Avid Technology Inc (AVID) Q4 2019 Earnings Call Transcript – The Motley Fool

March 10, 2020

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Avid Technology Inc (NASDAQ:AVID)
Q4 2019 Earnings Call
Mar 9, 2020,

Prepared Remarks:

Operator

Good day and welcome to the Avid Technology Fourth Quarter and Full Year 2019 Earnings Call. At this time, I’d like to turn the conference over to Whit Rappole. Please go ahead, sir.

Whit Rappole — Vice President Corporate Development and Investor Relations

Thank you. Good afternoon everyone and thank you for joining us today for Avid Technology’s fourth quarter and full year 2019 earnings call. My name is Whit Rappole, Avid’s Vice President for Corporate Development and Investor Relations. With me this afternoon are Jeff Rosica, our Chief Executive Officer and President and Ken Gayron, our Chief Financial Officer and EVP. In their prepared remarks, Jeff will provide an overview of our business and then Ken will provide a detailed review of our financial and operating results, followed by time for your questions.

We issued our earnings release earlier this afternoon and we have prepared a slide presentation that we will refer to on this call. The press release and presentation are currently available on our website at ir.avid.com and a replay of this call will be available on our website for a limited time.

During today’s call, management will reference certain non-GAAP financial metrics and operational metrics. In accordance with Regulation G, both the appendix to our earnings release today, and our investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational measures used on this call and in the presentation. Unless otherwise noted, all figures noted by management during the call are non-GAAP figures.

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

Actual future results or occurrences may differ materially from these forward-looking statements. For more information, including a discussion of some of the key risks and uncertainties associated with these forward-looking statements, please see our press release issued today and our 10-K for the year ending December 31st, 2019 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 thanks everyone for joining us today to review Avid’s Q4 and full year 2019 results. Along with Avid’s CFO, Ken Gayron in our prepared remarks, we’ll discuss the improved trajectory of our business and the key achievements resulting from the strategic plans first laid out by our leadership team in 2018, including significant new product deliveries throughout the year, market leading innovation with our customers as well as improvements in how we’re executing our business. We will also discuss how these accomplishments and our commitment to our plans give us confidence that we’ll make further progress in 2020 and beyond.

I’ll begin with my key takeaways for Q4 and 2019 overall. In 2019 Avid achieved higher profitability and drove very positive momentum in several areas including continued growth in high-quality recurring revenue streams that are strategically important to the business going forward, including subscriptions, maintenance and long-term agreements.

Our progress last year was driven by our continued focus on enhancing our already strong position with our customers and by realizing new opportunities through our pipeline of innovative new product deliveries and expansion of our subscription offerings to all customers. The subscription momentum that we saw in H2 and which we expect to continue in 2020 has been driven by the investments we’re making in refreshing our core creative software.

Our improving trajectory continued to be well supported by high growth rates in new paid user subscriptions for our creative tools Media Composer, Pro Tools, and Sibelius which were at approximately 188,000 at year-end, an increase of about 17,000 users in Q4 and 40,000 users in the second half of the year. During Q4 several enterprise customers also adopted subscription licensing for these products, part of our subscriptions expansion strategy which we view as a promising development for the longer-term growth trajectory of subscriptions overall.

The maintenance business also performed well and continued to show underlying strength during Q4. Excluding the headwind of ending the sale of service contracts on certain legacy storage systems at the end of 2018 and non-cash related maintenance revenues, we actually reported year-over-year growth of 2.6% in the quarter for maintenance.

In addition, Avid’s integrated solutions category made solid revenue contributions across categories including media storage, servers and graphics. Through our focus on delivering innovations for music creation and professional audio, including enhancements to the integrated solutions portfolio released in 2019, we made significant strides in capturing new opportunities and growing market share in recording, mixing and live sound. I’m pleased to say that our product strategy has returned our audio business to growth and I will remind you that we’re just getting started in refreshing this portfolio to drive further growth and improve profitability in this segment of our business.

We have also started to see the benefits from the transition of our supply chain, which stabilized and the new factories fully supported our production needs for Q4, including bringing into full production major new products in the quarter. This is obviously good news for the Company coming out of the difficulties we had with the supply chain transition earlier last year. As such, during the first half of 2020, we expect to achieve significant levels of both COGS and opex savings from our supply chain improvements. Additionally, we expect to benefit from reductions in working capital levels primarily related to inventory levels over the course of 2020.

Our sales to larger enterprise media companies performed well in Q4 providing solid growth versus same quarter last year, as well as significant sequential improvement. Sales to small to medium size enterprises improved sequentially but were flat year-over-year. While we experienced some continued softness in our enterprise platform software, sales of our production graphics and video service solutions were up year-over-year and sales of storage were quite solid and delivered sequential quarterly growth, but basically flat year-over-year. Going forward, while we see an improving situation with enterprise customers, we believe that we may continue to encounter occasional lumpiness in this customer segment.

Gross margin was up substantially year-over-year primarily driven by our new products and an improving mix as well as benefiting from the cost structure improvements from our Smart Savings initiative which have dramatically improved our profitability metrics. From a regional perspective, we saw further strengthening in both EMEA and APAC with both regions delivering strong results across the year. Additionally while Americas was challenged throughout most of 2019, the region did return to growth in Q4.

Overall, I’m pleased with the progress we made for the full year in key areas of the business, but we remain focused on ways we can continue the improvement. We’re continuing to work toward achieving the right cost and margin structure to position us well going forward.

