Avid Technology, Inc. (AVID) Q2 2019 Earnings Call Transcript

Avid Technology, Inc. (AVID)
Q2 2019 Earnings Call
Aug. 5, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Today's Avid Technology second quarter 2019 earnings call. I'd like to remind everyone that this call is being recorded, and at this time, I'll turn the floor over to Whit Rappole, Vice President of Investor Relations.

Whit Rappole -- Vice President of Investor Relations

Thank you, operator. Good afternoon everyone, and thank you for joining us today, for Avid Technology's second-quarter 2019 earnings call. My name is Whit Rappole, Avid Technology's Vice President, 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 a strategic 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 associates 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 this call are non-GAAP figures.

In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of 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 around outcomes. Actual facts, 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 10k for the year ended December 31st, 2018, as filed with the FCC. 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

Well, thanks, Whit, and thanks, everyone, for joining us today. Avid's q2 results did face slight revenue headwinds, due to some constraints from our supply train transition. We're taking into account in our cautions q2 outlook, noted in our q1 earnings call, which did bring our results in at the lower end of our guidance. That said, in spite of these challenges, we're actually, in the first half, fully in line with our own internal planning, and I'm pleased that Avid is entering the second half in a better position than we have been in many years.

Today, along with CFO, Ken Gayron, we'll discuss the factors in our performance, and the consistent indication of Avid's strategic plans and business execution have us on a good trajectory for the second half and the full year. We'll also review progress on our major operation initiatives, the success of new product introductions, and momentum with customers and partners.

So, let's start with my q2 observations. The slight revenue headwinds that we encountered during the quarter impacted our results, yet we're confident these factors don't change what we see as the company's improving, longer-term trajectory, nor our view of the full year 2019. In fact, we're continuing to see significant year-over-year growth in Avid's key financial metrics, including adjusted EBITDA, free cash flow, and net income per share. In q2, both revenue and gross margin were up, year-over-year, but only fractionally.

Toward the end of q2, as I just mentioned, because of our supply chain transition, we did face some constraints, due to order timing and product mix, which kept us from fulfilling orders for certain audio and video hardware products. Our continued strong growth in software subscriptions and the addition of new and extended long-term agreements during q2 give us confidence in our performance trajectory. We also continued to realize additional benefits from our smart savings initiative, and have achieved $13 million in OPEX savings on an annualized basis, as of the q2 close.

We're looking forward to achieving the remaining $7 million in COG savings in 2019, as we realize the benefits of our supply chain transition. Avid's now completed the exit from our former supply chain partner in Asia, and we're presently ramping up production at our new partner in the Americas. Inventory on hand will bridge to the new supplier, and we are prioritizing bringing up the production lines, according to forecasted demand. We'll have to carefully manage this process, as we're seeing strong demand in certain audio products, that could create some constraints as we ramp up. While we have encountered issues, it can be typical when undertaking such an extensive transition, we are starting to achieve our targeted cost savings and reduction in inventory, and don't anticipate that any short-term disruptions, if any are encountered in the near term, would change our outlook, on a full-year basis.

We also continue to make significant progress in our work with large media companies and studios, to support their own efficiency initiatives, bringing their crucial workloads into the cloud, including remote editing, backup of work in progress, archiving, and disaster recovery. As discussed last quarter, the solution to these major reference customers include our cloud-based, media-centered platform, and NeXus cloud storage, which are running on the Microsoft Azure cloud. While the revenue from these projects was small in q2, we're looking forward to the revenue to ramp up in the second half of the year and beyond, as we continue to bring more of these demanding media workflows into the cloud, for these and other clients.

Additionally, Avid has recently secured additional long-term agreements with major customers and partners. Among these is a renewal, in early July, of our multi-year agreement with the organization that produces the live television radio and digital coverage of the most-watched international sporting events. This agreement continues a successful relationship between our organizations, which started back in 2012, and it lasts until the summer of 2022, to provision production capability, and services to support their international summer and winter sports events, that are broadcast globally. Separately, Avid also signed a new strategic purchase agreement in q2, with one of the largest US retailers of Avid music and pro audio products.

Turning to q2 performance, we believe Avid continues to demonstrate, overall, that our improvement plan and strategic changes are making a meaningful impact on our profitability and cash flow. Revenue was basically flat, year-over-year, in q2. It benefited from continued growth of our software subscription business, which was up 17%, year-over-year, in the quarter, and from certain hardware products, including live sound and storage. However, as discussed earlier, revenue was slightly impacted by supply chain constraints.

E-commerce and software subscriptions also continue to make major contributions in q2. Revenue from e-commerce activities grew nicely, and was up 19% year-over-year, in the quarter. Software subscriptions continued their strong trend, and paid subscriptions surpassed $147 thousand at the end of q2, which is up 40%, year-over-year. Gross margin improved only slightly, year-over-year. During q2, gross margin was negatively impacted from a diverse mix, as the large, high-margin storage field, which we discussed in our q1 call, did not repeat during q2, as we'd expected, while certain lower-margin audio and video products were stronger in the quarter.

