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Avid Technology Inc (AVID)
Q3 2019 Earnings Call
Nov 7, 2019, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and welcome to the Avid Technology, Third Quarter Earnings Call. [Operator Instructions]. At this time, I would like to turn the call over to Whit Rappole. Please go ahead, sir.

Whit Rappole -- Vice President of Investor Relations

Thank you, Brad. Good afternoon everyone, and thank you for joining us today for Avid Technology's third quarter 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 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, 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, 2018, on file with the SEC.

With that, let me turn the call over to our CEO and President, Jeff Rosica for his remarks.

Jeff Rosica -- President and Chief Executive Officer

Thanks Whit, and thanks everyone for joining us today. As I highlighted in our preliminary earnings announcement last week, during the third quarter, we saw the clear strength of Avid's recurring revenue subscription and maintenance business as well as significant execution challenges related to our supply chain transition.

While we are disappointed in our Q3 final results, which show that we encountered stronger than anticipated headwinds within the quarter, we remain enthusiastic in the long-term trajectory and the opportunity for improving growth and profitability.

Q3 performance impacted our outlook for our full-year 2019 performance and is reflected in our guidance, we revised last week. Today, along with our CFO, Ken Gayron, we'll discuss the two primary factors in our under-performing in Q3 as well as the several strong indications that underscore or execute our executive team's confidence in Avid's strategic plans and business execution.

We'll also review progress on our major operational initiatives and momentum with customers and partners. While we get under way, I'd like to note that Avid was pleased last week to welcome Christian Asmar, as a new Director on our Board of Directors. Christian is a Managing Partner at one of Avid's new and largest shareholders, Impactive Capital.

This is a positive step in further diversifying the expertise and the ability of our Board to help guide the Company forward and to continue to -- our goal of having strong shareholder representation on our Board of Directors.

Now, I'll begin with my Q3 observations. Two primary factors leading to our under-performing were our supply chain transition and weaker than expected product sales to our smaller enterprise clients. As we had been discussing throughout 2019, we are in the midst of a major supply chain transition. The greater than expected challenges during Q3 resulted in approximately $8.1 million of hardware orders that were unfilled at the end of the third quarter.

While our progress was slower than expected during the quarter, we're making progress and we remain confident that the transition to the new outsourced manufacturing partner will deliver the cost structure improvements and reductions in inventory that we had previously disclosed. I'll discuss this in more detail in a moment.

The balance of the Q3 revenue shortfall was due to product sales to enterprise clients that fell short of our expectations, due to softer demand from our smaller enterprise customers and that mainly impacted revenue in the storage and media management product categories.

While the above factors were significant headwinds in our business during Q3, we also delivered positive results in several strategic areas of our business. These include, software subscriptions reached 170,000 unique subscribers to date, which was up 43% year-over-year and subscription billings grew 49% year-over-year.

Maintenance revenue while down year-over-year was up sequentially resulting from the participation of headwinds experienced earlier this year, price increases, improving renewal rates and the reemergence of the underlying trend from generally stronger product sales over the past year and a half. I'll discuss both of these points in more detail also in a moment.

As discussed last quarter, we've achieved $13 million opex savings from our smart savings initiatives. We expect to fully realize the remaining $7 [Phonetic] million from our supply chain transition. However, due to the factors impacting Q3 performance, these benefits are still to come.

During Q3, Walt Disney Studios and Avid's strategic cloud partner Microsoft made news when they began to discuss publicly their collaboration to create, produce and distribute content in the cloud utilizing many of Avid's cloud solutions.

Avid was very pleased to host both of these companies at our Annual Press event during the IBC trade show, a couple of months ago where they described their initiatives. We believe having secured one of the world's largest media companies with the most demanding workflows establishes the early proof point in our cloud strategy and signals to the entire M&E industry the readiness of the cloud.

In fact as stated earlier this year, we are engaged with other large media companies that are preparing to embrace cloud technologies for their own content operations. As of September 30th, Avid has 50 active long-term agreements. During Q3, we added two new strategic purchasing agreements with channel partners, and we also renewed or extended several other active agreements. Irrespective of the headwinds in Q3, we feel confident in the long-term trajectory of the business to deliver more profitable recurring revenue.

Turning over to Q3 business performance, we believe Avid continues to demonstrate that our improved plans and strategic changes are making a meaningful impact on our profitability and cash flow. Revenue was down year-over-year in the third quarter, although it benefited from continued growth in our creative software subscriptions business and stabilization in our maintenance business.