Avid software subscription business again delivered impressive results. As a cornerstone of our business strategy, we are heartened by the consistently strong performance of this part of our portfolio. Creative software subscriptions were up 50% year-over-year in Q4, as mentioned earlier, and Avid had about 188,000 paid subscriptions at year-end representing strong growth in new users across all of our creative products. Our mid-year introduction of Media Composer 2019 was well received and helped drive additional subscription growth on top of the continued strong performance of the other products in the suite. We are particularly pleased to report that Q4 was the second consecutive quarter of accelerated subscription — subscriber growth, with an overall growth in subscriptions of about 17,000 and this — and that this accelerated growth occurred following the price increases we implemented at the end of Q2 2019.

Our subscription billings were up overall by 66% year-over-year in Q4. This growth continues to track subscriptions and reflects the leading edge of subscription adoption by enterprise customers with three enterprises adopting subscription licensing for their business in the quarter. Subscription revenue was up 54% year-over-year in Q4 closely tracking the growth in subscriptions.

We continue to be greatly encouraged by the performance resulting from our subscription strategy and expect this strong subscription trend to continue in 2020 as we expand our enterprise subscriptions offerings and our sales efforts as well as from the continued healthy growth that we continue to see for the individual creative professional segment.

Moving on to the highlights of Avid’s Q4 performance. We continued to demonstrate that our plans and strategic changes have made a meaningful contribution toward improving performance in our key metrics. Total revenue in the fourth quarter was up 3.2% year-over-year benefiting from ongoing growth in our creative software subscriptions business and our audio integrated solutions business and continued relative strength in our maintenance business. The combined subscription and maintenance revenue was up 10.3% year-over-year as the fast growth in subscription revenue far exceed any headwinds outlined previously in our maintenance revenues.

LTM recurring revenue grew from 56% at the end of 2018 to 62% at year-end. So we’re making good progress toward our longer-term target of achieving 70% or greater recurring revenue as outlined at our recent Investor Day. Non-GAAP gross margin improved to 63.2% in the fourth quarter, representing an increase of 240 basis points as we saw gross margin improvement in hardware and professional services. I’m pleased that we saw a significant progress in our margin improvement programs ahead of fully realizing the complete benefits of our supply chain transition improvements.

Among the factors contributing to our Q4 performance was Avid’s strong traction with enterprise customers. Some of the key wins included the Finnish national broadcaster YLE which chose MediaCentral Cloud UX and the new Media Composer Enterprise edition to support their roughly 500 end users across the group. As well, the television network Al Arabi which selected Avid Media Composer, MediaCentral Cloud UX, NEXIS and other Avid products in replacement of a key competitor’s newsroom system. And at LA Film School they signed a multi-year subscription agreement to bring Pro Tools and Media Composer to its students. Our full year 2019 performance, especially through growth in our recurring revenues, highlights the growing resilience of our organization in responding to the difficulties that can arise in our business, including typical industry seasonality and challenges resulting from the comprehensive supply chain transition that we executed on last year.

Total revenue in 2019 was relatively flat year-over-year as the strength we saw in subscriptions and audio solutions were moderated by the headwinds we faced in certain areas including hardware maintenance, professional services and the impact of foreign currency. Revenue was down 0.4% in 2019, but on a constant currency basis, our total revenue for 2019 grew 1%. Gross margin improved to 61.5% on a full-year basis, up 170 basis points year-over-year on favorable mix shift, software and the initial benefits of our supply chain improvements as well as positive impacts from higher margin new products introduced in the year.

Adjusted EBITDA was $56 million for the year, up nearly 18% over 2018 primarily benefiting from improved gross margin as well as lower operating expenses due to our Smart Savings initiative. Free cash flow increased by 112% year-over-year to $12.5 million as we continued to work to improve the free cash flow conversion from adjusted EBITDA. We believe that we will continue to deliver improved free cash flow conversion during 2020.

Non-GAAP net income per share was $0.51 for the year, an increase of $0.26 over 2018, reflecting the improvements in our operating performance during 2019. And on a GAAP basis, we had net income per share of $0.17, our first full year of GAAP profitability since 2016 and our first year with both GAAP profitability and positive free cash flow since 2012.

Overall, our 2019 performance supports our confidence in the performance trajectory of the business to deliver more profitable recurring revenue and more sustainable growth. Ken will provide additional detail on the quarter and the full year in his prepared remarks.

I am pleased that Avid has entered 2020 with significant momentum resulting from the execution of our long-term strategic plans, our focus on improving our operational execution and our delivery of new products to which the market has responded quite positively.

I’d like to take a moment here to comment on the COVID-19 outbreak which has impacted so many around the world. Avid’s first concern is to do what we can in order to ensure the safety and well-being of our community, including especially our employees. While we continue to proceed as usual with our business, we are also executing on a proactive plan and taking proper precautionary measures including potentially adjusting Avid’s strategy for hosting and participating in major industry conferences and other events in the near term.

Overall, we remain optimistic about the long-term demand for our products and solutions. That said, while we do not currently see any material impacts to the business today, the rapidly evolving coronavirus situation could result in negative impacts to short-term demand for the product side of our business that are non-recurring in nature, which we feel we have factored into our Q1 guidance. At this point we don’t foresee any significant supply chain issues related to our manufacturing plans as we’ve now completed the move from our previous supply chain partners in China and Thailand to our new partners in Mexico and the United States.

Again, while there is a potential for the evolving COVID-19 situation to create disruptions for parts of our business, we currently remain optimistic about 2020 overall, especially in light of our high-quality recurring revenue streams, including our subscription business, which we believe will continue to show very strong growth in 2020, our maintenance business, which we believe will continue to be relatively stable and long-term agreements with enterprise customers and partners, which we expect will continue to expand. We believe, continued growth in these high-quality revenue streams will drive improved margins and we remain focused on driving efficiencies in our operations.