We're happy with the overall positive trajectory of gross margins and expect to see additional improvements in margins in the second half, from shipping new, higher-margin products, normalization of the product mix, and realization of savings from our supply chain transition. Avid delivered improved profitability in 2002, after operating expenses were down significantly, due to the success with our smart savings initiatives. We realized strong year-over-year adjusted EBIDTA growth of 78% and had a positive net income per share in the quarter. Finally, thanks to the improved cost structure, and strong execution overall, we delivered improved free cash flow generation during the quarter, versus the prior year, although, to remind you, q2 cash flow was seasonally weak, and included the normal 2018 bonus payment, as well as expenses for our NAB show and connect events.

Overall, we're on a good performance trajectory, with consistent improvement in the key financial metrics of revenue, adjusted EBIDTA, free cash flow, and net income per share. Additionally, on a last-12-months basis, we're showing significant improvement in all of these metrics. We're encouraged that we're exiting the first half of the year on a trajectory to achieve our full-year guidance, as we enter the seasonally stronger second half, coupled with an improving sales pipeline, and a more efficient cost structure.

Looking forward, we remain optimistic for h2, as we begin to realize the benefit of new products that we expect to drive growth, later in the second half, and beyond. We also anticipate completing our smart savings initiatives and fully realizing the benefits in the second half. The entire OPEX portion is essentially complete, and now, we're well-positioned to realize the benefits in COGs, for ramping up a lien-based supply chain, over the next several months. Also, Avid is intensifying the focus on delivering a consistently profitable and predictable financial model, built on growing recurring revenue, driven by our growing subscription offerings, and our long-term agreement strategy.

Importantly, Avid's product innovation is on a strong, accelerating pace, with several recent, strategic introductions in video software and integration solutions for pro audio and music. Our all-new Media Composer 2019 dramatically strengthens our category leadership, and better positions us to capture the emerging generation of film and TV editors, and video creators. Our next-generation, cloud-enabled platform, Media Central 2019, addresses the needs of small to medium-sized media organizations that have been seeking multi-site collaboration, and greater connectivity for their news, sports, and post operations. Both of these software products started delivery in late June.

In the second half, Avid will begin shipping new audio mixing products, the Avid S1, and Avid S4, which bring the power of our category-leading, higher-end systems within the reach of smaller studios and independent creators. Our latest introductions have all been very well-received by media creators globally, and we're already experiencing pipeline improvement for the second half, based on the new product momentum.

In summary, Avid has continued to focus heavily on optimizing our operations, and driving technology and product innovation, in order to support more profitable and sustainable growth, and thus, deliver greater shareholder values, but we're really just getting started.

So, with that, let me turn the call over to Ken, to provide details on our financial performance for q2. Go ahead, Ken.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. As noted above, Jeff and I are referring to non-GAAP figures, unless noted. For those new to Avid, seasonality impacts sequential comparisons, so it's important to look at our year-over-year comparisons, to assess the performance of our business. As Jeff outlined earlier, we're making substantial progress on our initiative to improve our financial performance.

While we continue to see year-over-year improvements in adjusted EBIDTA and free cash flow, we face certain revenue headwinds during q2, related to our supply chain transition, that brought our q2 results at the lower end of our guidance. With that said, our first-half results for 2019 were in line with our plans, and we enter our second half with a strong foundation to achieve our 2019 annual guidance.

Let's now get into the details. Turning to the income statement, GAAP revenue of $98.7 million for the quarter was fractionally up $100 thousand, year-over-year. We continue to see good growth in our e-commerce and subscriptions business for Pro Tools, Media Composer, and Sibelius and had a strong quarter in our media-central software business. Additionally, we saw favorable growth in our audio business related to our live sound product lines, but we had lower maintenance revenue in the quarter, with our continued shift in our business model from perpetual to subscription.

Gross Margin was 59.4% for the quarter, up 20 basis points, year-over-year. The q2 increase is due to a 140 basis point improvement in our software license and maintenance margin, offset by 170 basis point decline in our hardware and integrated software gross margin, from adverse product mix during the quarter. We expect to see more favorable gross margins, moving forward from our supply chain transition, and a more normalized product mix in the second half.

Operating expenses for the quarter were $51.8 million, down $4.2 million from q2 2018. The improvement in operating expenses resulted primarily from the realization of $3.2 million from our smart savings initiatives, that we began in the third quarter of 2018. Through June 30, we have realized $13 million of annual operating expenses savings, year-over-year, and have largely accomplished the expected operating savings targets we set last year. We expect these lower levels of operating expenses to continue throughout 2019.

And income per share increased to $0.02 in q2 2019, up $0.12 from a loss of $0.10 in q2 2018, primarily due to the improvement in operating expenses. Adjusted EBIDTA of $9.4 million for the quarter was up $4.1 million, or 78%, year-over-year, primarily from lower operating expenses. Adjusted EBIDTA margin of 9 1/2% was up 410 basis points, year-over-year. Free cash flow was negative $4.5 million in the second quarter of 2019, compared to negative $8.7 million in the second quarter of 2018. Including the impact of cash bonus payments of $6.4 million in q2 2019, and %8.3 million in q2 2018, free cash flow would have been $1.9 million in q2 2019, up $2.3 million, year-over-year.

