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Avid Technology Inc (AVID)
Q1Â 2020 Earnings Call
May 9, 2020, 8:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, good day, and welcome to the Avid Technology Q1 2020 Earnings Call. [Operator Instructions]
At this time, I would like to turn the conference over to Whit Rappole, Vice President of Investor Relations. Please go ahead, sir.
Whit Rappole -- Vice President Corporate Development and Investor Relations
Thank you, Abby. Good afternoon, everyone, and thank you for joining us today for Avid Technology's First Quarter 2020 Earnings Call. My name is Whit Rappole, Avid's Vice President for Corporate Development and Investor Relations. With me this afternoon are Jeff Rosica, our Chief Executive Officer and President; and Ken Gayron, our Chief Financial Officer and EVP. In their prepared remarks, Jeff will provide an overview of our business, and then Ken will provide a detailed review of our financial and operating results, followed by time for your questions. We issued our earnings release earlier this afternoon, and we have prepared a slide presentation that we will refer to on this call. The press release and presentation are currently available on our website at ir.avid.com. And a replay of this call will be available on our website for a limited time. During today's call, management will reference certain non-GAAP financial metrics and operational metrics.
In accordance with Regulation G, both the appendix to our earnings release today and our investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational measures used on this call and in the presentation. Unless otherwise noted, all figures noted by management during the call are non-GAAP figures. In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this call as well as the accompanying slides that 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, our 10-Q for the three months ending March 31, 2020, and our 10-K for the year ending December 31, 2019, 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
Thank you, Whit, and thanks to everyone for joining us to review the full details of Avid's Q1 2020 results that we released today and which followed the business update we issued on April 7. Avid is hard at work to help our customers succeed during this extraordinary time amid the COVID-19 global pandemic. We've been learning a lot from our communities' capacity for rapid change to ensure business continuity and their ability to continue to deliver the high-quality content that consumers are demanding. Today, along with Avid's CFO, Ken Gayron, we will review our Q1 results, the effects of the global pandemic on our industry, its impact on our performance and what we expect going forward. We'll also review the action plan and significant cost savings measures that we immediately put into motion to help mitigate the business impacts of the global pandemic. In addition, we'll discuss the continued strength and advantage of our long-term strategy to grow recurring revenue streams and increase our efficiency and effectiveness in the way we work and serve our customers. And we'll share how we're preparing to emerge from this challenge challenging time in an even stronger position when our customers across media and entertainment are ready to return to full capacity. So let's get started with the important takeaways for Q1.
Increasingly, during the first quarter, Avid felt the effects of COVID-19 on our business and on our day-to-day customer engagements, especially with enterprises and productions urgently asking for our help to keep their people working and their operations running. This intensified during March as the COVID-19 situation unfolded quite rapidly on a global sale. Our industry is being impacted in the near term from the effects of COVID-19 and especially from stay-at-home orders and social distancing efforts around the globe. For example, many types of film and TV productions have had to temporarily halt, though some are finding unique ways to keep producing content, many of which rely on Avid. The most extreme examples are sports, live events like music festivals and tours, and theatrical shows that have had to halt their schedules. Across all walks of media, customers have had to change the way they work and rethink their overall plans this year. Meanwhile, consumption of traditional TV and streaming media has grown dramatically as the world shelters at home. While some studios and production companies are working to maintain new content production, many others have had to pause their productions. So we do anticipate a potential surge in productions once workplace and travel restrictions are eased, as content creators do need to refill their production pipelines.
The business headwinds that we experienced in Q1 and expect to see continuing in the near term are related to the nonrecurring revenue parts of our business, which includes product sales and professional services for customer projects. This part of our business generally depends disproportionately on sales that closed during the last few weeks of each quarter, which was severely impacted in March due to delays in purchasing decisions and customer projects because of the unfolding COVID-19 global pandemic. The positive side of our first quarter performance came from the continued recurring revenue growth, reflecting our strategy over the past few years to build a strong recurring revenue business from subscriptions, maintenance and long-term agreements, a growing and stable foundation for us now representing nearly 2/3 of our revenue. And as the global pandemic unfolded, Avid quickly and decisively enacted a comprehensive crisis response management plan to mitigate the financial impacts to Avid, to protect our employees and workplaces, to offer proactive help for our customers and partners and to prepare us to capitalize on the opportunities as the eventual recovery begins.
