two products and how they work together for the production of film and TV programs. It does uniquely differentiate us because we have such a strong position in this space as we create new opportunity, as we create strength, I think, with the Company in this space through this innovation. It clearly continues to, I think, cement us in a very strong position at the high-end of these markets.

But we also are going to be solving some pretty important problems for these customers and we will be generating higher price points or higher ARPU from these customers as we look forward. We haven’t started to bring those prices up yet. We want to see more of the value of those innovations that we’re developing come to market, and then we will be looking to bring prices up in those markets as we’re delivering that value to these customers, and they are benefiting substantially in their own cost savings or efficiencies that they’re getting from it.

As far as the phases, the first phase has been done. This horizon was Horizon 1 as we call it was launched already in December. The second horizon is coming this summer. I don’t have an exact date, but it will be mid this year. And the third horizon we plan for early next year, but we haven’t fully gone public with that.

Josh Nichols — B. Riley — Analyst

Thanks, everyone. I’ll pass the mic.

Jeff Rosica — Chief Executive Officer and President

Okay. Thanks, Josh.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thanks Josh. If I could ask people to just limit themselves to one follow-up, that would be great. Our next question is from Samad Samana at Jefferies to be followed by Nehal Chokshi. Samad, please go ahead.

Jeremy Sahler — Jefferies — Analyst

Hey, guys. This is Jeremy Sahler on for Samad Samana. Thank you for taking my questions.

Jeff Rosica — Chief Executive Officer and President

Hi, Jeremy.

Jeremy Sahler — Jefferies — Analyst

Hey. So, it’s great to see that new ARR guidance. How should we think about the seasonality of net new ARR going forward? Are there any trends that we should be mindful of?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So, I think in general our ARR is typically strongest seasonally in Q4, just because of that’s usually the strongest part of our cycle in terms of maintenance renewals that drive our enterprise business. So that’s where you would expect higher growth in that quarter versus earlier periods in the year. So that’s what we saw this year and expect that next year.

Jeremy Sahler — Jefferies — Analyst

Got it. I think you sized the relative impact of enterprise customers on net new ARR this quarter versus previous quarters and how is that trending?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So in terms of the trend, the trend’s very positive as we look at our — as we look at our ARR in terms of subscription ARR. Subscription ARR was up 40%. When we look at, that that piece of growth, sure, we grew our creatives closer to low-20s, but the enterprise was in the 60%, 70% growth rate, which puts bounce to the 40% ARR growth.

Jeremy Sahler — Jefferies — Analyst

Understood. Thanks for taking my questions.

Ken Gayron — Chief Financial Officer and Executive Vice President

My pleasure.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thanks, Jeremy. Our next question is from Nehal Chokshi at Northland to be followed by Paul Chung. Nehal, please go ahead. Nehal, are you there?

Nehal Chokshi — Northland — Analyst

I’m here now. Can you hear me?

Whit Rappole — Vice President, Corporate Development and Investor Relations

Yep, we can now.

Nehal Chokshi — Northland — Analyst

Okay, great. So, you may have already answered this. I know you pointed out that creative net adds came in at 12,800. I think that’s a pretty big step down from prior quarter net add of 20,000 on the accretive net adds. What’s the narrative behind that?

Jeff Rosica — Chief Executive Officer and President

Hi, Nehal. Its Jeff. I talked about this a bit during my prepared remarks. It really was a pullback a bit on the Sibelius area. Pro Tools, Media Composer performed quite well for the number of creative net adds that we added in the quarter. But we saw a bit of a pullback on Sibelius, really around the lower priced SKUs. It was a few thousand that we saw a pullback on, on lower priced SKUs, heavily around students and education. We may see some of that come back, but we did see quite a bit of that pull-back in the quarter. It was our lower priced SKUs, so even with that, we still had very favorable subscription revenue from Sibelius for the quarter. But that was really — that headwind you’re seeing is really around the Sibelius product line.

Nehal Chokshi — Northland — Analyst

Just to be clear, you mean that the Sibelius subscribers was actually down Q-on-Q, due to these lower priced SKUs within the student section?

Jeff Rosica — Chief Executive Officer and President

The number of net adds was down significantly.

Ken Gayron — Chief Financial Officer and Executive Vice President

So, we still grow — we still grew in Sibelius. It’s just the growth rate in terms of net adds slowed versus the prior quarter. And as Jeff said, it’s in the lower priced SKUs with Sibelius, and obviously when you look at the revenue growth for the quarter, it was very strong in terms of total revenue and total subscription ARR growth. So, again, these are the lower-priced SKUs that had a deceleration, but we still had growth.