From a cost perspective, we’re continuing to work on further operational and cost efficiencies. Additionally, with the good progress on Avid’s supply chain transition in Q4, we’re now poised to reap more of the financial and operational benefits from that strategy in 2020. Thus we anticipate significant improvement in adjusted EBITDA and free cash flow conversion and therefore greater free cash flows in 2020.

During 2019 Avid unveiled and released a range of brand new products and major enhancements to our category-leading solutions. We dramatically stepped up our innovation for the professional audio community to help them do their best work and return our audio business to growth. In Q4, we ramped up shipments of our new S4 audio control service and launched our new lower cost S1 audio control service. Then at NAMM Show at the beginning of 2020 we debuted a number of new integrated audio solutions and enhanced versions of our software creative tools several of which are entering the market this quarter.

Encouraged by this progress, we’re accelerating our pace of product innovation to continue to benefit customers of all types and build an increasingly strong engine to help fuel Avid’s growth. Additionally, we are increasingly enthusiastic about the long-term prospects from enterprise customers moving their media production operations into the cloud and SaaS type offerings. We continue to expect modest near term growth among those looking to become early adopters of cloud-based workflows for their feature films and TV shows, archiving and other business critical applications. We believe Avid has created a market-leading position based on our initial commercial success and pilot deployments at several large media organizations. All of these factors make our management team and Board confident both in Avid’s present position and our expectations for this year and beyond based on consistently profitable and predictable financial model built on growing recurring revenue streams.

So with that, I’ll hand the call over to Avid’s CFO Ken Gayron to share details behind our Q4 and full year 2019 performance and our outlook for 2020. So over to you, Ken.

Ken Gayron — Chief Financial Officer and Executive Vice President

Thank you, Jeff and good afternoon everyone. As noted above, Jeff and I are referring to non-GAAP figures unless noted. Overall, we are pleased with the progress in Avid’s business model as we exit 2019. Our focus in 2020 will be to continue to drive higher quality recurring revenue while improving gross margin and profitability through aggressive promotion of our creative subscription software tools, selective price increases across our portfolio of products and continued focus on driving efficiencies in our cost structure. We expect these efforts to result in continued improvement in our key financial metrics, including stronger free cash flow conversion in 2020 and subsequent years. With that, let’s now get into the details of our fourth quarter financial results.

GAAP revenue was $116.3 million during the fourth quarter, up 3.2% year-over-year primarily from strength in subscriptions in audio hardware as well as stabilizing maintenance and improvements in storage and graphics. Combined subscription and maintenance revenue was $49.3 million, 10.3% year-over-year as the 54% growth rate in subscription revenue far exceeded the decline in maintenance revenue. Excluding the decline in maintenance from the sun setting legacy storage systems at the end of 2018, maintenance revenue would have been up 2.6%.

Sequentially, maintenance revenue stabilized and was flat at $33.4 million for the fourth quarter. During the fourth quarter the supply chain recovered from the challenges we faced in the third quarter as the new contract manufacturer based in Mexico whom we brought on board earlier in 2019 was able to fully meet the demand during the fourth quarter. During the quarter, we launched production of the new S1 audio control service and ramped the production of the new S4 audio control service introduced at the end of the third quarter. We look forward to achieving additional cost benefits and improvements in working capital levels from the supply chain transition as we move forward into 2020.

Gross margin was 63.2% for the fourth quarter, up 240 basis points year-over-year. The increase was due to a more favorable revenue mix of higher margin subscription and maintenance revenue, a 440 basis point improvement in integrated solutions gross margin that benefited from a supply chain transition and overall mix plus a 520 basis point improvement in professional services gross margin.

Operating expenses for the quarter were $54.4 million, a $4.2 million increase over fourth quarter of 2018. The increase in operating expenses was due to increased investment in R&D to support our 2020 product roadmap, increased web store transaction fees of approximately $700,000 driven by higher subscription volumes in our expanding e-commerce business, higher sales commissions of approximately $1 million in the quarter related to strong fourth quarter sales performance in our Europe and APAC markets and a $1.6 million increase in bonus accrual quarter over quarter. As the fourth quarter of 2018 had a bonus accrual credit, while the fourth quarter of 2019 had bonus expense due to Avid’s improved performance during the quarter. We believe the higher year-over-year bonus and sales commissions are temporary anomalies in our fourth quarter expenses and will not reoccur in the first quarter of 2020.

Adjusted EBITDA was strong at $21.2 million in the quarter, reflecting a margin of 18% which was down slightly year-over-year. Non-GAAP net income per share was $0.28 for the fourth quarter, flat year-over-year. Free cash flow of $17 million in the quarter was roughly flat to last year. Free cash flow in the fourth quarter was impacted by the timing of billings during the quarter that resulted in an elevated level of accounts receivable at year-end. If not for the timing of these billings, we believe free cash flow would have been $2 million to $4 million higher in the quarter.

Now turning to fiscal 2019 results. GAAP revenue was $411.8 million in 2019, down 0.4% year-over-year as growth in subscriptions and integrated solutions were offset by declines in maintenance and professional services as well as from FX headwinds due to the relative strength of the US dollar versus the euro and pound during the year. On a constant currency basis, revenue in 2019 was up 1% year-over-year. Also when you exclude the impact in non-cash revenue from sun setting of our maintenance revenue related to our legacy storage business, overall revenue would have been up 1.8%. Combined subscription and maintenance revenue was $175.6 million, up 0.3% year-over-year as the benefits from the 26% growth in subscription revenue exceeded the impact of the 6% decline in maintenance revenue due mainly to the legacy storage and of service issue discussed above. Excluding the sun setting of our legacy storage and non-cash revenue mentioned previously, subscription and maintenance revenue in 2019 was up 5.8%. Gross margin was 61.5% for the year, up 170 basis points year-over-year. The increase was due primarily to 140 basis point increase in software and maintenance gross margin, a 110 basis point improvement in integrated solutions gross margin, which benefited from the supply chain transition and a 610 basis point improvement in professional services gross margin.