Now, moving to annual contract value, and recurring revenue. The percentage of revenue that is recurring has steadily increased, providing us more confidence in the predictability of our business. With a 12-month, ending June 30, 2019, 58% of total revenue was recurring, up from 51% in the 12-month ending June 30, 2018. We expect recurring revenue to continue increasing over time, given the growth we are seeing in subscriptions, and our focus on adding new-long-term agreements. We reaffirm our goal of reaching 70% LTM recurring revenue in the next two to three years.

ACV was $246 million at the end of the second quarter, up slightly, year-over-year, driven from our strategy to focus on higher-margin software subscriptions and long-term agreements, offset by lower maintenance revenue. We expect to see continued growth in ACV over time, given our strategy toward signing more long-term agreements and growing our subscription business, plus stabilization of the maintenance revenue.

The decline in maintenance was related to the ongoing transition from perpetual to subscription for our creative software products, as well as the impact of lower maintenance from certain customers, as they upgrade their storage systems. We expect maintenance to stabilize during the remaining quarters of 2019, as stronger hardware and integrated software revenues that started in the second half of 2018 should provide a callus to our maintenance business, and our maintenance contracts start renewing.

Now, moving to the composition of our revenue. In the second quarter of 2019, revenue from high-margin software licenses and maintenance, which includes both subscriptions and perpetual licenses, was %50 million, down $1.4 million year-over-year, due to the decline in maintenance, partly offset by the increase in subscription and perpetual. Software licenses and maintenance was 51% of our revenue during the second quarter. The gross margin for software licenses and maintenance was 85.2%, up 140 basis points over q2 2018, driven by the growth in subscriptions. We expect this category to grow modestly, and continue to produce software gross margins of 85%, plus.

Moving to the next revenue line, hardware and integrated software, which we also call integrated solutions, had revenue of $41.7 million in the second quarter, up 6% year-over-year, on the strength of our live sound product. Hardware and integrated software contribute 42% of total revenue in the quarter. These solutions, which combine hardware with high-value, high-margin software, generate attractive margins. In q2, gross margins from hardware and integrated solutions was 36.5%, down 170 basis points from q2 2018, due to adverse product mix in the quarter, with a high mix of lower-margin audio and video hardware sold in q2 2019, versus the prior period.

Although gross margins in hardware and integrated software were lower in q2 2019, versus q1 2019, we expect to see gross margin improvement in the remainder of 2019, as a result of one, a more normalized products mix, second, introduction of new products in audio and video in 2019 that have stronger margins, third, expected benefits from the transition to our new supply chain vendor, that will result in cost reductions in crate and overhead.

The balance of our revenue comes from professional services, which is the smallest portion of our business. Professional services revenue was $7 million in the second quarter, down 10% year-over-year, as we are more strategic and selective in the professional services business we take on. With that said, gross margin in professional services is 11% in q2, up 810 basis points.

On June 30, 2019, we had cash of $51 million, down $9.2 million from June 30, 2018, primarily from the use of cash to purchase our convertible notes. Our cash balance at June 30 excludes $9 million in restricted cash, including the $8.5 million of cash that was used to collateralize a letter of credit issued in favor of our former supply chain vendor. As we discussed above, we completed the exit from this vendor during q2, and we received the $8 1/2 million of cash back as unrestricted cash in July 2019. This will be reflected in our q3 balance sheet.

Cash balance is down $4.3 million from March 31, the negative free cash flow in the quarter, which was expected, as this is our seasonal low point in free cash flow for Avid. We ended the second quarter with $58.6 million of accounts receivable, up $10.9 million from June 30, 2018, signifying the growth in the business. Out DSO was 54 days at June 30, 2019, due to the timing of billing later in the quarter. We expect our DSO to normalize back to the mid-40s as we move further into 2019.

Inventory was $34.1 million at the end of the second quarter, up $2.3 million over June 30, 2018. Inventory levels remain elevated, as we are completing the supply chain transition, and are expected to decline in the second half of 2019, as we burn off the remaining inventory from the prior supplier.

Contract assets totaled $18 1/2 million at the end of the second quarter, up from $15.5 million at June 30, 2018, as a result of growth in our subscription business. Deferred revenue was $93.5 million at June 30, 2019, down $4.2 million from June 30, 2018, due to the amortization of $5 million in non-cash revenue.

Contractually committed backlog was $351 million at the end of q2, up $1 million year-over-year, on increased long-term agreements. Contractually committed backlog was down $7million from the end of q1, as our billings from backlog exceeded new agreements. We expect that the strong pipeline of new long-term agreements, including the ones Jeff mentioned earlier, which have already been signed during the third quarter, will contribute to increased contractually committed backlog, going forward.

At the end of the second quarter, long-term debt was $200.2 million, down $30.5 million from June 30, 2018, due to the repurchase of convertible notes from the additional term load proceeds from the May 2019 refinancing. Additionally, long-term debt was further reduced by $29 million, as the convertible notes due 2020 were reclassified as a current liability, as of June 30, 2019.

As we have previously disclosed during the second quarter, we completed a tendered offer to repurchase $74 million of principal value of our convertible notes due 2020, through the addition of additional term loans, that mature in May 2023. These refinancing transactions result in the small increase in our total debt principal of about $5 million while reducing the term loan interest rate.