Avid's successful long-term strategy to grow sources of recurring revenue performed well and continued its positive trajectory in the first quarter, with the benefit of also helping to buffer against some impacts of COVID-19. Overall, during the first quarter, LTM recurring revenue reached 66% of total revenue, which was up from 57% a year ago. Subscription revenue continued to grow rapidly, increasing approximately 50% year-over-year. We also added a record number of roughly 30,000 net new paid subscriptions in the quarter, continuing the acceleration we've seen in recent quarters. By comparison, back in Q1 2019, we added about 12,000 subscriptions in the quarter. At the end of Q1, Avid had approximately 218,000 paid subscriptions for its creative tools Media Composer, Pro Tools and the Sibelius product. The subscription growth includes the addition of several enterprise subscription customers in Q1. Our enterprise customers have initially responded well to the advantage of software subscription, and we expect more of them to adopt subscription in the second half of this year as we launch our complete enterprise subscription offerings. Additionally, as part of our COVID-19 response to support our clients, we have loaned approximately 125,000, 90-day, free-of-charge licenses for our creative tools to many of our enterprise and education customers, helping support their business continuity efforts and enabling their employees or faculty and students to work remotely.
Many organizations appear to want to retain these new-found remote working capabilities, which we expect will create additional business for Avid as we convert many of these initial free-of-charge licenses to one of several pay commercial options, including an enterprisewide subscription plan. Now last month, Avid also announced that it reached over two million cumulative downloads of our first creative tools for aspiring our users. Downloads of these premium offerings have more than doubled since 2018, enabling new users to enjoy producing music and videos with industry-leading tools for free and to have the option to upgrade to a full-featured version with a paid subscription. The conversion rates we're seeing show this is this part of our strategy is really an important contributor to help drive subscription growth. Maintenance revenue was also continued to stabilize as the headwinds from ending the sale of service contracts on certain legacy storage systems at the end of 2018 has significantly diminished. And the underlying strength of maintenance renewals plus benefits from new product sales has reemerged. In the first quarter, overall subscription and maintenance revenue was up 11% year-over-year. Revenue from long-term agreements was also up year-over-year, contributing to an 11% year-over-year growth in our annual contract value.
Avid secured numerous renewals and a multiyear customer agreements in Q1, including a new strategic purchasing agreement with one of our largest resellers and an enterprise license agreement with a new major sports customer. Our cloud and SaaS business saw an upsurge in customer interest late in Q1 with the onset of COVID-19, which is driving for us accelerated demand for our offerings, including Avid Edit on Demand, which includes full media composer editing functionality and NEXIS intelligent storage hosted on Microsoft's Azure cloud platform. We also secured a new agreement with another of the world's largest media companies that owns and operates TV networks and film studios globally. We've initially brought some of their broadcast news and TV production workflows into the cloud, so teams on several continents can continue collaborating to create and deliver their content during the pandemic. We hope to announce the details on this very soon. Additionally, Avid has already consulted with over 100 enterprise customers within just a matter of weeks to help them explore our cloud solutions to solve their issues arising from the COVID-19 situation. We've already helped several rapidly rolled out, cloud-based workflow solutions to address their immediate needs and our responsiveness has resulted in new pipeline of over several million dollars for our cloud and SaaS solutions.
Earlier this week, Avid announced a new five-year strategic alliance agreement with Microsoft that builds on our early success in moving to film and TV content creation workflows into the cloud on Microsoft's Azure. Our close-working relationship with Microsoft allows us to move rapidly to aid numerous Avid clients that needed to transition their production personnel to working remotely. The strength of our partnership with Microsoft really shined through during this time, and we're quite excited about our continued close partnership with them. And during Q1, the intensification of the COVID-19 global pandemic did negatively impact the nonrecurring portions of our business, mainly project-based and run rate sales of our integrated solutions, perpetual software licenses and professional services. The suspension of sporting events, cancellation of music festivals and concert tours and the shuttering of television and film productions during March immediately impacted some of our customers' purchasing decisions. This significantly impacted our Q1 billings, as seen particularly in the downturn of our run rate activity as some of our customers delayed projects and purchasing decisions and as our channel partners overall were a little more careful with restocking orders that are typical at quarter end and as they move to more tightly manage their own inventory levels.