Operating expenses for the year were $206.6 million, $5.1 million lower than 2018. The improvement in operating expenses was primarily due to the benefits of the Smart Savings program. Adjusted EBITDA was $56 million for the year, up 18%. Adjusted EBITDA benefited from higher gross margin and improvement in operating expenses.

Non-GAAP net income per share was $0.51 for the year, up $0.26, or 104% year-over-year as the improvements in gross margin and operating expenses benefited our non-GAAP net income. Free cash flow was $12.5 million in 2019, up 112% similar to the increase in non-GAAP net income. Free cash flow benefited from the improvement in operating income.

Now moving to the composition of our revenue. In the fourth quarter, revenue from subscriptions was $15.8 million, up 54% year-over-year. Earlier in 2019, subscription revenue growth on a year-over-year basis was negatively impacted as a result of higher reserves taken against certain subscription revenues starting at the end of 2018. In the fourth quarter the year-over-year comparisons normalized and subscription revenue growth more closely matched the subscription license growth. Moving forward, we expect subscription revenue growth to closely track subscription license growth.

We added over 17,000 subscriptions for our creative software solutions during the fourth quarter and our total subscription count now exceeds 187,000. Media Composer and Pro Tools subscriptions both grew by more than 50% year-over-year. Additionally, the price increases we implemented in the third quarter have had the intended effect of influencing customers to select annual paid upfront contracts, which we believe are higher quality revenue stream for Avid when compared to monthly paid subscriptions. We have seen the share of annual paid upfront subscriptions increase to above 15% of the total revenues and the share of month to month subscriptions decrease to below 14% at the end of the fourth quarter.

From a cash perspective billings for subscriptions increased 66% year-over-year in the fourth quarter, above the growth rate in subscriptions, due in part to the price increases in the third quarter and the increase in customers who are selecting annual paid upfront contracts. While subscription revenue continues to grow, perpetual license revenue was down $3.4 million year-over-year due to weakness in Media Central perpetual sales into a portion of our customers selecting subscriptions rather than perpetual licenses for our creative software products. In the fourth quarter of 2018 Media Central perpetual revenue had been favorably impacted by a new feature release in the third quarter of 2018 benefiting fourth quarter 2018 Media Central revenue. Additional product enhancements to Media Central are planned for mid 2020 which should benefit our Media Central business in that time period.

Maintenance revenue was $33.4 million during the fourth quarter, flat sequentially and down 2.7% year-over-year. We are starting to see the reemergence of the underlying trend of increasing installed base of product in hardware and software products as well as selective price increases that took effect in July to build the maintenance revenue base. But we should also continue to see some impacts of the end of support for the legacy storage systems — solutions continue and then the slowly declining non-cash revenue that comes through the maintenance line. Excluding the non-cash revenue and the legacy storage maintenance revenue discussed above, maintenance revenue grew 2.6% year-over-year in the fourth quarter.

Gross margin on software licenses and maintenance was 85.6% in the quarter, up 30 basis points year-over-year. The Company’s hardware and integrated software revenue recovered strongly in the fourth quarter and was $50.3 million in the quarter, up 6.3% year-over-year and up $16.1 million sequentially. This revenue line benefited the strength in our audio hardware products including the new S1 and S4 audio control services and the improved performance of the new supply chain partner as well as a sequential recovery in storage and graphics products.

Gross margin from the hardware products and integrated software was 43.1% in the fourth quarter, up 440 basis points as the higher production volumes better absorbed manufacturing overhead in the quarter. The balance of our revenue comes from our professional services business. Professional services revenue was $7.2 million in the fourth quarter, down 8% year-over-year as we are being more strategic and selective in the professional services business moving forward. Gross margin on professional services was 18.8% in the quarter, up 520 basis points year-over-year.

Now looking at 2019 on a year-over-year basis. In 2019 revenue from software subscriptions was $45.2 million, up 26% as the full year 2019 result was impacted by the revenue reserve change discussed above. During the year, we added 62,000 subscriptions for our creative software solutions and we saw the rate accelerate during the year from 10,000 to 12,000 per quarter in the first half of the year to 17,000 to 22,000 per quarter in the second half of the year. We expect to see quarterly variation in the number of new subscriptions based on the multiple factors including timing of new releases, seasonal buying patterns and promotions.

Maintenance revenue was $130.4 million in 2019, down 6.3% year-over-year. The legacy storage impact was $6.9 million and the impact from decreasing non-cash revenue was $1.7 million. We see both issues having a much smaller impact in 2020. Excluding these two factors, maintenance revenue was flat in 2019 compared to 2018.

Total subscription and maintenance revenue increased by 0.4% in 2019 as the subscription growth exceeded the maintenance declined. While subscription revenue continues to grow, perpetual license revenue was down $3.5 million year-over-year due to a portion of customers selecting subscriptions rather than perpetual licenses for our creative software products. Gross margin from software license and maintenance was 85.6% during 2019, up 140 basis points over 2018. The Company’s hardware and integrated software revenue was $172.5 million in 2019 up $5.7 million year-over-year or 3.5% benefiting from the strength in audio hardware products as well as year-over-year improvements in both storage and graphics.