At the end of the quarter, we were compliant with our leverage covenant ratio, and have significant cushion with our required covenants. We expect to retire the remaining $29 million in convertible notes due June 2020 when they mature, and we have sufficient cash on hand, plus $22.5 million of undrawn revolver capacity in additional free cash flow that's expected, so we are comfortable with that level of maturity.

As we finish the second quarter of 2019, we are pleased with the progress we are making. With that said, we are completing the supply train transition, and that transition contains inherent risks, so we remain appropriately conservative on our third-quarter guidance. In the third quarter, we expect GAAP revenue to be between $101 million to $109 million, showing year-over-year growth at the midpoint. In the third quarter of 2019, we expect adjusted EBIDTA to be between $13.5 million to $18.5 million.

We are also reaffirming our 2019 annual guidance. Our 2019 revenue guidance remains $420 million to $430 million. Our 2019 adjusted EBIDTA guidance remains $60 million to $65 million. Our 2019 free cash flow guidance remains $12 million to $17 million. Also, as our business strategy is showing clear signs of improved profitability, we are adding guidance for full-year 2019, non-GAAP net income per share of $0.60 to $0.72, assuming 43 million shares outstanding.

With that, I'd like to turn the call back to Jeff for closing commentary.

Jeff Rosica -- Chief Executive Officer and President

Actually, I think we turn it back to the operator, right?

Whit Rappole -- Vice President of Investor Relations

Thank you. Actually, that concludes our prepared remarks. We are now happy to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you, Sir. And, ladies and gentlemen, for any questions, please signal by pressing *1 on your telephone keypad, and if you'd just make sure that your mute function is turned off, to allow us to receive that signal. Once again, at this time, that's *1 for any questions, and we'll pause for just a moment.

All right, and first, from Jeffries, we'll hear from Samad Samana.

Samad Samana -- Jeffries -- Analyst

Hi, good afternoon, and thanks for taking my questions. Maybe I'll start off with -- Thanks. I'll start off with thanks for all the color on the supply chain transition. I think it's really helpful for us to understand, and you guys did caution us last quarter that there could be some risks around it. But maybe, if we can double click on it a little bit more, just to understand. So, there's no more risks related to the legacy partner, but as you think about what the risks are, as you ramp up your new partner, could you maybe just highlight that a little bit more for us, and maybe what parts of the product portfolio might have risk associated with that as well? That would be helpful as we think about the back half of the year.

Jeff Rosica -- Chief Executive Officer and President

Yeah, I think I'll take this one. So, I think, when we look at the back half of the year, I don't think we see overall risk in the back half. Obviously, there could be some timing characteristics between q3 and q4, as we bring up new production lines, but there is, we don't foresee any risks today that would risk our second half in totality. That's why we made the comments we made.

And really, what we're talking about is, we did, as we've said before, built up inventory to handle the transition from one supplier to another. The risks are really only that, you know, it's pretty normal to have some production supply chain -- I won't call them issues, but as you bring the new product lines up, we can encounter things that we have to deal with. But more importantly, we forecasted our audio product strength, and to be honest, audio is performing better than we actually expected, so it will ultimately put pressure on new inventories because we are selling at such a good clip on the audio products.

It's being managed, and we'll manage through it, and it'll be -- we don't see any issues in the second half. That's why we've still got good confidence in our trajectory to delivering on our full-year guidance. And the products that are affected are basically audio, not all audio products, but certain audio products. That's the only lines we were moving over, between June, July, and August.

Samad Samana -- Jeffries -- Analyst

Okay, great. Ken, maybe a financial question for you, or more numbers-related, but as I think about the -- You noted that there was a couple of things that were headwinds to make it into the transition to subscription, and then some customers taking lower maintenance. Could you maybe help us understand the magnitude of those two? And then, just as we think about the transition to subscription, should we see the benefit of that in the contractually committed backlog number, or where should we start to see that in the metrics the company is reporting?

Ken Gayron -- Executive Vice President and Chief Financial Officer

Yeah, so maintenance revenue was down approximately $4 million, q2 '19 versus q2 '18. You know, the shift to the business model from perpetual to subscription is one of the leading drivers of that, plus, as we move from ISIS to NeXus. That said, we still believe that maintenance is going to be a better performer for us in the second half, and the reason is we've had stronger product sales. The integrated solutions business has performed well for us over the last year, and as that maintenance comes up, the first year is free. As those products come up for renewal, with those stronger volumes, that will be a tailwind to our maintenance business. And also, we're starting to see stronger renewal rates overall in certain areas. So, those two will be tailwinds to our business and will help us, I would say, have better revenue from maintenance in the second half of the year.

Samad Samana -- Jeffries -- Analyst

Great, and then, yeah, if I could squeeze in another one. How should we think about the strength of the product refresh cycle from the new products? Should we think of that as a 6-month type of product cycle, 12-month, or longer duration? And maybe, could you help us understand what the percentage uplift is, in moving over to the new storage product, and then your products that you release?