However, as discussed earlier, product revenue was negatively impacted by our temporary supply chain constraints and lower than expected sales to enterprise customers during the quarter. Gross margin improved to 62.1% from higher gross margin in our software products and maintenance and favorable impact from the product mix in the quarter.

Adjusted EBITDA was down 12% year-over-year primarily due to lower revenue in the quarter, but EBITDA benefited by the improved gross margin as well as lower operating expenses due to our smart savings initiative. Finally, free cash flow while negative in the quarter was $1.8 million better year-over-year due primarily to lower operating expenses.

Ken will provide additional detail on the quarter in his discussion. Given the magnitude of the effects of the complex supply chain transition on our Q3 results, we want to -- provide you with further details of what happened in Q3, how we're making progress to deliver on our plan in Q4, and to remind you of the operating and financial benefits that we ultimately expect to receive from the transition of the supply chain.

I want to note that Q3 was the first quarter of shipping the effective products including the new S4 audio consoles exclusively from our new manufacturing partner. During the quarter, there were several greater than expected difficulties that impacted the quarter. First, we underestimated time and resources required to ensure that the product's process and test documentation was sufficient to enable the new manufacturing partner was able to qualify and start producing in volume, impacting the timing of qualifying production at the new partner.

Second, given the lower or slower than expected qualification of products of the new partner, our ability to move to volume ramp was impacted affecting our ability to meet desired volumes at the end of the quarter. Third, the introduction of the new S4 audio console during the third quarter exasperated the challenges at the new partner. While we did ship the first several S4 consoles for revenue during Q3, we did not ship as many as we had planned.

Finally we had planned for a range of product mix during the quarter, of course, but we experienced unexpected higher demand for certain products that we were transferring to the new manufacturing partner exceeding our production capacity for those products. While all of these factors contributed to the approximately $8.1 million of hardware orders that were unfilled at the end of the third quarter, we're continuing to bring the new partner online and we have shipped $3.9 million of the Q3 backlog as of November 6th.

We are optimistic that we are now in a position with the new manufacturing partner to meet our plan for the fourth quarter. We've completed all of the major product qualifications, and the remaining smaller products needed are scheduled to be qualified through Q4.

We've learned from Q3 and have rapidly adapted the production lines in order to support the expected demand in Q4 and going forward. Finally, our new S1 audio console is on target for Q4 volume production in order to meet the strong pre-order demand, we've already seen from our channel partners globally and higher expected demand in time for the holiday season.

Now while our supply chain transition has been painful for the Company in the short term, we're starting to see improved manufacturing performance and we fully anticipate realizing the financial benefits over the coming quarters after we complete the full transition by the end of '19.

We expect these benefits to be significant, both from a cost perspective as well as reduced inventory and working capital, resulting from a lean manufacturing flow. Now turning to a consistent strong performer, Avid's software subscription business delivered solid results in Q3.

As stated obviously -- previously, creative software subscriptions were 46% up year-over-year in Q3 to over 170,000 subscriptions for our creative products including Pro Tools, Media Composer and Pro Tools, Sibelius. We instituted a series of price increases on July 1, and despite those increases, Q3 saw Avid's largest ever subscriptions increase with over 22,500 net new subscriptions.

This demonstrates the significant value our customers place in our subscription products as well as our ability to monetize that value over time. We saw subscriptions growth across all of our creative software products. Media Composer made a particularly strong contribution, which was driven by the June release of the completely reimagined Media Composer 2019, which has been well received by individuals and enterprises alike.

Pro Tools also showed strong growth and surpassed a 100,000 subscriptions in the quarter. Our subscription billings were up overall by 49% year-over-year in Q3. This growth in billings continues to track subscriptions. The billings result also reflects the price increases we implemented at the start of Q3. While this is significantly ahead of our revenue growth, over the long term subscription revenue should track with billings growth.

We also want to provide you with more insight into our maintenance revenue which is Avid's largest revenue line and which generates revenue related to both our hardware and software product sales. While maintenance revenue was down year-over-year in Q3, it was sequentially up as several of the factors that have negatively impacted it during 2019 are starting to dissipate. And the benefits of generally stronger product revenue in the recent quarters, and the health of our large installed base of hardware and software products begin to reemerge.