These impacts were strongest during the last month of the quarter when we typically generate the largest portion of our nonrecurring product sales each quarter. Additionally, the travel restrictions and workplace closures hampered our ability to complete the delivery of certain projects and to deliver some professional services during Q1. That said, we are able to deliver many professional services and learning services remotely, which does help us keep a portion of services revenues intact during COVID-19. As I mentioned earlier, since the onset of COVID-19, we have rapidly moved to develop a comprehensive crisis response management plan. The fundamentals of the plan include: an internal crisis response program to institute policies, procedures and communications that keep our team operating smoothly with most employees unable to work for home; efforts to also ensure operational continuity to prevent disruptions to our supply chain and customer support; programs to help our customers and partners deal with disruptions from the crisis, such as our temporary creative tools license offer and our unique solutions for remote collaboration; also, a strategic focus on maximizing near-term business and revenue, including our opportunities for new cloud business, ongoing subscription growth and more long-term agreements; and finally, significant targeted cost reductions implemented beginning in April that we expect will reduce our operating expenses during Q2 and throughout 2020, which Ken will give some details in a moment.
We expect this overall plan will remain in place as required during 2020, and it will evolve depending upon the pace of improvements in the global situation, and of course, our business environment. While we have positive expectations for the business as we emerged in COVID-19, Avid is navigating the current situation with an abundance of caution. Our management team and Board are confident that Avid is doing the right work and is in the best possible position to deliver on a consistently profitable and predictable financial model on growing, recurring revenue streams. We remain enthusiastic about the accelerating long-term prospects from enterprise customers, moving their media production operations to cloud and SaaS. We believe we can continue to capitalize on the early market-leading position we've established and expect modest near-term growth in this part of our business. Avid continues to build underlying strength from the execution of our long-term strategic plans, our heavy focus on quickly reducing costs and our continued plan of delivering new product and innovation, which should help to offset some of the challenges to the nonrecurring revenue parts of our business, so long as the pandemic persists at the current level in the medium term.
We believe that our high-quality recurring revenue streams, including our subscription business, will continue to show strong growth in 2020. Our maintenance business will continue to be relatively stable. And long-term agreements with enterprise customers and partners will continue to expand this year. We anticipate that the extraordinary factors that affected our Q1 will continue through the next couple of quarters, but likely dissipate as the global pandemic eases. We're encouraged to see more nations are easing restrictions, so many people can return to work soon. Although we can't forecast when the industry will get fully back in motion, we remain highly confident that Avid is quite effectively engaged to help our community endure and then rebound while improving our ability to capture the resulting opportunities.
So with that, I'll now hand the call over to Ken Gayron, who will offer more details behind our Q1 2020 performance. Over to you, Ken.
Ken Gayron -- Chief Financial Officer & Executive Vice President
Thank you, Jeff, and good afternoon, everyone. As noted above, Jeff and I are referring to non-GAAP figures unless noted in our comments. Overall, our business and financial results for the first quarter of 2020 were in line with the revised guidance provided in the business update we issued on April 7. While our recurring revenue sources, including subscription and maintenance were strong, the nonrecurring portion of our business faced major headwinds late in the quarter due to the unfolding global pandemic. Our focus in the second quarter and beyond will be to react quickly to the current market conditions. As part of this effort, we have been revising our operating plans to adjust forecast and spending targets and have instituted significant cost-saving efforts that began in April. We are confident that with these efforts, we can weather the coming months and emerge on the other side as a stronger company well prepared to deliver value to our customers and shareholders. With that, let's now get into the details of our fourth quarter financial results. GAAP revenue was $86.5 million during the first quarter, down 16.3% year-over-year. Recurring revenue was strong, with growth in subscription and stable maintenance, while nonrecurring revenue from hardware and perpetual licenses was down sharply due the impact on sales of the COVID-19 pandemic.
Combined subscriptions and maintenance revenue was $45.8 million, up 10.8% year-over-year, as the 50.4% growth in subscription revenue far exceeded the 0.7% decline in maintenance revenue. Excluding the decline in maintenance revenue from the sunsetting legacy storage systems at the end of 2018, maintenance revenue would have been up 2.1% year-over-year. During the first quarter, revenue from the Americas was 48% of the total and down 10.4% year-over-year. Revenue from EMEA was 38% of the total and down 10.8% year-over-year. And revenue from Asia Pacific was 13% of total and down 41% year-over-year as the impacts from COVID-19 were seen in Asia Pacific before other geographies. Please also recall that our first quarter 2019 revenue included a multimillion-dollar storage order in Asia Pacific that did not reoccur in the first quarter of 2020. At constant currency, our first quarter 2020 revenue was down 14.3% year-over-year, as the relatively stronger U.S. dollar compared to the euro negatively impacted revenue by approximately 2%. And when you further adjust for the large multimillion-dollar storage deal that occurred in the first quarter of 2019, our first quarter 2020 normalized revenue on a constant currency basis would be down about 10%.Gross margin was 61.7% for the first quarter, up 40 basis points year-over-year.