Gross margin from the hardware products and integrated software was 39.9% in 2019, up 110 basis points over 2018 as the benefits from the supply chain transition started to be visible in the fourth quarter after being a drag on gross margin in the third quarter. Professional services revenue was $28.7 million in 2019 down $4.4 million or 13% year-over-year as we are being more strategic and selective in our professional services business. Gross margin on professional services was 14.8% in 2019, up 610 basis points year-over-year. We generated approximately 45% more gross margin dollars from our professional services business in 2019 than the prior year due to improved project scoping and business selection.Now moving to recurring revenue and ACV. The percentage of our revenue that is recurring continues to steadily increase. For the 12 months ending December 31st, 2019, 62% of the total revenue was recurring, up from 56% in the 12 months ending December 31, 2018.Recurring revenue percentage increased due to increased subscription revenue and revenue under long-term agreements, exceeding the decline in our maintenance revenue stream. We expect recurring revenue percentage to continue increasing over time, given the growth we are seeing in subscriptions and our focus of adding new long-term agreements and we believe we will be well on our way to achieving 7% recurring revenue in the next several quarters.

Annual contract value was $280 million at the end of the fourth quarter, up 13% year-over-year benefiting from our strategy to focus on higher margin software subscriptions and long-term agreements and from stabilizing maintenance revenue. Now moving to the balance sheet. At December 31, 2019 we had a cash balance of $69.1 million, up from $52.3 million at the end of Q3, 2019 and up $13 million from $56.1 million at the end of 2018. Cash balance increased due to free cash flow during the year, offset in part by debt repurchases and refinancing costs. We ended the year with $73.8 million of accounts receivable, up $6 million from the period ended 2018 due to the timing of billings during the fourth quarter. Inventory was $29.2 million at the end of the fourth quarter, down $3 million from September 30th and down $3.8 million over December 31, 2018. Inventory levels were down due to initial benefits from the supply chain transition. We expect inventory levels to continue to move down over the next few quarters as our new manufacturing partner reaches volume production and we take advantage of the new lean supply chain.

Contract assets increased $3 million during 2019 to $19.5 million, primarily from an increase in annual paid monthly subscriptions. Deferred revenue was $97.9 million at December 31, 2019 down $1.7 million from December 31, 2018 due to decreases of $4.5 million in IPCS non-cash deferred revenue and $4 million in professional services deferred revenue offset in part by increases of $6.2 million in maintenance deferred revenue and $400,000 in product and subscription deferred revenue.

At the end of 2019 long-term debt was $199 million, down $600,000 from September 30th from amortization of our term loan and down $21.6 million from December 31, 2018 due to the reclassification of the remaining $28 million in convertible notes due June 2020 to our current liability. We plan to retire the remaining convertible notes at or prior to June 15th, 2020 from cash on hand. We, again, were compliant with our leverage ratio at the end of the fourth quarter and have significant cushion with our comments, which we expect to continue moving forward.

During the next few quarters — during the last few quarters, we saw improvement in our credit metrics. Avid has seen a material improvement in these areas and today, our net debt to adjusted EBITDA ratio is 2.9 times, a significant improvement from 4.5 times 18 months ago. Given Avid’s improvement in profitability and more favorable credit metrics, we believe Avid is well positioned to lower its cost of debt over time and we continue to track carefully the multiple options available to us today. Any such reduction in the cost of funding should result in favorable reduction in our annual cash interest expense and improvement in free cash flow. Our objective will be to continue to strengthen our balance sheet in 2020 by paying down debt and reducing cash interest expense.

Let’s now turn to guidance. We are confident in the underlying strength in our business as we enter 2020. That said, we are continuing to carefully track any potential impact of the evolving COVID-19 situation in our business. Our transition of our supply chain out of Southeast Asia during 2019 has lessened any impact we may have otherwise felt to date. However, as the situation evolves there could be potential risk to our Q1 results any of which, to the extent realized would likely be timing differences as opposed to permanent in nature. Accordingly, we have widened our guidance ranges for the quarter to the downside, given the risk of COVID-19.

Recall also that in the first quarter of 2019 we benefited from a large multi-million dollar storage order that is likely not going to reoccur this quarter. Given this, for the first quarter of 2020 we are guiding revenue of $95 million to $105 million. Our Q1 2020 subscription plus revenue guidance in the written materials is $43 million to $47 million. However, our official guidance for subscription and maintenance is $44 million to $45.5 million for Q1 2020 as there was a scrivener’s error in our press release for this revenue category.

Our Q1 2020 adjusted EBITDA guidance is $10 million to $16 million. At this time, we are also reaffirming our 2020 annual guidance that we provided at our Investor Day in November. Our 2020 revenue guidance remains $417 million to $437 million, our 2020 subscription plus maintenance guidance remains $180 million to $190 million, our 2020 adjusted EBITDA guidance remains $66 million to $74 million, our 2020 free cash flow guidance remains $27 million to $35 million and our 2020 non-GAAP net income per share guidance is $0.84 to $0.93 per share.

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

Whit Rappole — Vice President Corporate Development and Investor Relations

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

Questions and Answers:

Operator

Yes, sir. [Operator Instructions] And our first question comes from Samad Samana with Jefferies.

Samad Samana — Jefferies LLC — Analyst

Hi. Good evening and thanks for taking my questions. Maybe I will kick off.

Jeff Rosica — Chief Executive Officer and President

Hi, Samad.

Samad Samana — Jefferies LLC — Analyst

Hi. I’ll kick off with the — I think the big news in the last few months of 2019 was the agreement with Disney and Microsoft. And I’m just curious if maybe you’re seeing tailwinds from other customers now approaching Avid for similar type of deals and maybe just what kind of momentum you’re seeing there. And then as a — kind of dovetailing from that, just generally, what customer acquisition behavior it looks like on the enterprise side? And then I have a couple of follow-up questions.