Jeff Rosica — Chief Executive Officer and President

And now this is Jeff. Just be clear, the number you compared before was sequential. There’s always a sequential difference between Q3 and Q4 because Q3 is a big quarter for turn on of subscriptions for education. So, we really look at quarter-on-quarter perspective, but still if you look at Q4 last year, it’s not quite as strong as Q4 last year, but that is related to Sibelius.

Nehal Chokshi — Northland — Analyst

Understood. Okay. And then, what is your expectation for the creative net adds on an annualized basis then?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah, so in terms of the — how we’re looking obviously in Q1 we’re obviously — we’re trending positive to where we were last year. So we’re already starting off in good shape. So, we should have creative adds in Q1 that are going to be positive to last year or similar to last year right in that area. And we expect to continue to drive our long-term plan of having, I would say, total subscription adds of 90,000 to 100,000 per year, which is what our long-term plan is, and have double-digit growth. Creatives will be a big chunk of that growth in terms of net adds as well as enterprise. So that’s what our long-term model is, and we’re already seeing that Q1 is already kind of on plan in terms of the trends through Q1 ’23.

Nehal Chokshi — Northland — Analyst

Great, thank you. That’s my follow-up question, so I guess I’ll get back in the queue.

Jeff Rosica — Chief Executive Officer and President

Thanks, Nehal.

Ken Gayron — Chief Financial Officer and Executive Vice President

Thank you, Nehal.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thanks, Nehal. Our next question is from Paul Chung at J.P. Morgan to be followed by Jack Vander Aarde. Paul, please go ahead.

Paul Chung — J.P. Morgan — Analyst

Hey, thanks for taking my questions. So can you just talk about kind of the pace of revenues and margin expansion, relative to your long-term targets provided for ’25. Your revenue guide here in ’23 is suggesting kind of a breakout here from the low $400 million you’ve seen in past and you have some expansion in EBITDA margins as well. Could you see some upside to ’23 progression across both gross margins and operating margins [Indecipherable]?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So, in terms of growth, we feel really good about, first, the guide that we put out there. We think it’s well balanced and we ended Q4 as a very strong bookings quarter. I think, in general, we see growth at 10%. We’ve talked about in earnings in the Investor Day, high-single-digit growth. So, we’re on plan in terms of that long-term model. And then, in terms of growth of the subscription business, our growth in Q4 was aligned with that long-term model, slightly over 40%, and that actually beat the long-term model. We expect subscription to have very strong growth next year and our subscription and maintenance business to grow very nicely, aligned with the long-term model. So, we talked about mid-teens growth and that’s what we see.

So, I think the growth is in front of us, we have a great solid creative business that continues to grow and we have one-third of the enterprise customers converted. So, the opportunity is ahead of us in terms of driving that, and our sales team is very well incentivized to achieve those targets.

And then on the integrated solutions, sure, this year with the backlog, there was some challenges, but we expect that to mainly be resolved in Q2, and then net revenue to come in Q2 and Q3. So, we expect a recovery in the integrated solutions business, and that will complement the strong growth in our subscription and maintenance business to drive 10% year-over-year growth.

Every year, I would say on the margin progression, we’ve seen solid progression in both gross margin and EBITDA margin. As we drive the subscription business, we usually generate gross margin improvements of 200 basis points per year. That’s what we should expect as we look forward. That’s what we’ve modeled in the long-term plan, and that’s what we generally have achieved and as you go back in our business model transition.

And then, in terms of cost management, we are investing for growth to drive that top line, but we’re very prudent on other areas of the business. So, as we drive gross margin improvement, that does result in improvement in EBITDA margin. So, we should see the EBITDA margins get into the low-20s as we talk about in our guidance. So, we feel really good about the opportunity ahead of us that will drive the revenue growth that we expect, and the margin expansion given where that growth is coming from in the subscription business, and ultimately that drives our profitability.

Paul Chung — J.P. Morgan — Analyst

Okay, great. Thanks. That was super helpful. And then, just on cash flow, I mean, you’re seeing some lower conversion here in the guide, where could you see some upside to that projection because I assume you would get better kind of working cap turnover this year. So, where could you see upside in the cash restructuring offsetting that? Is that — what’s driving that cost? Is that included in the free cash guide as well? Thank you.