The increase was due to a more favorable revenue mix of higher-margin subscription and maintenance revenue, offset in part by the impact of lower volumes on our products in our professional services gross margin. Operating expenses for the quarter were $51.3 million, a $1.8 million decrease year-over-year and a $3.1 million decrease from the fourth quarter of 2019. The decrease in operating expenses was due to the benefits from our smart savings initiatives as well as lower bonus accrual in savings and discretionary spending, which were offset in part by $600,000 bad debt write-off, foreign exchange charges of $500,000 and onetime costs related to the canceled NAV trade show of $200,000. Adjusted EBITDA was $4.2 million in the first quarter, reflecting a margin of 4.8% for the quarter. Non-GAAP net loss per share was $0.08 for the first quarter, down $0.19 year-over-year, reflecting the decline in non-GAAP operating income. Free cash flow was $7.1 million negative in the quarter, down $11.7 million year-over-year, impacted by the decline in net income as well as a decline in billings and collections, plus an increase in inventory due to lower-than-expected product sales. Now moving to recurring revenue and annual contract value. The percentage of our revenue that is recurring continues to steadily increase. For the 12 months ending March 31, 2020, 66% of total revenue was recurring, up from 57% in the 12 months ending March 31, 2019.
Recurring revenue percentage increased due to increased subscription revenue, in revenue under long-term agreements, with maintenance revenue generally flat and lower nonrecurring product and professional services revenue. We expect recurring revenue percentage 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 $264 million at the end of the quarter, up 11% year-over-year, benefiting from our strategy to focus on higher-margin software descriptions and long-term agreements. The ACV from long-term agreements was $9.3 million or 13% year-over-year on continued growth in both enterprise agreements and strategic purchase agreements. During the first quarter, we added two new strategic purchasing agreements. Our partners that are under strategic purchasing agreements exceeded, in aggregate, their total minimum purchase commitments in the first quarter of 2020. As we look into the detail of our revenue streams, we continue to be encouraged by the continued resilience and growth of our subscription base. In the first quarter, we added a record number of new subscriptions with nearly 30,000 net new subscriptions for our creative software solutions. And our total subscription counts reached nearly 218,000 at quarter end. Subscription growth was particularly strong in Pro Tools, up 68% year-over-year; and Media Composer, up 59% year-over-year.
Additionally, we continue to see a shift toward annual paid upfront contracts, which we believe are higher-quality revenue stream for Avid when compared to monthly paid subscriptions. Annual paid upfront subscriptions grew 254% year-over-year in the first quarter and now represent 18% of the total subscriptions, up from 8% a year ago, while month-to-month subscriptions were basically flat year-over-year and now account for 12% of the total subscriptions, down from 19% a year ago. We believe that month-to-month subscriptions will remain important to enable certain customers to temporarily increase their capacity for specific projects. However, we believe that the share of annual paid upfront subscriptions will continue to grow as more of our enterprise customers adopt subscription, which will help augment our cash flow in the short term and reduce churn in the long term. From a cash perspective, billings for subscriptions increased 83% year-over-year in the first quarter, above the growth rate in total subscriptions, due, in part, to the increase in customers who are selecting annual paid upfront contracts, coupled with price increases that went into effect in the third quarter of 2019. Now moving to the composition of our revenues. Maintenance revenue was $31.8 million during the first quarter, down 0.7% year-over-year.