Jeff Rosica — Chief Executive Officer and President

Yeah, absolutely. So, this is Jeff. So I think things are continuing to go well. I mean we continue to work with Disney obviously on their on their front. But as I mentioned in my comments that we’re not able to mention them at the moment. We are working with other media companies and we’re pretty far along in the work with those companies in doing similar activities what we do with Disney. So we like the progress we’re seeing. I think it’s going quite well. As we mentioned in the near term the contribution revenue perspective will be mild, but we do see that building rather quickly as we look forward over the next couple of years.

I’d say if you — as far as the activity, it is building. I think the situation that’s happening right now with the current coronavirus situation does play well, I think, into a cloud strategy. A lot of companies are worried about business continuity and how they have remote workers enabled. That’s a strength of Avid. I know we’ve talked before about the remote collaboration capabilities of Avid tools and the cloud only takes that even further.

And so it really does, I think, bring the life for people that business continuity is important, how you’re going to have workers work more remotely is important, and that I think plays extremely well into our strategy. So as much I don’t want to benefit from a crisis, but I think it does remind the industry of what cloud and quite frankly what Avid can do in this regard. So that’s been a benefit, I think in general ’19 as I mentioned in the larger enterprises performed quite well in Q4. We saw definitely a sequential improvement in Q4 of the small and medium though they were flat year-on-year. The larger ones [Indecipherable] see a solid growth year on year. So execution wise I think we’ve seen a lot of great momentum from those customers. As I said I think there’ll be some lumpiness in this market. We expect that to happen from time to time, but it’s more about timing. So overall we’re feeling good about that side of our business.

Samad Samana — Jefferies LLC — Analyst

Great. And obviously, I heard the comments that were in the script around guidance and factoring in the current market uncertainty.

Jeff Rosica — Chief Executive Officer and President

Yes.

Samad Samana — Jefferies LLC — Analyst

I guess, maybe could you help us understand; one, if the Company has made any changes whether it’s telling salespeople that they can’t travel or changing any customer meeting just so that we can kind of think about behavioral change? And then in that vein, I guess as you think about guidance, Ken, I heard you say that 1Q you narrowed the range or that you widened the range. But if we think about it ex what’s going out with COVID-19, is it fair to assume guidance would probably have been modestly bumped up for 2020?

Jeff Rosica — Chief Executive Officer and President

So let me answer the first part and I’ll let Ken answer the guidance part. So on the behavioral change, yes, as I said, it’s — the number one priority is the safety of our employees and our contractors and I think our customers too. We want to make sure that we’re taking care of our own staff, but we’re also making sure our staff isn’t mistakenly being a carrier of something. So we’re being careful. We have moved to business — I’d say business critical or business important travel. So we’re doing what’s necessary to execute on our customers’ projects. I know the sales team is doing what’s necessary to execute on the business. But we are being more careful. We’re using more virtual remote technology to connect with customers and to do a lot of the selling and even, and especially for internal meetings, we’ve moved to video conferencing almost exclusively. So I don’t think there has any — been real disruption. We use a lot of remote tools already in our selling and in the way our Company works. So that’s not a massive change. We’ve just had people lean a little bit more into that in the near term.

I don’t know Ken if you want to speak to the guidance.

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So on the guidance piece Samad, fist are reaffirming our full year guidance as disclosed in our November analyst meeting as overall we feel good about the direction of Avid’s business, our improving recurring revenue streams and the rapid expansion of our subscription business. Our current assessment is that given the move of our supply chain from China to Mexico, we’re going to have minimal supply chain risk in the short term. Our first quarter guidance that we provided reflects some of the uncertainty with respect to COVID-19 which could have a timing impact on receipt of certain potential orders, but this would be a temporary issue. And as a result we’ve widened the range by $2 million. So that’s something that we did with respect to Q1, but overall we feel good about the direction of the business and reaffirmed full-year guidance.

Samad Samana — Jefferies LLC — Analyst

Okay. Maybe one more for me and I’ll pass it along. But just maybe you mentioned on retiring the rest of the 2020 converts. So I guess the free cash flow is ramping nicely. I know there are some investments the Company wants to make, but maybe how should we think about capital management given the pullback in the stock, the free cash flow generation improving nicely, maybe just the philosophy around that for the intermediate term?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So we have significant liquidity from this call it $69 million of cash on hand, additional free cash flow to generate plus over $20 million of revolver capacity to comfortably meet the convert maturity of $29 million. So in terms of that payment, we have sufficient resources. In terms of our balance sheet we want to continue to delever and improve the Company through improvements of free cash flow and EBITDA. Obviously, we see an opportunity to reduce our interest expense over time and the Company will be evaluating different options in the capital markets to execute upon that during 2020.

Samad Samana — Jefferies LLC — Analyst

Great. That’s helpful. I’ll get back in the queue.

Operator

And our next question comes from Nehal Chokshi with Maxim Group.

Nehal Chokshi — Maxim Group LLC — Analyst

Yeah. Thanks. And a great quarter and great stats here. On the guidance for the subscription and maintenance, I think typically you guys see flattish to modest [Indecipherable] decline. But you’re guiding toward a slight growth here. So I think that’s above the high end of the historical norm. What is the driver of this hear?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. So I would say on the subscription and maintenance, our Q4 results were up 10.3% in Q4. As we sit here today, we see that continuing in Q1 and we believe that the guidance that we provided, which is tighter at $44 million to $45.5 million is the right range for us as not only do we see subscription moving in the right direction, but our maintenance revenue, we’re having less of an impact from the non-cash piece in that legacy storage product that is running off.