Maintenance revenue from hardware products such as storage, audio consoles and graphics products represented about 45% of total maintenance in Q3. The primary negative impact on overall maintenance revenue in 2019 was due to our ending sales of maintenance contracts on certain legacy storage systems at the end of 2018.

Aside from this issue, we are seeing positive underlying trends in maintenance from improving renewal rates and selective price increases and from generally stronger product sales recently. Maintenance revenue from software products that's Media Central, our creative tools -- and our creative tools represented about 55% of total maintenance revenue in Q3.

We have a healthy maintenance revenue stream from our customers for all of our software products including MediaCentral, Media Composer and Pro Tools.

In the quarter, there was a negative impact from the ongoing transition of a portion of creative tool customers to a subscription model. Looking beyond our Q3 performance, I would say that we've isolated the primary factors to supply chain and sales to enterprise clients. As we've discussed the supply chain challenges -- while great -- were greater than expected, they are temporary and we are optimistic that we have made the changes so that we will meet our Q4 production goals and achieve the expected financial benefits.

On the weaker sales to enterprise customers during the third quarter, we have a strong pipeline of potential business and expect to improve performance in Q4. Overall, we remain confident in our positioning for the opportunities ahead of us as well as our ability to meet future expectations. We are making rapid progress and fully expect that in Q4 we will achieve a number of milestone in products delivered from our new supplier, including our new audio products that have generated significant market excitement.

We're pleased that our software subscription business continues to trend upward and increase its contribution with significant year-over-year growth in total subscriptions, billings and revenue driven in particular by our Creative Tools, Media Composer and Pro Tools.

Throughout this year, we've been consistent in announcing and delivering new product innovations across our video and audio tools and solutions portfolios that contribute to our growth. Looking at all these indications combined, Avid's executive management team remains confident in our trajectory toward delivering consistently profitable and predictable financial model built on more and more growing recurring revenue.

So, thank you, and let me turn it over to 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. As Jeff outlined earlier, the shortfall in our third quarter revenue was related to $8.1 million of hardware orders that did not ship in the quarter with the remaining portion of the variance related to softness in sales to our smaller enterprise customers.

Beyond our third quarter results, we remain optimistic in our model giving our improved software subscriptions recovery in our maintenance revenue and improving gross margin. The continued mix shift to higher margin software subscriptions and maintenance resulted in an improvement in our gross margin to 62.1% in the third quarter, up 190 basis points year-over-year, despite a significant headwind from lower hardware margins in the quarter due to the supply chain.

We also continue to see benefits in our operating expenses from our $20 million smart savings plan as we have already achieved most of the expected operating expense savings in the plans for Q3. Looking forward, we anticipate improvement in revenue, adjusted EBITDA and free cash flow in the fourth quarter with our continued year-over-year progress in our forward-looking metrics, consisting of annual contract value and recurring revenue.

Let's now get into the details. GAAP revenue of $93.5 million during the quarter was in line with our preliminary results. The positive news today is that $3.9 million of the unshipped backlog at the beginning of the quarter has shipped as of November 6th, and the remainder is expected to ship by November 15th.

Also, our new manufacturing partner has qualified all major production lines and has a much better rate of production in at [Phonetic] beginning of the third quarter. During the third quarter, we also experienced lower revenue in our storage and media management products, which contributed to our lower than expected revenue.

Our Enterprise business including storage did well in the first half of the year, but it was softer in the third quarter. We continue to focus on entering into more long-term agreements with both enterprise customers and channel partners to lock in more predictable revenue streams for this portion of the business.

During the quarter, we continued to make strong progress in our high margin software and subscription business. We had a record number of new subscriptions for our creative software solutions with our total subscription count now exceeding 170,000 total subscriptions. We saw exceptional growth of over 50% year-over-year in a number of subscriptions for both Pro Tools & Media Composer.

In addition, we increased prices on many of our subscription products by an average of about 15% during the third quarter. Importantly, we have seen no reduction in the growth rate of our subscriptions following these price increases, demonstrating Avid's value to our customers in embedded pricing power.

We're also pleased with the recovery in the maintenance revenue during the third quarter, due to the decreasing headwinds from the legacy storage and of service issue that Jeff discussed as well as improved pricing and renewal rates on maintenance contracts.