We continue to see the impact of the end of support for legacy storage solutions and slowly declining noncash revenue that flows through maintenance revenue. Excluding noncash revenue and legacy storage maintenance revenue, maintenance revenue would have been up 2.1% year-over-year on a growing maintenance renewal base and the contributions from generally stronger product sales in 2019, offset in part by maintenance declines on legacy media management solutions and on Media Composer and Pro Tools as a portion of those users transitioned to subscription. While subscription revenue continues to grow, perpetual license revenue was down 33.9% year-over-year, due to weakness in MediaCentral perpetual sales, particularly late in the quarter due to COVID-19 and to a portion of our customers selecting subscriptions rather than perpetual licenses for our creative software products. Gross margin on software licenses and maintenance was 82.5% in the quarter, up 40 basis points year-over-year. The company's hardware and integrated software revenue was $29.3 million in the first quarter, down 36.6% year-over-year, due to the impact of COVID-19 on customer operations and purchasing decisions. This revenue line was impacted by declines in sales of storage solutions and video service due to the impact of COVID-19 on studio and broadcast customers as well as substantial declines in live sound audio sales on lower demand due to the impact of COVID-19 on music concerts and festivals.
As companies and economies reopen, we expect to see improvement in hardware and integrated software in future quarters as we believe there will be a strong resurgence in content creation that will require our solutions. Gross margin from hardware products and integrated software was 32.2% in the first quarter, down 1,160 basis points year-over-year as lower production volumes did not absorb as much manufacturing overhead in the quarter, plus the mix shifted within hardware toward more audio products and less storage. The balance of our revenue comes from our professional services business. Professional services revenue was $6 million in the first quarter, down 21.4% year-over-year, as certain projects were pushed out and further delays caused by the limited availability of professional services personnel to be on-site due to the global pandemic. Gross margin on professional services was 5.7% in the quarter, down 880 basis points year-over-year due to lower utilization during the quarter. In response to the evolving COVID-19 situation, we rapidly implemented a significant cost-savings effort starting in April 2020 to ensure that we are well positioned to survive the global pandemic. We expect the actions to reduce non-GAAP operating expenses by at least $30 million year-over-year for 2020.
The cost-savings actions include: furloughs of three weeks per quarter for most employees or an equivalent temporary wage reduction during the second and third quarters; the company has structured the furloughs so that our customers will experience little-to-no impact during this period; our executive officers and Board of Directors will also be taking similar temporary salary reductions in line with the nonexecutive employees; our hiring freeze and elimination of merit increase and 401(k) matching; reductions in marketing spend related to canceled trade shows and other activities; reduced usage of contractors, consultants and outside services; reduced travel costs and reduction in other discretionary spending. These efforts are expected to have an immediate cash benefit starting in April 2020 with at least $9 million in year-over-year operating expense savings in the second quarter of 2020. The cost-saving actions are also expected to yield $10 million year-over-year reduction in nonmaterial cost of goods sold during 2020, which we expect will protect our gross margin at the expected lower product and professional services volumes. We have also reduced our 2020 capital expenditure plans, and we now expect that our capital expenditures for all of 2020 will be approximately 40% below the level we indicated in the guidance provided in November 2019. And we're also deferring the enterprise improvement spending that we planned for 2020.
We're actively monitoring this situation and prepared to take further cost actions as necessary to enhance liquidity, preserve free cash flow and best position the company for longer-term growth. Now turning to the balance sheet. As of March 31, 2020, we had cash balance of $81.2 million, up from $69.1 million at December 31, 2019. Cash balance increased on $22 million draw under our existing revolving credit facility, offset by negative free cash flow of $7.1 million during the first quarter of 2020. We ended the quarter with $60 million of accounts receivable, down $13.8 million from December 31, 2019, due primarily to reduced billings in the quarter. Inventory was $32.6 million at the end of the quarter, up $3.4 million from December 31, 2019 and down $1.7 million from March 31, 2019. Inventory levels were up due to the lower-than-expected sales at the end of the quarter. We continue to be pleased with the performance of our new contract manufacturing partner in Mexico, and the new supply chain partners fully supported our first quarter production needs. Based on current information, Avid doesn't expect any production issues that would impact its second quarter production. In early April, in response to the COVID-19 pandemic, the Mexican government placed restrictions on businesses, including our contract manufacturers, that limited their ability to produce nonessential items such as products for the month of April.