Jeff Rosica -- Chief Executive Officer and President

Well, so, I'll try to answer, Samad. When you say product cycle, you mean the cycle between announcement or launch and when we see revenue, or how do you mean on the cycle question? Let me first clarify that.

Samad Samana -- Jeffries -- Analyst

Yeah, so from release to when we start to see the impact to the business.

Jeff Rosica -- Chief Executive Officer and President

So, on the software products, it depends on where it is. On the enterprise products like Media Central, that does have a few months kind of germination before it becomes revenue, one, because when we get the orders, we've got to actually deliver on the system, and then we've got to obviously turn that to revenue, which can take some time. So, I'd say things can happen as fast as two or three months, and some things could take as long as a year on big projects, so it depends, though there has been a lot of project work going on, even though the product wasn't released yet. So, you know, I think it gradually starts delivering results. I mean, Media Central will deliver results in the second half, the new Media Central. On the new Media Composer example, that wills tart having results right away in the second half.

On the hardware products, it converts to revenue very quickly, because it's heavily channeled, so as soon as the products start shipping, we start delivering to channel, and they start taking delivery and delivering them to customers. So, the turn there can start within the quarter. Really, it's about how fast we can ramp up production on these products.

Samad Samana -- Jeffries -- Analyst

Okay, last one and then I'll hop out. Just, you know, today, there's a lot of noise going on, from a macro perspective. Software earnings have been a little bit mixed, as far as we've seen. I'm just curious if there's any change in behavior at your customers from a high level, or if there's any increase, either caution or if it's business as usual, just from a macro view that you've gotten, in terms of customers.

Jeff Rosica -- Chief Executive Officer and President

I wouldn't say that it's any different. I think it's pretty much like we've said all along. I think the video creative, the content creation business is really doing quite well, and people are really adopting those tools pretty quickly.

The enterprise customers, as we've said before, is a bit lumpy, quarter to quarter, but I don't think there's any change in trajectory on that. It's about the same. We actually benefit from having a couple of dozen customers in our facility last week, who was on the strategic summit with us and talking about market dynamics and they looked at our product plans. I could talk about this group, they were very public with this on social media, so it's not like people wouldn't see that we're promoting it. And so, our feedback from at least a sample of our customers is pretty fresh, and I think we've got a pretty good view. So, I wouldn't say anything significant has changed in our views, from what we've talked about in the last couple quarters.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Our software business is very healthy, Samad, and you can see that in the user base, which seems to be up over 40% in the growth, and we're obviously seeing a lot of demand, and that's one of the reasons why we actually took an action to increase prices that will also benefit us in the second half.

Jeff Rosica -- Chief Executive Officer and President

Yeah, that's a good point. Thank you, Samad, for your questions.

Samad Samana -- Jeffries -- Analyst

Thank you for taking my questions.

Operator

And next, from Maxim Group, we have Nehal Chokshi.

Nehal Chokshi -- Maxim Group -- Analyst

Yes, thank you. So, I think there's typically September quarter seasonality, and that seems what your guiding, too. Can you just remind us, what are the drivers of that seasonality?

Jeff Rosica -- Chief Executive Officer and President

Well, I mean, you've got both good and bad. I mean, you've got, on the tailwind side, a lot of our products, not all of them, but a lot of our products are announced in the first half and so q3 benefits from those products. On the same token, it's summer in Europe, so there's the headwind, obviously, we manage through summer in Europe. And then, finally, we have our big European convention at IBC in September, which actually does help us, because it allows us to bring a lot of the stuff we've unveiled in the first half, including at NAB and Connect, allows us to put it in front of a lot of the media enterprise customers in Europe in the month of September.

So, again, there's seasonality that goes both ways, but we pretty much know our seasonality as a business, and obviously, q4 is a very big quarter for Avid. It's always gonna be that way. It's never gonna change, not that I see, going forward.

Nehal Chokshi -- Maxim Group -- Analyst

Okay, so, the reason why I ask is that I think that the guidance embeds a typical level of seasonality that you see from June quarter to September quarter, and, given that the supply chain transition is now over, I would have expected that the little bit of softness that you saw in the June quarter due to supply chain transition would produce an above-seasonal September quarter guidance. So, that's what I'm really trying to try about here. So, any color on that potential concern there?

Jeff Rosica -- Chief Executive Officer and President

No, just other than I want to clarify one point there is that the transition out of the partner in Asia is complete, and in fact, I know Ken mentioned that we've actually even returned our -- the letter of credit's been released. So, that $8 1/2 million's been put back, will be back on our balance sheet in q3. We already received it in July, but it will be in our q3 balance when we report q3. So, that's done.

With the ramp-up of the production and the move to lien supply chain is a several-moth activity, so there's still activity we'll be doing, bringing up new production, as I mentioned before, supply chain in q3. We're just gonna continue to be, as we were before, cautious on the current quarter, but, as we all said, we still feel good about our full-year guidance, and we're on the right trajectory to deliver on that.

Nehal Chokshi -- Maxim Group -- Analyst

Got it, understood. And then, Ken, You already pointed out once that you saw very good software license revenue growth, up 20% year-over-year. That is a significant acceleration, relative to March quarter, where it was flat in the prior quarter. Is there a narrative behind that acceleration?