We expect maintenance revenue to stabilize as these headwinds continue to dissipate coupled with improving renewal rates and an increasing installed base of products reemerges. Gross margin was 62.1% for the quarter, up 190 basis points year-over-year. The increase was due to a 160 basis point improvement in software license and maintenance gross margin that benefited from increased subscription and maintenance pricing and an improvement in professional services gross margin, coupled with a more favorable revenue mix.

The improvement in software, maintenance and professional services gross margin more than offset the decline in hardware gross margin resulting from lower production volumes. Operating expenses for the quarter were $47.3 million, an improvement of $3.5 million from Q3 2018. The improvement in operating expenses resulted primarily from the realization of our smart savings as well as a $3 million bonus accrual reversal in the quarter.

Year-to-date through September, our operating expenses are down $9.3 million year-over-year as we have largely realized our smart savings targets and operating expenses in the year. Adjusted EBITDA of $12.8 million for the quarter was in line with our preliminary results. The impact on adjusted EBITDA from lower revenues for the quarter was offset in part by year-over-year improvements in gross margin and operating expenses.

Our year-to-date adjusted EBITDA through September 2019 of $34.8 million is up 33% over the same period in 2018 showing the favorable progress the team has made in improving profitability during 2019. Non-GAAP net income per share was $0.10 for the third quarter, down $0.03 year-over-year due to the impact of lower revenue offset by the improvement in gross margin and operating expenses.

Free cash flow was negative $4.6 million in the third quarter of 2019, compared to negative $6.4 million in the third quarter of 2018, an improvement of $1.8 million. Now moving to the composition of our revenues. In the third quarter of 2019, revenue from software subscriptions was $10.3 million, up 17% year-over-year. Revenue growth in software subscriptions on a year-over-year basis has been impacted by higher reserves taken against certain subscription revenue starting at the end of 2018.

Over time, subscription revenue growth should more closely track the growth in a number of subscriptions moving forward. From a cash perspective, billings for subscriptions increased 49% year-over-year in the third quarter above the growth 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.

The pricing increases in the third quarter were designed in part to influence customers to select annual paid upfront contracts, which we believe are higher quality revenue stream for Avid when compared to monthly paid subscriptions. While subscription revenues continues to grow, perpetual [Phonetic] license revenue was down $1.1 million year-over-year and flat sequentially, due to the challenges with sales to smaller enterprise customers into a portion of customers selecting subscriptions rather than perpetual licenses for our creative software products.

With that said, we expect high-margin perpetual software licenses and the associated maintenance to be a relatively stable piece of Avid's revenue stream with growth in our overall software business centered on subscription revenue moving forward.

Maintenance revenue was $33.4 million during the third quarter, down 4.7% year-over-year, but up 5.6% sequentially. While we continue to see the impacts of the end of support for legacy storage solutions, as discussed earlier, and a slowly declining non-cash revenue that comes through the maintenance line, we are starting to see the reemergence of underlying trends of increased installed base of hardware and software products as well as selective price increases that took effect in July to build our maintenance revenue.

Excluding non-cash revenue in the legacy storage maintenance revenue discussed above, maintenance revenue grew 2% year-over-year in the third quarter. The total software licenses and maintenance revenue in the third quarter was $52.3 million, down 2.4% year-over-year and up 4.7% sequentially. This revenue stream represents 56% of revenue in the quarter, up 500 basis points year-over-year due to the lower mix of hardware product revenue during the third quarter.

If we exclude maintenance on hardware products, total software licenses and software maintenance was flat year-over-year, during a period of transition from perpetual to subscription, which we believe demonstrates the strength of Avid's software business. Typically, many companies see a revenue decline during their transition to subscription and we believe the stability seen to-date in our software business demonstrates that we are expanding category, taking new users and growing our share in the market.

Gross margin from software licenses and maintenance was 86.7% during Q3, up 160 basis points from Q3 2018, due in part to price increases. The revenue challenges during the third quarter can be seen in the Company's hardware and integrated software revenue which was $34.2 million in the quarter, down $8.2 million year-on-year or 19%.

This revenue line was directly impacted by the challenges discussed earlier in ramping up the new manufacturing partner and by software [Phonetic] sales to smaller enterprise clients. We expect strong sequential improvement in hardware and integrated software revenue in our seasonally strong fourth quarter and expect to see continued improvement in hardware margin and hardware maintenance.

Gross margin from hardware products and integrated software was 34.2% in the third quarter, down 610 basis points due to the impact of lower production volumes and the higher cost during their transition to the new manufacturing partner.