However, in early May, our contract manufacturing partners informed us that under revised guidelines, they have resumed needed production of our products. We believe we have sufficient finished goods inventory at our logistics facilities in the U.S. to support our expected production needs during the second quarter. We will continue to monitor our supply chain providers globally as the global pandemic situation continues to evolve. Moving to contract assets, which increased $2.71 million during the quarter to $22.2 million from enterprise agreements and the increase in annual paid monthly subscriptions. Deferred revenue was $95.4 million at March 31, 2020, down $2.5 million from December 31, 2019, from the recognition of ITCS noncash revenue of $1.2 million and the seasonal decline in maintenance deferred revenue. At the end of the quarter, long-term debt was $220.4 million, up $21.4 million from December 31, due to the previously mentioned $22 million draw on the existing revolving credit facility. Now turning to our capitalization and credit metrics. As of March 31, our leverage per our credit agreement was 4.6 times. We were in compliance with the 6 times leverage covenant given our liquidity level. Starting in June, the leverage covenant will start to gradually step down. We are monitoring our leverage covenant, and we expect our leverage multiple to gradually improve in the second half of 2020, as we fully realize the planned cost savings.
Avid has also been evaluating stimulus and tax incentive programs both in the U.S. and overseas to help companies weather the pandemic. Earlier today, Avid signed an unsecured promissory note under the Paycheck Protection Program, which would we expect to result in Avid receiving a loan in the amount of $7.8 million that would accrue interest at a rate of 1%. If Avid meets certain conditions, some or all of the $7.8 million loan may be forgiven at a later date. Finally, our current plan is to repay our convertible notes due June 15, 2020, with cash in our balance sheet at maturity. Let's now turn to our outlook. The evolving COVID-19 global pandemic and its potential impact on our business and market demand for our products is still uncertain. Given the level of uncertainty, we are not providing guidance for full year 2020, and we'll provide limited outlook for the second quarter. Our current expectations for the second quarter is for weakness that we saw at the end of the first quarter in hardware and integrated solutions, perpetual license and professional service to continue during the second quarter, resulting in a year-over-year decline in total revenue. We expect that growth in subscriptions will continue and maintenance revenue will be stable, so combined subscription plus maintenance revenue will continue to grow year-over-year. We expect that the cost-savings efforts implemented starting in April 2020 will reduce operating expenses by at least $9 million year-over-year and help protect our gross margin.
We expect sequentially higher adjusted EBITDA for the second quarter based on our outlook for lower year-over-year revenue in the quarter and a significantly improved cost structure in the quarter. As we look to the remainder of 2020, we have been evaluating various scenarios for how the COVID-19 situation could play out in our business. We expect that the demand for our many of our solutions that support new film and television production, live sports and live music to remain weak into fall, with pent-up demand building that will resurface when the restrictions on production and performances ease. We believe that demand for our subscription offerings should remain healthy as content creators individually and within studios start to continue delivering new content for their audiences. With all these expected challenges for our business, we have taken what we believe to be appropriate cost-saving measures to deliver stable adjusted EBITDA margin and positive free cash flow for 2020. Finally, I want to repeat that we have quickly mobilized as the COVID-19 pandemic emerged to support our customers and employees through the crisis. We revised our operating and spending plans to control costs and preserve cash during the downturn. We expect these cost savings to have immediate impact during the second quarter. And we're aggressively building out our cloud practice to support our customers' business continuity and remote workflows during the pandemic and beyond.
With that, I'd like to turn the call back to Whit Rappole.
Whit Rappole -- Vice President Corporate Development and Investor Relations
Thank you, Ken. Thank you, Jeff. That concludes our prepared remarks, and we're now happy to take your questions. Abby, please go ahead.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And we will take our first question from Josh Nichols with B. Riley Financial.
Josh Nichols -- B. Riley Financial -- Analyst
Yes. Thanks for taking the time to answer a couple of my questions here. One, I did want to ask, obviously, some headwinds facing the hardware, that's not unexpected here, but phenomenal growth in the subscription business. Are you seeing that flow through now that we're like a month and a week into the second quarter? Anything you could talk about the cadence that you're seeing thus far in the subscription business as far as sustainability into Q2?
Jeff Rosica -- President and Chief Executive Officer
Well, I'd say this, this is Jeff. Our expectations from the growth of subscriptions have not abated. They continue to be quite strong. We haven't seen the whole quarter yet, but so far, trends are continuing as we expected.
Josh Nichols -- B. Riley Financial -- Analyst
Great. And then on the hardware front, if you could just provide a little bit more color? One, like, some of the stuff that is selling versus I know Ken mentioned on the call that, like, there's some margin compression and a lot of that may be due to just similar audio versus storage solutions? Like, any color you could provide on the hardware sales generally and what you're thinking as far as margin going forward broadly would be helpful, I think?