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So, we expect free cash flow to improve this coming year, and only because of the improved profitability, but we expect working capital to be less of a headwind in terms of cash flow, as we continue to drive collections of multiple years of enterprise business that is built up. So, we expect working capital to be less of a challenge this year, and I think in general, we feel good about the guidance that we have. In terms of the restructuring, we have provided that as part of the guidance, so the $7 million of restructuring is in our guidance. So, we expect $50 million to $60 million when you include that $7 million in restructuring and cash flow.

Paul Chung — J.P. Morgan — Analyst

Thank you.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thanks, Paul. And our final question comes from Jack Vander Aarde at Maxim. Jack, please go ahead.

Jack Vander Aarde — Maxim — Analyst

Okay, great. Thanks. I appreciate the update guys and thanks for taking my questions. I’m going to ask just kind of two kind of a loaded question on the enterprise subscription, just to make the most of my time. You mentioned you’ve converted about one-third of your enterprise customers to subscription. Wondering if you’re able to sort of parse that out or split that between existing enterprise subscription customers expanding seats versus new enterprise conversions versus new to Avid altogether customers. That’s one question.

And then, I have a follow-up on Slide 6 of the presentation about the 50 plus new enterprise subscription agreements secured. What does that mean exactly, and how does that relate to the number of seats and what was that number last quarter? Thanks.

Jeff Rosica — Chief Executive Officer and President

Yeah, good question, Jack. So on the question really about where we are, so you actually, I think, loaded in a couple of different elements there. The first one is, when we talk about conversions, those are where we’re converting existing customers who may be on a perpetual license subscription — perpetual license maintenance model, and we’re converting them with an uplift to a subscription — enterprise subscription model. And so on that transition, we’re about 30% through the customers.

Now, a lot of customers early days are some of the larger dollar customers, so as we get through the customer base, we’re obviously going deeper and wider the customer base, as we move forward. But when we talk about 30% or about one-third, that is — we’re talking about the conversions of customers. We also do have new customers coming onboard, that like any business, we got new customers coming in, and a piece of our business, generally, I would say, our company is around 10% to 15% is new customers coming into our business on any given year. And I think that would be the same for subscription. Though, I can’t tell what is the exact number for the quarter to give you here today, but it’s about the assumption we have.

Now, you also asked about upgrades or expansions. We have done a couple of expansions already with some major customers and we’ll continue to see a few of those throughout this year, but as we get to December or this December quarter, that is where we started to really — remember, December quarter of 2020 is when we really started leaning into the enterprise subscriptions. That’s where some of the big renewals will start coming, and we’ll see — we believe, we’ll see significant improved economics as we expand and upgrade people, but we are along the way doing and expansions with customers. We’ve done several so far. So far, overall the mix of what we’ve done is what’s generating the business that we see, if that makes sense. You were going to ask about the 50 customers?

Jack Vander Aarde — Maxim — Analyst

Yeah. Very helpful color there and then, yeah, in terms of, I think it’s on Slide 6, there’s 50 plus new enterprise subscription agreements in the quarter. What was that number last quarter, if you have it on hand? And then what is — do you have the total amount, do you provide — do you disclose that or how much of that as a number you’ve disclosed?

Jeff Rosica — Chief Executive Officer and President

Yeah. So, I’m going to have to look up that number so I don’t make a mistake off the top of my head and confuse quarters, but the 15 new agreements, these are 50 different customer agreements that we’ve made throughout the year around the world. And these are all — generally, we’ve done some small customers, but they’re generally large and medium customers, that we’re signing and some of them I named in my remarks. We don’t name them all just because we don’t really name them when they allow us to name them, but these are varying sizes and types of media companies and broadcasters and production companies around the world. I believe last quarter we said in the — mid-’20s is the number we gave.

Jack Vander Aarde — Maxim — Analyst

I appreciate the color.

Jeff Rosica — Chief Executive Officer and President

As Ken said, Q4 is always going to be our strongest quarter. On the maintenance business, we used to say that Q4 and Q1 were our biggest quarters. I think what we’ve seen is Q4 is definitely always going to be an outlier and going to be a major quarter. But as far as Q1 through Q3, we’re seeing a different pattern there, where we’ve really been able to upgrade people to subscriptions throughout the year. So, it’s a little more even and not quite as seasonal between Q1 and Q3 as it used to be.

Jack Vander Aarde — Maxim — Analyst

Very helpful color. Thank you, guys.

Jeff Rosica — Chief Executive Officer and President

Thanks, Jack.

Whit Rappole — Vice President, Corporate Development and Investor Relations

Thanks, Jack. That ends the Q&A session. Thank you all for your participation and your questions. We appreciate the time you’ve taken to join us on today’s earnings call, and we hope everybody has a wonderful evening. Thank you again and good night.

Related Post