Hardware margins are expected to recover in the fourth quarter as production volume increases. The balance of our revenue comes from professional services business, which is the smallest portion of our revenue. Professional services revenue was $6.9 million in the third quarter, down 15% year-over-year as we are being more strategic and selective in PS business moving forward.

Gross margin on professional services, however, was 14.5% in the quarter, a strong improvement from breakeven in the year-over-year period. Now moving to recurring revenue and annual contract value. The percentage of our recurring revenue has steadily increased over the periods.

For the 12 months ending September 30th, 2019, 59% of our total revenue was recurring, up from 54% in the 12 months ending September 30th, 2018. We expect recurring revenue as a percent of sales to continue increasing over time, given the growth we are seeing in subscriptions and our focus on adding new long-term agreements.

Annual contract value was $258 million at the end of the third quarter, up 4% 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 September 30, 2019, we had a healthy cash balance of $52.3 million, up from $50.5 million at the end of Q3, 2018. We ended the third quarter with $53.7 million of accounts receivable, up $2.7 million from September 30th, 2018.

Inventory was $32.2 million at the end of the third quarter, down $1.9 million over June 30th, 2019 and flat with the prior year. Inventory levels are expected to move down over the next few quarters as our new manufacturing partner reaches volume production and we take advantage of the new lien supply chain.

Deferred revenue was $85 million at September 30, 2019, down $3.2 million from September 30th, 2018. Due to a decrease of $4.9 million and IPCS non-cash deferred revenue and $4.3 million in professional services deferred revenue, offset in part by an increase of $3.8 million in maintenance deferred revenue, $1.1 million in subscription deferred revenue and $900,000 in products deferred revenue.

Total revenue backlog which includes deferred revenue and contractually committed backlog was $443.6 million at September 30, 2019, down $1.2 million from June 30, 2019. The decline was primarily due to lower deferred revenue and the timing of certain long-term agreements. We have confident we should see revenue backlog increase in Q4 2019 given our expectations for signing new long-term agreements and a seasonally stronger maintenance billings that occurred during the fourth quarter that will increase deferred revenue.

At the end of the third quarter, long-term debt was $199.6 million, down $30 million from September 30th, 2018, due to the reclassification of $28 million in remaining convertible notes to current liabilities. We plan to retire the remaining convertible notes at or prior to June 15th, 2020 maturity from cash on hand or borrowings under the senior credit facility.

We are confident that we will have sufficient liquidity with our existing cash balance plus $22.5 million of undrawn revolver as well as our expected free cash flow generation to meet this obligation. We were compliant with our leverage ratio at the end of the third quarter and have significant cushion with our covenants.

Now looking at the business over the last 12 months. Our main non-GAAP profitability metrics and free cash flow are all showing improvement from a year ago. Our trailing LTM revenue of $408 million through September 30, 2019 is flat to the prior LTM period, reflecting the challenges faced during the third quarter.

However, our trailing LTM EBITDA of $56 million through September 30, 2019 is up 36% from the LTM period ended September 30, 2018, reflecting the improvements in gross margin and lower operating expenses during the past year.

Our LTM free cash flow of $13.2 million through June -- through September 30, 2019 is up $23.9 million from the 12 months ended September 30, 2018 reflecting our improved adjusted EBITDA and reduced cash restructuring costs, plus improvements in working capital.

Let's now turn to guidance. We believe we are well positioned to have a strong fourth quarter given the progress we are making in ramping up production with our new manufacturing partner, coupled with the initial hardware orders totaling $8 million that will ship in Q4.

At this time, we are reaffirming our 2019 annual guidance that we provided with our preliminary results last week. Our 2019 revenue guidance remains $405 million to $415 million. Our 2019 adjusted EBITDA guidance remains $55 million to $60 million. Our 2019 free cash flow guidance remains $12 million to $17 million. And finally, our 2019 Non-GAAP net income per share guidance is $0.50 per share to $0.60 per share assuming 43.7 million shares outstanding.

Lastly, I wanted to invite you to attend our 2019 Investor Day that is scheduled for Tuesday, November 19th at the NASDAQ headquarters in New York.

Jeff, myself and other leaders from Avid will be doing a deep dive into our business strategy, our products and go-to-market initiatives. We will also have a product demonstration. Finally we'll be providing our 2020 guidance and high level expectations for our long-term operating model. We believe all of this information will provide you a better transparency into our business and show you how Avid is a compelling investment in today's market.