So we see maintenance overall relatively stable. And then the significant growth in subscription, which leads us to high-single digit guidance for Q1.

Nehal Chokshi — Maxim Group LLC — Analyst

Sounds like you’re expecting the rate of subscription adds to maintain in the 10%-ish range, is that correct? [Speech Overlap]

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah, I would say we feel good about the recent performance in subscription, the last two quarters and for that to continue in Q1.

Nehal Chokshi — Maxim Group LLC — Analyst

Okay. And going on that, so you did have 66% subscription billings growth that’s on 50% [Indecipherable] growth. And you did mention you expect ongoing strong growth here. So can you help bracket what do you think that means and what time frame are we talking about? Are we talking about 10%, 20%, 30%, 40%, or are we going to sustain the 60% subscription billings growth? Can you just give some bracketing here for us and also time frame on that bracketing [Phonetic]?

Ken Gayron — Chief Financial Officer and Executive Vice President

The subscription and maintenance growth of 10% in the last quarter was driven by the strong, obviously, subscription growth in the quarter. We see that trend continuing in 2020. We guided subscription plus maintenance kind of in the high single digits for the year. I’m feeling very good about that at this point given the elements that we’re seeing in our subscription business and our stabilizing maintenance. At this point we’re reaffirming that subscription and maintenance number and we’ll look to revisit that as we move through the year. But I feel very good about the high quality revenues moving in the right direction for Avid at this point.

Nehal Chokshi — Maxim Group LLC — Analyst

Okay. And then finally ACV accelerated 13% year-over-year growth from 4% in the prior quarter and the year-to-date average of around 4% as well. And I think that’s due to the subscription acceleration as well as the growth in the LTAs. So can you give a little more color on the LTAs? Where was it at the end of the quarter and remind us where it was a quarter ago and the year-ago numbers?

Ken Gayron — Chief Financial Officer and Executive Vice President

So I would say, first just on the — on also on your subscription point, the subscription revenue continues to be — was impacted by that revenue reserve, that’s now normalized and that’s what we expect. So that should be a catalyst to higher subscription for the year.

In terms of the ACV, we did see a 13% increase year-over-year. And what I would — when you look at the components of it subscription was the main driver and then the LTAs were up from, I would say, in the neighborhood of 15% for the year.

Nehal Chokshi — Maxim Group LLC — Analyst

Great. Thank you very much.

Ken Gayron — Chief Financial Officer and Executive Vice President

That offset the decline in maintenance.

Nehal Chokshi — Maxim Group LLC — Analyst

Yeah.

Operator

[Operator Instructions] Our next question comes from Steven Frankel with Dougherty.

Steven Frankel — Dougherty & Company — Analyst

Good afternoon. I understand your comments around the supply chain, given that you’ve moved production out of China. But what about critical component? How many of those come from China and what’s your visibility in terms of your supply of the components you need to hit your Q1 numbers?

Jeff Rosica — Chief Executive Officer and President

Thanks, Steve. This is Jeff. I’ll answer it. Look, overall we feel good about that. There are obviously some components and subassemblies that come from China. We’re in good shape on those. We’ve got the commits that we need. Right now we’re looking at the first half that we have the commit that we need and/or they are on-hand. So we’re in good shape. They are either — again they’re either committed or on hand. And we have very little actually that come — relatively low comes out of China. Even in cases where we had situations in China, we looked at — we worked on backup plans, build source.So I think we’re OK.

I mean, there may be small things that we have to deal with, but overall we’re feeling that — we’re feeling good at this point.

Steven Frankel — Dougherty & Company — Analyst

Okay. And going back to the LTA subject kind of either in terms of the number or the dollar value, however you want to address it, in LTAs in Q4 on a year-over-year basis, you gave us the full-year number, but kind of what did the activity look like in Q4 and how was that relative to your expectations?

Jeff Rosica — Chief Executive Officer and President

Well, I mean we are not publishing the exact numbers. I’ll say that there was a several million dollar improvement in Q4 from LTAs. We — in this area, we had — as I mentioned, a couple of them were mentioned in my comments. So there was two contributors in those comments I made. We just see a solid trend of that area growing with enterprise agreements or enterprise license agreements really helping grow the long-term trend. As I mentioned, LA Film School, YLE both signed multi-year agreements around that regard where there are others we also signed that we weren’t able to mentioned yet. So I think we made good progress in the quarter and we’re happy with it. Q4 can be a strong LTA quarter because a lot of people will sign up for new agreements for the coming year. So Q4 and Q1 can always be rather good for us in that regard, just — again just because people were tentative to sign up at year-end or at the start of the year.

Steven Frankel — Dougherty & Company — Analyst

Okay. And how should we think about the year-over-year decline in contractually committed backlog?

Jeff Rosica — Chief Executive Officer and President

I’ll let — Ken, do you want to address that?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah. Yeah, so in terms of backlog, the Avid as we move through the — our progression of our business model and we have some multi-year agreements that mature, there is a headwind on backlog. That said, we are growing the higher margin elements of our business which is subscription and that is resulting in really the growth rate in ACV. Additionally, we talked about the LTAs where over 15% growth. So that’s helping our ACV. So we’re focused on annual contract value. That’s the number that when I started the year we have $280 million under contract that is growing year-on-year and then the recurring revenue. So that’s our — what I get comfortable with in terms of the forward-looking metrics along with our internal pipelines that are all positive. So that’s why we’re focused on those metrics as we look forward in our business.

The multi-year contracts that mature as they go through, that’s just a timing issue when those renew.