Ken Gayron -- Executive Vice President and Chief Financial Officer

Yeah, just on the subscription side, more growth on the subscription side, across all areas: Pro Tools, Sibelius, and the new Media Composer. And Media Composer, which was announced at NAB, had a nice uplift in June, so we're excited about that, as we look at the second half. And also, we have very good growth into the perpetual side, related to Media Central, with that new release. So, that's really the color behind the better growth in q2 versus q1.

Nehal Chokshi -- Maxim Group -- Analyst

Okay, got it. And then, you guys talked about, you have a very nice pipeline for your long-term agreements. It sounds like, though, in the current quarter, there wasn't significant progress in terms of new long-term agreements being signed. A) is that correct, and B) can you give us some color as far as how big is that pipeline, perhaps, maybe, relative to what's already in your contractually committed backlog?

Jeff Rosica -- Chief Executive Officer and President

Well, I don't know if I could share kind of a ratio, off the top of my head, but I mean, the pipeline is a bit better than, you know, we track the pipeline every quarter, year-on-year, so the pipeline is better. It's quite, I would say, comfortably better. We like what we're seeing from a trend. We did not get all -- I notice, I commented about one of the renewals of agreements that we did in July. As we've said before, you know, we're really not focused on bookings. We're focused on, really, the deliveries and the revenue, and the other metrics around the company.

We do look at the bookings from the standpoint of the business we need for a quarter, and we obviously look at the booking when it's time to renew an agreement. In the case of the agreement I mentioned in the call about, that was signed in early July, we didn't push for it to be signed in June, because, as I think I shared before in the call, we want good behavior from the sales team, and so, we're not incentivizing them to get stuff in early. We're making sure they get in on time, but you know, we're not using critical boundaries for contract negotiations. That's a bad place to be putting ourselves as a company.

But we are making the progress we want to see. We saw a slight uptick in the ACV and recurring revenue this quarter. Remember last quarter, it was a little bit down. We saw a little bit of an uptick this quarter we're happy with. We'll keep focusing on hopefully delivering an uptick in the second half.

Ken Gayron -- Executive Vice President and Chief Financial Officer

You know, I would say we feel good about the forward-looking metrics. First, our LTM results through June 30 show we're really close to the low end of our annual guidance, so the trajectory with the business, but when we look at the new product releases, Wolf at NAB in April, I talked about Media Composer having a nice benefit in June. That's moving forward. We have new products that were just introduced at the summer NAMM conference. We have price increases. We have the improving pipeline that Jeff mentioned, which I'm very optimistic on. Granted, it's not in contractual revenue, but the pipelines are growing. So, we feel very good about the second half, and the annual guidance that we reaffirmed.

Nehal Chokshi -- Maxim Group -- Analyst

Okay, a couple more questions, just to follow on here. One is that the pipeline, does that consist of largely existing customers, or is new customers a significant portion of that pipeline?

Jeff Rosica -- Chief Executive Officer and President

No, it's both. I mean, we're running about the same percentage we have been, from a new customer standpoint. The pipeline is all of the above. It's upgrades to existing customers, it's new project existing customers, it's new customers. It's also new products that we're unveiling, which give us the additional pipeline. And you know, a lot of our channel business is new customers. Not all, but there is a lot of recurring customers there. But a lot of our channel business does deliver a lot of the new customers to the company.

Nehal Chokshi -- Maxim Group -- Analyst

Okay, and then, Ken, you mentioned a couple times, I recall, raised prices. Which products do these refer to?

Ken Gayron -- Executive Vice President and Chief Financial Officer

These are our creative cloud products.

Jeff Rosica -- Chief Executive Officer and President

Our creative software products.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Creative software. This is Pro Tools, Media Composer, and Sibelius.

Nehal Chokshi -- Maxim Group -- Analyst

This is basically in response to Adobe having raised prices for creative cloud.

Jeff Rosica -- Chief Executive Officer and President

Well, no, it was not really a response to them. Obviously, they did something similar a couple of months before us. But it wasn't response, it's looking at the business model as we move forward. We're trying to also make it very attractive for people to get on subscription and off perpetual, and just general, some adjustments that we made based on lessons learned on the business. But those price adjustments that we made, I shouldn't say they're all increases. Some, actually, there are some neutral, there are a couple that went down. There are a few that went down. We basically adjusted, but we will see a tailwind in our software revenues for the creative tools, because of those price adjustments.

Nehal Chokshi -- Maxim Group -- Analyst

Gotcha, thank you.

Jeff Rosica -- Chief Executive Officer and President

Yep.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Next, from Dougherty, we have Steven Frankel.

Steven Frankel -- Dougherty -- Analyst

Hi, good afternoon, thank you. I'm trying to connect a couple dots. So, you've seen this maintenance revenue decline, and you're hoping it bottoms, and you talk about the storage products that were bought last year coming into a year two, and helping to turn that around. And I look at the gross margin, that you talked about, was a mix issue in q2. Does that say that the new storage cycle has quieted down for the moment?

Jeff Rosica -- Chief Executive Officer and President

No, No, see...