If you'd like to attend, please RSVP to our VP of Investor Relations, Whit Rappole whose contact information is included in the press release. We look forward to hopefully seeing all of you in the next two weeks. With that I'd like to turn the call over to Whit.

Whit Rappole -- Vice President of Investor Relations

All right, thank you, Jeff, again. That concludes our prepared remarks. We are now happy to take your questions. Operator, please go ahead.

Questions and Answers:


Thank you. [Operator Instructions]. And our first question comes from Nehal Chokshi with Maxim Group.

Nehal Chokshi -- Maxim Group -- Analyst

Yeah. Thank you. So I just want to drill into the enterprise softness that was the smaller part of the 3Q'19 miss. But I want to make sure what gives you the confidence that the enterprise softness is not competition related?

Jeff Rosica -- President and Chief Executive Officer

Hi, Nehal, this is Jeff, I'll answer that. Well, the confidence is really because a majority of our business in the enterprise is tracked by us in our -- in our CRM systems. So we know what we've won or lost and/or what's deferred or what's changed over the period. So we can track that pretty closely and we see no change in trends in the quarter, different than any prior quarter. So there's nothing that gave an indication of that.

I would say, yes, just one thing to remember is that we had always planned for a growth or an improvement in enterprise in the second half and it did improve in the second half versus the prior year. We just saw a bit of softness from what our expectations were for the quarter, but it's important to note that they did improve from our prior year.

Nehal Chokshi -- Maxim Group -- Analyst

So have you been able to track down what was the driver of that softness then?

Jeff Rosica -- President and Chief Executive Officer

Well, yeah, I just -- I think that, what we -- what we saw now is that the -- we had a bit of greater softness in the small to medium sized enterprises that we experienced this quarter. A lot of that comes through our channel partners, but we saw a little softness in there and that offset what we saw was a relative strength in our larger media enterprise customers in the quarter.

So I think it's -- at this point in one quarter, and I wouldn't say that we would talk about a specific trend that would point to, but there was a bit more softness on the -- for the smaller to medium-sized businesses this quarter.

Nehal Chokshi -- Maxim Group -- Analyst

And why do you think there was softness on the SME sector?

Jeff Rosica -- President and Chief Executive Officer

Well, I think a little bit, I think there is a bit of a bifurcation in the market going on. I think some of the business from the Tier 2, we call it Tier 2 or kind of the middle segment -- middle sector. Some of those smaller to medium businesses, some of that businesses is just starting to bifurcate up into Tier 1. And so, we're able to see some of that business start to show up in the Tier 1 space, but larger media enterprises, and we are seeing a little bit of it go down into Tier 3 where those customer types are really becoming more and more capable.

But it's only one quarter we've seen this, so I wouldn't want to speculate beyond that trend. I would say in general, again, the business was up for us year-on-year. Just wasn't as much as we had expected in our plans. And again, that's probably the best way to leave [Phonetic] it.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. And I want to get an understanding as to why EBITDA guidance goes down for the full year, but not free cash flow guidance?

Jeff Rosica -- President and Chief Executive Officer

Yes, I would say, first, we feel good about the guidance range, we feel it's appropriate at this time with respect to our free cash flow guidance. We had a very strong fourth quarter last year and where we started the year, the LTM at $13 million, we expect a similar position in free cash flow in Q4.

So we feel like -- we'll hit the $12 million to $17 million of guidance if not at the higher end. That said, we did take down revenue and EBITDA given the comments with respect to the challenges we had in the supply chain. I would say that on the free cash flow, we have good visibility in terms of moving that forward. And we believe, will come into the guidance range. I would say, we are probably a little more conservative in free cash flow when we set the original guidance earlier in the year as well, because of the supply chain transition.

So now that that's kind of, we're moving forward on that point, we believe we'll be able to come on the original guidance upto $12 million to $17 million.

Nehal Chokshi -- Maxim Group -- Analyst

Got it. Understood and my last question is on the subscriptions, which was very impressive especially the strong net adds and subscription users, yet you noted a 15% average price increase. That's incredibly impressive and you did note that that's a test to the value that you're providing. But it's still surprising that you saw such strength despite the increase in the price. So any further color as far as why you're seeing such strong user adds here?