Ken Gayron -- Chief Financial Officer & Executive Vice President
Yes. So Josh, this is Ken. Let me take that question. It's a good question. In terms of our hardware margins, during the quarter, they were impacted by mix. Our storage business, server businesses was down. Our storage business tends to have higher margins than our audio business. With that said, we expect our hardware margins with this situation to be somewhat challenging. But as Jeff pointed out and in my prepared remarks, we expect this pent-up demand. Our storage business will recover. And as a result, we expect hardware margins to increase in the back half of the year. When we look at our margins, typically, Avid has reported hardware margins in the low 40s. We're down about 1,000 basis points in the second quarter. We expect our margins to kind of get back to more normalized levels as we move through the year.
Josh Nichols -- B. Riley Financial -- Analyst
Ken, that's helpful. And then just talking about cadence a little bit. I obviously don't expect any kind of detailed guidance. But you did mention you do expect EBITDA to be actually up quarter-over-quarter in Q2. Does that kind of imply what the cost savings that you expect to be like the trough in EBITDA to be in Q1?
Ken Gayron -- Chief Financial Officer & Executive Vice President
Yes. When we look at our model, the cost-savings plan that we put in place has will result in an immediate EBITDA improvement. These actions are already taken, so the savings are already in the P&L. So we feel that we'll have a better performance in Q2 than Q1. And that will result in better EBITDA for the quarter, and we should see the business improve over time. But we expect Q2 to be much better than the first quarter.
Josh Nichols -- B. Riley Financial -- Analyst
Yes. And then just kind of generally speaking on the revenue front, Mike. I would expect Q2 revenue to be down quarter-over-quarter based on some of the commentary that you said. But as the law of states are still in the early stages of reopening, I would expect you may start to see a little bit of a quarter-over-quarter uptick in the revenue line in 3Q. And then hopefully, if we get some professional sports back in, in the fourth quarter, which is usually the strongest quarter, that a more meaningful potential uptick based on what we're seeing now, at least regarding COVID-19 and what states have for the reopening schedule. Is that, at a high level, kind of what you guys are have planned out for your internal model?
Ken Gayron -- Chief Financial Officer & Executive Vice President
Yes. I would say that, in general, although we're not providing our 2020 guidance, the themes you provided in terms of some challenges through the fall, but then pent-up demand and that having a better impact in our revenue lines toward the second half of the year and then sports reopening, that will all benefit our revenues as we think about the second half of the year.
Josh Nichols -- B. Riley Financial -- Analyst
Okay. I just want to make sure, directionally I was thinking about it in the right way it seems like. And then I don't want to monopolize the call at this time, so I only have one more question that's really on the subscription front and the growth there. Jeff, you mentioned that there was a number of enterprise customers that you've been dealing with. And historically, you've said that the transition to enterprise subscription business was going to be like a handful number of years type situation. Based on what you're seeing currently, do you expect that, that could be pulled forward and we could see a significant increase in the company's subscription revenue over the next, like, 12 to 24 months from enterprise subscribers in the current environment?
Jeff Rosica -- President and Chief Executive Officer
Well, I'd say I would say I would probably say what we've said before, which is, if you remember, we talked about the fact that we've been piloting some of the enterprise subscription offerings in the first half. Actually, we did it late in 2019 and been continuing that in the first half of 2020. We still have the plan to launch the more the buyer offerings for subscription for the enterprise this summer. So we do see, as we said before, that continuing to be a positive contributor even more so in the second half and as we go through these couple of years. So our position hasn't changed. I will say that the market obviously is different today. But it's probably, in a good way, it's been helping subscription.
Josh Nichols -- B. Riley Financial -- Analyst
Great, thanks a lot. I'll hop back in the queue.
Operator
And we will take our next question from Jack Vander Aarde with Maxim Group.
Jack Vander Aarde -- Maxim Group -- Analyst
Hey, guys. Thank you for taking my questions. I've had to jump kind of back-forward between calls as a lot of analysts, so I may have missed some comments. But I want to revisit the 2Q outlook, specifically for product revenue. I know it's really tough to tell. And I know you said total revenue would be down Q-over-Q, year-over-year. But did you comment can you provide anything around 2Q product revenue? Whether do you think it's going to be down or up or flat relative to Q1's product revenue?