Steven Frankel — Dougherty & Company — Analyst

Okay, and then — I know you’re not giving us a hard number of free cash flow in Q1 or in the front half, but how should we think of the flow of cash during the year? And I know in years past you’ve either moved bonus payments totally out of Q1 or I think last year you split them between Q1 and Q2. What are you thinking this year and how does that impact what we’re going to see?

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah, I would say Q1 will be a positive free cash flow quarter and Q2 will be impacted by a bonus payment for 2020. And then seasonally we generate a lot of our free cash flow toward the end of the year. So that cycle will likely continue. But as a team, we see the Company’s working capital improving this year which was a drag on free cash flow for the year and based on the improving credit metrics and the decline in LIBOR which has already declined 150 basis points since our Analyst Day, we see that improvement — that those elements will help our interest expense, our cash interest expense. So those two elements, plus the improvement in profitability will drive much higher free cash flow conversion in 2020.

Steven Frankel — Dougherty & Company — Analyst

Okay. Great. And then maybe just a little more around your thought process as to whether you participate in NAB or not. I know — I noticed a couple of more companies dropped out today.

Jeff Rosica — Chief Executive Officer and President

Yeah, so this is Jeff. Hi Steve. So — well, look, right now we are in active discussions with NAB and the Avid Customer Association Board of Directors to make a decision that we think is in the best interest of our employees, customers and partners. We expect to make an announcement later this week regarding our participation — well, our participation at NAB and what we’ll be doing about Connect. So I would say stay tuned. But generally I think we’re going to probably have to lean to be a little more safe with our decisions.

Steven Frankel — Dougherty & Company — Analyst

Yeah. Makes sense to me. All right thank you so much.

Jeff Rosica — Chief Executive Officer and President

Yeah.

Ken Gayron — Chief Financial Officer and Executive Vice President

Thanks, Steve.

Operator

And our next question comes from Josh Nichols with B. Riley.

Josh Nichols — B. Riley — Analyst

Yeah, thanks for taking my question. And great to see the strong subscription revenue growth and it looks like a fairly even split for subscriber growth between like the Media Composer and Pro Tools. Do you expect that cadence to kind of continue through 2020?

Ken Gayron — Chief Financial Officer and Executive Vice President

Well, I would say Pro Tools up until the second half of the year was the fastest growing SKU the Company had on subscription. That said, with the new Media Composer release that was done in Q2, the second half of this year we are seeing the Media Composer now in terms of the growth rate match Pro Tools. We should expect that to continue in the near term. And we have a significant opportunity to continue to accelerate our growth rates in both of those SKUs which are — obviously have great brand recognition in the market. So we’ll continue to be focused on adding functionality and the marketing team is doing an incredible job supporting some digital marketing efforts that are driving an acceleration of that growth.

Jeff Rosica — Chief Executive Officer and President

I think if I can say we will see Media Composer will be helped as it was in Q4 and Q3. As we talked about, we’re expanding our subscription offering more to the enterprise side and Media Composer does benefit more than Pro Tools on that. So — and we also — if you remember, we launched a new product called the Media Composer Enterprise, which has a lot of features very specific or enterprises that a lot of our competitors don’t have. So that does help our subscription growth in that part of the business. I think we’ll see that there’ll be peaks and valleys throughout the year with enterprises. But I think that will help generate the overall growth.

Josh Nichols — B. Riley — Analyst

Great. And then in the press release and also on the call you talked about continuing to really invest in R&D with some of these new offerings outside of the Media Composer offering expected in the second half. Is there anything else that you could kind of talk about that you have planned for release, whether it’s on the hardware or software side?

Jeff Rosica — Chief Executive Officer and President

We won’t — I would say we’re not going to pre-announce things that we haven’t gone to the public with. But I’ll say that what we talked about at Investor Day, and I’ll repeat that maybe with a little more clarity, the areas we’re investing in R&D clearly around our software suites, whether it be the audio creative suite, video creative suite or the platform suite, we will continue to make R&D investments in those areas to innovate to keep driving the kind of growth we’re looking for in subscription and in software overall.

In our integrated solution business as you know, we’re making a lot of work in the — have been doing a lot of work on the audio side with bringing our audio business back to growth and we see a huge opportunity there, along with the fast growth of Pro Tools to really drive a lot of growth in that audio part of the business. You’ll continue to see new products coming on the audio front. On the video front — media front, you will see a lot of that R&D is around cloud instead of necessarily a lot of hardware. We will continue to innovate around storage and we have a lot of interesting innovation around collaborative storage. But you’ll also see us doing a lot of innovation on that side around cloud.

Josh Nichols — B. Riley — Analyst

Thanks for the additional color on that. And then last question for me. Could you provide a little bit more detail on like the opex side for 1Q and how that’s going to flow through the year? I know that 4Q there was a couple of one-time items, I think you mentioned. And just want to make sure I get it right.

Ken Gayron — Chief Financial Officer and Executive Vice President

Yeah, so with respect to the fourth quarter R&D investments and the product development [Phonetic] that will continue into 2020. The web store transaction fees that were up $700,000, we did transition to a new provider and we will start seeing the savings in that in Q1 2020 and then commissions and the bonus were just timing differences. We expect the opex to come down from Q4 to Q1 by $2 million to $3 million in absolute opex dollars.

Josh Nichols — B. Riley — Analyst

Great. Thanks.

Ken Gayron — Chief Financial Officer and Executive Vice President

Yep.

Operator

Gentlemen, there are no further questions in the queue at this time.

Jeff Rosica — Chief Executive Officer and President

Thank you. We appreciate your interest in Avid and we look forward to speaking to you again in the future. Have a good evening.

Ken Gayron — Chief Financial Officer and Executive Vice President

Good evening every one.

Operator

[Operator Closing Remarks]