Ken Gayron -- Executive Vice President and Chief Financial Officer

No, and that's why we didn't see a lot of high-margin storage in q2.

Steven Frankel -- Dougherty -- Analyst

And what's the outlook for storage between now and the end of the year?

Jeff Rosica -- Chief Executive Officer and President

So, let me just take that. So, in the first quarter, we specifically called out, there was a large storage deal that was high-margin, that occurred in the first quarter of 2019. That was multi-million dollars, and that likely wouldn't reoccur. So, as a result, our margin was slightly higher in q1. In q2, with that storage deal not reoccurring, the margin declined, but we're still optimistic on storage, it's just a mix issue. Some quarters, you sell more higher-margin products, like we did in q1. In q2, the mix was less higher-margin storage and more live sound audio, which typically has lower margins. And, as you know, the live sound business is related to the concerts, and that's related to the summer, so q2 tends to be a bigger quarter for that. But we are optimistic on the storage business, and we're optimistic in the second half on storage, but also on a lot of other elements of the business.

Steven Frankel -- Dougherty -- Analyst

Was storage up year-on-year in the second quarter?

Jeff Rosica -- Chief Executive Officer and President

Storage year-on-year was up about -- Actually, q2 year-on-year was slightly down, but for the first half, we're up double digits.

Steven Frankel -- Dougherty -- Analyst

And then, there was a comment earlier in the call about maintenance being impacted by the shift to subscription. I understand that in the tier three side, but could you give us a flavor for where is the tier one, core, long-term Avid customer on shifting from perpetual to subscription?

Jeff Rosica -- Chief Executive Officer and President

Hi, Steve, this is Jeff. So, on the tier one level, let me say tier three is obviously doing lots of subscription. Tier two, it's growing in subscription and that's phase two. That's more the small to medium-size enterprises, could be production companies or post-production companies. That is also growing pretty well. We're launching a new team offering, which we've announced, which will be delivered in the second half, which will make team subscriptions, which will help be more attractive in the tier two market.

In the really big league enterprises in tier one, that has started, as we've said before, there's a few customers that have gone subscription. We've only taken a few customers into subscription there, mainly because our back-office systems aren't ready for it, but we have taken a few big customers there, and we will probably continue to take a few more, but we haven't really launched aggressively into that space, as of yet.

Steven Frankel -- Dougherty -- Analyst

Okay, and Ken, in the past, you've given out a subscription software number, and I didn't see it on the datasheet this quarter.

Ken Gayron -- Executive Vice President and Chief Financial Officer

In terms of the user base? I just want to make sure.

Steven Frankel -- Dougherty -- Analyst

No, a revenue number.

Ken Gayron -- Executive Vice President and Chief Financial Officer

So, we have it in the earnings slide. We do break up subscription -- Actually, on the earnings slide, that's software licenses and maintenance. On the earnings -- on the IR datasheet, it should be there. We'll make sure it's posted for you, Steve.

Steven Frankel -- Dougherty -- Analyst

I didn't see it. It could be there and I didn't see it.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Okay. It's in the 10q that will be coming out, I think, in the next 15 minutes, as well.

Steven Frankel -- Dougherty -- Analyst

Okay, and then, in terms of the ACV is kind of stalled out. Is it your proposition that, when you get the console cycle running in the back half of the year, we should start to see ACV growing again?

Ken Gayron -- Executive Vice President and Chief Financial Officer

I think we'll see ACV growing for a couple reasons, hopefully. ACV is heavily driven by subscription growth, and the second half is, first of all, seasonally strong. The second point is that, of course, the holiday season is important for us to grow that. The other -- because a lot of our music customers, that's a heavy time for music, because of the holidays. We also, as we're working to sign long-term agreements at the high end, in tier one, and of course renewal of SPA agreements near the end of the year, that will also help. That's what our anticipation is.

Steven Frankel -- Dougherty -- Analyst

Okay, and then, what's the biggest risk factor to your free cash flow forecast for the full year?

Ken Gayron -- Executive Vice President and Chief Financial Officer

I feel very good about the free cash flow forecast. On a last 12 months basis, through June, we're at $10.7 million in free cash flow. The guidance is $12 million to $17 million. Given the new products that we have, given the improved cost structure, and given the fact that, with the supply change conversion, we're going to be able to reduce inventory, I feel like our free cash flow will be better positioned in the second half than in the prior year. So, I think there's a lot of clear visibility to improve free cash flow for the full year, and achieving the guidance, if not beating the guidance.

Steven Frankel -- Dougherty -- Analyst

Okay, thank you.

Jeff Rosica -- Chief Executive Officer and President

Thank you, Steve.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Thanks, Steve.

Operator

And once again, folks, *1 if you do have any questions. Next, from BWS Financial, we have Hamed Khorsand

Hamed Khorsand -- BWS Financial -- Analyst

Hi. So, first off, on the hardware side of the business, in the last few years, it's usually been the first half of the year has been seasonally weak, and then you get this ramp in the second half. This year, the first half is much stronger than prior years. So, is there a change in the seasonality, or is this gonna be a steady kind of performance? What are you expecting from hardware in the second half? Will it continue this kind of trend that you're seeing this year?