Ken Gayron -- Chief Financial Officer & Executive Vice President
Yes. Hey, Jack, this is Ken. Thank you for your questions. So we're not giving our guidance specifically for Q2 in terms of specific revenue elements. I think what we believe is that our subscription and maintenance business which has performed well in Q1. As Jeff pointed out, subscription is doing well already in April. We continue subscription maintenance will be healthy. With respect to product revenue, we see those challenges that were in Q1 continuing into Q2. But in general, I think what we see is really highlights on subscription and maintenance for Q2. So I hope that kind of gives you some indication of what we expect for the quarter.
Jack Vander Aarde -- Maxim Group -- Analyst
Yes, yes. Sure, it's helpful. And if I just revisit again, what the Q1 as it relates to product revenue in Q1, the drop off, was it it was my understanding that was more related to new customers being kind of, I guess, halted, landing new customers toward the end of the quarter because of COVID? Now that the Mexico manufacturing and product manufacturing is back online, is the hang up in product revenue going to be related to just the customer demand for it at the current time or your ability to take on new product orders? Or is it it doesn't because it doesn't seem like it's an inventory bottleneck or supply issue, it's just more related to the customers, I guess, logistics?
Jeff Rosica -- President and Chief Executive Officer
It is, yes. This is Jeff Rosica. So there was no even though we had some supply pausing in the last, let's say, month or so, it had no impact on our ability to supply our customers. We've had the right inventory buffer throughout. So supply has not been a constraint we've had or inventory. The issue is really customer demand and customers' ability to execute when everything from Hollywood shows or high in entertainment or sports or music program or music tours are pausing or suspending or canceling the needs, the immediate needs, for the equipment or gear they were going to deploy isn't there. And so part of it is just things that are being deferred because they're going to wait and see how things play out for their business. In other areas, it's just because they were they are they were and are still quite busy dealing with their own business continuity and dealing with their own business issues. So it will gradually worm back up, but there will be some demand constraints from the customer side for a little while as this is recovering.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. That's helpful. And then just lastly...
Jeff Rosica -- President and Chief Executive Officer
I wanted to actually say, it wasn't just Jack, when we said new customers, it wasn't really our inference there wasn't just new customers, it was any customer. Whether it's a customer upgrading or adding on or expanding their environment or new, it's I wouldn't really characterize it one or the other.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. Okay. Thanks for the clarity. And then I guess just lastly, I just want to revisit the kind of the cash conversion cycle or the billings collection process is how much of how big of an issue has that been? Or I guess, how difficult or challenging has that been versus if you could parse out between demand from customers for your products versus and how does that, I guess, relate to the billings collection process, which I think was an issue toward the end of last quarter as well for this current quarter?
Ken Gayron -- Chief Financial Officer & Executive Vice President
Yes. So in terms of our customer base, we have a fairly healthy customer base in terms of the creditworthiness of it. I would say the DSO did increase from year-end to March 31. We did see a lot of companies do the work-from-home arrangement imposed by governments. There was less people in the office. So as we were making collection calls, just naturally there was less response. But I would say, our AR is the DSO is still roughly 60 days, and that's a fairly good metric when looking at other companies. But we're very focused on collections. We're engaging more. And we're working with our sales team to make sure that we collect our receivables.
Jack Vander Aarde -- Maxim Group -- Analyst
Understood. Okay, thanks guys. That's it from me.
Operator
[Operator Instructions] And with no additional questions at this time, I would like to turn the conference back to Jeff Rosica for any additional or closing remarks.
Jeff Rosica -- President and Chief Executive Officer
So thank you, operator. So let me close by saying that Avid's collaboration with our customers to keep the industry work has shown us its deep capacity to adapt to this difficult situation quite rapidly. We are encouraged by the resilience and innovation, both inside-out and throughout our community, and our strong recurring revenue streams and increasingly rigorous operating and cost discipline, combined with our unique position to help the industry today, will enable Avid to endure and make the most of the global rebound. So I want to thanks all of our investors, analysts and others who joined us today. And I hope everyone will remain safe and healthy as we look ahead to the eventual global recovery from COVID-19. Thanks.
Operator
[Operator Closing Remarks]
Duration: 50 minutes
Call participants:
Whit Rappole -- Vice President Corporate Development and Investor Relations
Jeff Rosica -- President and Chief Executive Officer
Ken Gayron -- Chief Financial Officer & Executive Vice President
Josh Nichols -- B. Riley Financial -- Analyst
Jack Vander Aarde -- Maxim Group -- Analyst