Jeff Rosica -- President and Chief Executive Officer

Well, I'd say, and Nehal, this is Jeff again. Yeah, I would say that, I mean, one is, yes, like I said before is that obviously the market sees value in what we're doing, and as we've been adding features and functionality into the products performance that has helped us. I think the Media Composer 2019 announcement and that new product, which if you remember that started delivery a little like the last few days of June. So most of the benefit of that product rolled into Q3. And that was very well received by the market. And obviously the price increase is also to help from a rate billings and eventually revenue standpoint. But I would say the machine -- our go-to-market machine performed very, very well during the quarter.

And we were pleased. We're going to -- we're going to continue to lean in aggressively in this area of the business and continue to push hard and driving this hard.

Nehal Chokshi -- Maxim Group -- Analyst

Is there some sort of a change in the competitive environment that has enabled this increased rate of user adds?

Jeff Rosica -- President and Chief Executive Officer

I would say my belief right now is that I would say that it was really largely in response to the product improvements we've been making in that and the fact that our marketing teams and sales engines in our channel and web store have been performing very well over the summer.

Nehal Chokshi -- Maxim Group -- Analyst

Okay, great. Thank you very much.

Jeff Rosica -- President and Chief Executive Officer

You know, in [Technical Issues] [Indecipherable] Nehal, we indicated we were putting a little more effort on the marketing spend for direct digital. I think those are some of the things that you're seeing from that return on that spend.

Ken Gayron -- Executive Vice President and Chief Financial Officer

Yeah, it's a good point.

Nehal Chokshi -- Maxim Group -- Analyst

Right. All right. That's great. Thank you.


Thank you. Our next question comes from Steve Frankel with Dougherty & Company.

Steven Frankel -- Dougherty & Company -- Analyst

Good afternoon. I'd like to go back to that enterprise and storage weakness a little bit and maybe ask how the tier one traditional big broadcast regional station groups, how that's performed in Q3 and what your expectations are for Q4.

Jeff Rosica -- President and Chief Executive Officer

Hi, Steve. This is Jeff. Like I said, we are saying, I think what -- what I was saying to Nehal before is exactly kind of what your question is. We did see relative growth and decent growth in what we call and you know we call Tier 1 which are the large media enterprises. The big broadcasters, the big networks, studios and the large station groups, some broadcasters, a lot of smaller broadcasters are in the Tier 2, but a lot of the larger one performed well. We saw growth year-over-year. It wasn't quite the growth we had planned for, but we are happy with the trend that we're seeing in the large media enterprises in Q3 and it was really under pressure more from the smaller side. So I'd say we're happy with the progress we made in the quarter. We just like to do more, but -- it did well.

Steven Frankel -- Dougherty & Company -- Analyst

And does the slower growth make you question what this storage cycle looks like relative to what you thought it was going to be at the beginning? Or is this an economic pause, why do you think that business is not hitting your targets?

Jeff Rosica -- President and Chief Executive Officer

Well, first of all, one thing I want to make clear, it wasn't the storage cycle. It we -- the point we were making in the prepared remarks, Steve, was that in that enterprise segment when we look at the dollars they buy, it more of the impact if there is a mist in that from our expectations, more of that would be in storage and media, but in reality, it goes into storage media servers, graphics, editors. I mean, it goes in a lot of those categories, but a bulk of the impact will show up in those storage and media -- we call media management categories, which is the platform category, but I just want to make sure -- that may have clarified that point.

The -- as far as the trend. I mean, we know that there are macroeconomic forces out there and we have to obviously navigate those to the company. But I think we're very well positioned to navigate those forces because of our platform story, because of, we're really driving efficiencies in what we're doing there. We're helping enterprises drive efficiencies in their business, which is clearly what they're looking for from media enterprise.

I think our cloud strategy and what we're going after there is important. I mean, obviously there is a transition going on with some people between on-prem and cloud. But we think the work we've been doing is proving to be very successful at the Disney and Microsoft. The Walt Disney Studio and Microsoft announcement was a great testament to that.

So I think it's a market that's in transition, it's got a lot of macro trends going on. But again, I think we're really well positioned to do that. And even if we may see differences quarter-to-quarter than we -- than we originally expected, I like the trajectory that we're on, and I like what we're doing there.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. And what's the volume of long-term agreements that are up for renewal in the fourth quarter?