Jeff Rosica -- Chief Executive Officer and President

As we've said before, I think, Hamed, and hi, by the way, we had talked about, back at investor day, because we didn't talk about it, is we've been expanding a lot of our portfolio around the solutions, the integrated solutions that we are selling around the creative process, and as we expand that portfolio, as we did with, remember the original S6L Live Sound Expansion, which we had unveiled late last year, that really was a big benefit in the first half of this year, because we put a lot more live sound products our into concerts and festivals, and in fixed facilities. And, as we continue to expand those -- Also, storage has been performing quite well.

And then, the second half, we have more of those solutions, with the expansion with the S1 and S4. So, I think, as I foresee it, We're gonna see, even if there may be very near-term headwinds from supply chain transition, we look at the second half, and we look at the full year, and even into next year, we're encouraged by how those products are gonna contribute. We're really getting more of the economic relationship now, from those customers, than we were before.

Hamed Khorsand -- BWS Financial -- Analyst

And then, could you just talk about this whole maintenance revenue, as it declines? What's the customer mix like, when you go into subscription? How much of your enterprise customers have switched over from maintenance to subscription?

Ken Gayron -- Executive Vice President and Chief Financial Officer

So, again, we're, on the enterprise side, I would say, we're, as Jeff pointed out, we're kind of in the earlier days to move people onto subscription. That said, we have some big opportunities that we're working through, that we'll be able to talk about as we think about the second half of the year. Those are things that we're working on today. In terms of the actual maintenance decline, the two things that we talked about was, we are still moving on the other side of the business, on the creative side, from perpetual to subscription, so that's been a headwind, as well as on the storage, as we move from ISIS to NeXus, that's also a headwind. So, that resulted in a decline year-on-year, on maintenance.

That said, when we look forward, Hamed, on maintenance, our product revenue, as you pointed out, we're starting to have very strong product sales, our product sales over the last year have been fairly strong, and as a result, those product sales come up for maintenance renewal, because the first year we provide the maintenance free. That will be a tailwind for us, to drive more maintenance revenue as we move forward. So, we did decline, and we talked about the reasons for that, but with the strong product sales, that will help us, moving forward. And also, we're starting to see a tick up on some of the renewal rates that we're looking at carefully here, across the tiers.

Hamed Khorsand -- BWS Financial -- Analyst

So, are you seeing a decline in enterprise customers, because now you're seeing more subscription coming in from individual professionals?

Ken Gayron -- Executive Vice President and Chief Financial Officer

No, our subscription today is mainly the creative professionals. We are working, we're in the early innings of moving enterprises to subscription. We have some big opportunities. So, that will become more part of the company's revenue streams, as we move forward.

Jeff Rosica -- Chief Executive Officer and President

Maybe I can add, there may be confusion, Hamed. So, maintenance didn't just come or doesn't just come from big enterprises. Individual creatives have a maintenance stream because when they have a perpetual license, we had an annual support program and software maintenance program. So, if somebody comes on subscription and goes off of perpetual, the revenue moves from maintenance over to subscription. Right, so, and it's not just big enterprises. We're not losing big enter I don't know of any significant or major, or even sizable of any kind, big enterprises moving off of maintenance on our product, or off of Avid. It really is just about the, really, that part of the maintenance headwind is all about the move to perpetual to subscription.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, and last question is, how do you plan on paying off the remaining convertible debt that's now short-term?

Ken Gayron -- Executive Vice President and Chief Financial Officer

Well, we had $51 million of cash in the balance sheet. We just got back $8 1/2 million that was restricted, so we've got close to $60 million of freely available cash. We expect to have strong cash flow in the second half of the year, plus we have $20 million, $22 million of undrawn revolver. So, I have multiple sources to pay it off. You know, I'm just gonna use cash from the balance sheet. I feel very comfortable doing that and reducing that liability.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, thank you.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Yep, thanks.

Operator

And at this time, it looks like we don't have any further questions from the audience. I'd like to turn things back to Jeff Rosica for any additional or closing remarks.

Jeff Rosica -- Chief Executive Officer and President

All right, thank you, Operator, and thanks, everybody, for attending the questions. So, as you've heard, Avid has exited the first half of 2019 on a positive performance trajectory and is entering the second half with some confidence. We're encouraged by the progress we've made in our operational improvements and smart savings initiatives to date. We're also excited about our recent new product releases and deliveries, which we anticipate will make an important contribution to our performance in the second half, as we work to deliver the results laid out in our full-year guidance. Thanks, again, to everyone for joining us today, and we look forward to our next call in the fall when we report our q3 2019 results. Until then, have a great rest of your day or evening, and enjoy the rest of the summer. Thanks, everyone.

Operator

Once again, ladies and gentlemen, that concludes our call for today. Thanks for joining us. You may now disconnect.

Duration: 54 minutes

Call participants:

Whit Rappole -- Vice President of Investor Relations

Jeff Rosica -- Chief Executive Officer and President

Ken Gayron -- Executive Vice President and Chief Financial Officer

Samad Samana -- Jeffries -- Analyst

Nehal Chokshi -- Maxim Group -- Analyst

Steven Frankel -- Dougherty -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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