Jeff Rosica -- President and Chief Executive Officer

I don't have that data point in front of me, Steve. There are -- a lot of them are in Q4 and we're in the process of resigning, extending or even putting new contracts in place. Both maintenance agreements and long-term agreements, both are heavy in the Q4. But it's not like half the businesses there, it's just -- it's probably the heaviest quarter of those agreements, but it's not a majority of the agreements.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. And then as you resign these long-term agreements, do you -- would you expect the gross margin profile of those agreements to be the same upon renewal, higher or lower?

Jeff Rosica -- President and Chief Executive Officer

[Speech Overlap]

Ken Gayron -- Executive Vice President and Chief Financial Officer

Yeah, I would say, as we've signed long-term agreements -- and when you look at our model, our gross margins have improved. We think we get better wallet share and that helps cover overheads. We think that in general, the margin profile would be the same, if not improve as we expand the agreements. And we're also positioning more software in the agreements and that provides better margins and we protect ourselves in the agreements from a mix standpoint.

We don't want to have partners just buying all low-margin product. So we protect -- we protect ourselves on the downside there.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. And the price increase is pretty impressive. Is it too soon to have any data on what that might do to churn on your month-to-month accounts?

Ken Gayron -- Executive Vice President and Chief Financial Officer

In general, we don't talk publicly by metrics on churn, but we're actually -- when I look at the user base that went up a 170,000 over adds of 22,000 and when we look at where we're heading this quarter, we don't expect any dramatic changes in the churn number. Additionally, we're moving more people to annual paid annual given the strategy of the price increases and that's a much better churn for Avid.

So we think over time, as we move people, annual pay annual, we get a higher quality recurring revenue for the company. And as we said, that's really going to be benefiting our gross margins moving forward with the strength in this business.

Jeff Rosica -- President and Chief Executive Officer

And Steve, I would also say, you [Phonetic] said monthly, on the month to month, the price increase we did in the month to month, our goal two is to try to move them over to more, at least in annual monthly if not an annual pay annually.

Steven Frankel -- Dougherty & Company -- Analyst

Okay, great. And then I missed a couple of items, I was late to the call. How large was the bonus accrual reversal?

Jeff Rosica -- President and Chief Executive Officer

$3 million.

Steven Frankel -- Dougherty & Company -- Analyst

Okay. And is there anything non-traditional in the Q4 free cash flow guidance like any payments moving from one quarter to another that would impact that or it should be apples-to-apples with last year?

Jeff Rosica -- President and Chief Executive Officer

No, I mean we -- our LTM free cash was $13.2 million through September, the guidance is $12 million to $17 million and we have good visibility in our plan to in that cash flow guidance. So there's nothing unusual at all.

Steven Frankel -- Dougherty & Company -- Analyst

Okay, great. Thank you.

Jeff Rosica -- President and Chief Executive Officer

Thanks Steve.


Thank you. Our next question comes from Nehal Chokshi with Maxim Group.

Jeff Rosica -- President and Chief Executive Officer

Hey, Nehal.


And Mr. Chokshi, your line is open.

Jeff Rosica -- President and Chief Executive Officer

Operator, that may have been a mistake, because he was already on for questions.


Right. And at this time we have no further questions. I would now like to turn the conference back to management for any closing remarks.

Jeff Rosica -- President and Chief Executive Officer

So thank you, operator and thanks to all the participants for your questions. In closing the call, I want to underscore [Phonetic] that while the factors including our complex supply chain transition negatively impacted our Q3 results and have been -- are challenging for our investors as well as Avid, we expect to capture the longer term cost efficiencies and the working capital benefit from our commitment to establishing a lean supply chain.

This expected improvement, combined with the strong growth in subscription software fuels our enthusiasm about Avid's long term trajectory and potential for significantly improved profitability and growth.

In Q4 Avid is sharply focused on closing the year strong, bringing new revenue-generating products to market and accelerating new product innovation that will contribute to growth in 2020 and beyond. So thanks again everyone for joining us today. We encourage you to register on our website for the live stream of Avid's 2019 Investor Day, which will take place on November 19th from 10:00 AM Eastern Time through 3:00 PM Eastern Time. Until then, I hope you'll enjoy the rest of your day or evening. Thanks everyone.


[Operator Closing Remarks].

Duration: 48 minutes

Call participants:

Whit Rappole -- Vice President of Investor Relations

Jeff Rosica -- President and Chief Executive Officer

Ken Gayron -- Executive Vice President and Chief Financial Officer

Nehal Chokshi -- Maxim Group -- Analyst

Steven Frankel -- Dougherty & Company -- Analyst

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