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Avid Technology Inc (AVID)
Q3Â 2020 Earnings Call
Oct 28, 2020, 5:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and welcome to the Avid Technology's Third Quarter 2020 Earnings Call. [Operator Instructions]
Let me turn the call over to Whit Rappole, Vice President of Investor Relations. Please go ahead, sir.
Whit Rappole -- Vice President Corporate Development and Investor Relations
Thank you, Keith. Good afternoon, everyone, and thank you for joining us today for Avid Technology's third quarter 2020 earnings call for the period ending September 30, 2020. 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 Investor Relations 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 metrics used on this call and in the presentation. Unless otherwise noted, all figures noted by management during the call are non-GAAP figures.
In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcomes. Actual future results or occurrences may differ materially from these forward-looking statements.
For more information, including a discussion of some of the key risks and uncertainties associated with these forward-looking statements, please see our press release issued today and our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.
With that, let me turn the call over to our CEO and President, Jeff Rosica, for his remarks.
Jeff Rosica -- Chief Executive Officer and President
Thank you, Whit, and thanks to everyone for joining us to review Avid's third quarter results that we released today. We're certainly pleased with our Q3 results. Specifically, we're encouraged by the start of the turnaround in demand that we encountered in our non-recurring business during the quarter. And also with the continued strength of the recurring revenue elements of our business, driven by both the growth of our creative software subscription business and initial rollout of our enterprise subscription offerings. COVID-19 did continue to have some temporary impact on customer demand on some parts of our non-recurring product business. But we expect now to continue the recovery that started in the third quarter.
We have adjusted our strategy and investments to quickly respond to the changes in the market we're seeing, focusing even more sharply on the parts of the business that we believe will drive more profitable growth. We also remain focused on ensuring we have the right cost structure moving forward to make sure Avid enters 2021 as a stronger and more profitable company.
Today, along with our CFO, Ken Gayron, we will review Avid's Q3 results, our resilience to the ongoing effects of the global pandemic and how we remain hard at work delivering product innovations to better position Avid and our customers for the future. In addition, we will discuss our long-term strategy to continue to grow recurring revenue streams, and increase our efficiency and effectiveness in the way we work and serve our customers.
Before we dive into our third quarter results, I want to take a moment to reflect on the strategic priorities we outlined at our November 2019 Investor Day, and the progress we have made toward these priorities. I'm pleased to say that we have stayed focused on execution in spite of the obvious distractions from the COVID-19 situation, and that we achieved significant results against these priorities we laid out for 2020. Our first priority is to grow recurring revenue from subscriptions, maintenance and long-term agreements.
Despite the challenging market conditions for most of this year, we've continued to make progress in this area by focusing our sales and marketing efforts on subscription business models. As of Q3, our LTM recurring revenue has increased year-over-year on a dollar basis, driven by the success of growing our cloud-enabled software subscriptions. The total number of paid subscriptions, in particular, is approximately 81,000 or 43%, since the beginning of the year, despite the impact of the global pandemic.
Our second priority is to deliver more consistent growth, enhanced profitability and free cash flow. While COVID-19 is having an obvious impact during 2020 on the non-recurring elements of the business, we have continued to deliver solid growth in our subscription and overall software sales. We have also focused on controlling operating expenses and non-material COGS, which altogether have contributed to our improving profitability, and strong free cash flow. We are free cash flow positive year-to-date as of the end of Q3 for the first time in many years. And I'm especially proud that we've accomplished this while strengthening our balance sheet as we're in a strong position going into the fourth quarter, historically our strongest quarter for free cash flow generation.
Our third priority is to improve business operations and expense control while making the needed R&D investments to support growth. We have adjusted our strategy and investments to quickly respond to the changes in the market, focusing even more sharply on the parts of the business that we believe will drive more profitable growth. We also remain focused on ensuring we have the right cost structure as we move into 2021 to ensure that we can continue to deliver improved profitability. We've also adjusted our product roadmaps and R&D spending to focus on the product and solution areas that will address our customers changing needs and will help drive growth for the company, another one of our important priorities. We've continued innovating, listening and delivering new product offerings.
I will talk about some of those innovations shortly. But sufficed to say that we have released numerous new solutions this year, and have even more plans for Q4 and throughout 2021. And our final priority is to create innovative cloud and SaaS solutions for media enterprises to enable secure, flexible and powerful media creation workflows. During the past year, we have expanded our SaaS offerings and added several early adopters of cloud-based solutions at large media companies, studios, broadcasters and post production facilities across the globe.
Now, let me jump into the discussion of our third quarter results. During the quarter, we saw strong sequential recovery in our non-recurring revenues from our integrated solutions, including our NEXIS video storage systems, which turned into strong performance aided by our newest release during the quarter NEXIS 2020. Likewise, our Pro Audio Solutions category had another strong quarter, even though the pandemic is having an ongoing impact on the live sound portion of the industry. This non-recurring revenue recovery also reflects improved demand for perpetual software licenses of average creative tools and the MediaCentral platform.
During Q3 on the recurring revenue side of our business, we saw ongoing growth in software subscriptions for our creative tools as well as for growth in annual contract value. Sales of individual subscriptions for creative tools continued their upward trajectory. And in the quarter, we also saw initial success with subscription sales to our enterprise customers for MediaCentral, as well as our creative tools. In the quarter, we signed subscription agreements with several large organizations in broadcast, post production and higher education. We're very pleased that enterprise customers of all types are starting to take advantage of this new flexible way of working with us to ensure their production tools and other Avid based resources are always available to their teams.
As we're in the early days of this planned expansion of our software subscription offerings for enterprise customers, we see this as an additional growth engine for our overall subscription business. Also, during the third quarter, we saw ongoing benefits from the operational and fiscal discipline that we embarked on two years ago, as well as the additional cost savings measures we established very quickly in April, as it became clear that COVID-19 would likely materially impact our operating plans this year. This discipline significantly contributed to our higher gross margin, and lower operating expenses. Combined with the accelerating growth in our high quality revenue streams and solid performance of the strategic elements of our business, all of this contributed to significantly improved profitability and free cash flow.
Let's review a number of key metrics and indicators highlighting average overall performance and the success of our ongoing strategy. As I mentioned earlier, Avid delivered continued strength in recurring revenues and benefited from recovery in the sales of non-recurring integrated solutions and perpetual licenses, which together contributed to substantially improved results in the third quarter. Subscription revenue was up nearly 74% year-over-year. For paid subscriptions, our creative tools continued to deliver strong growth, aided by a number of major new product releases and enhancements.
Growth in subscription revenue in Q3 also reflects the introduction of enterprise subscription for our MediaCentral platform and initial sales to enterprise customers, as I mentioned earlier. Our maintenance revenue increased slightly on a sequential basis in the third quarter and along with a strong subscription revenue growth, we saw the combined subscription plus maintenance revenue growth of 11.6% year-over-year. Our e-commerce business continued to deliver strong growth increasing 41% year-over-year. This part of our business, which is increasingly viable route to market, continues to perform well as a profitable commercial engine for our creative software tools. And we are supporting the growth of our e-commerce web store with focused digital marketing efforts to generate additional demand through this channel.
Adjusted EBITDA was up over 50% year-over-year in the third quarter, as GAAP revenue almost returned to the level of last year's Q3, while gross margin is significantly higher year-over-year and operating expenses are significantly down year-over-year. Our continued cost discipline, operational rigor and the overall profitability contributed to very strong free cash flow of $15.5 million in the quarter, which gives us positive free cash flow for the first nine months of 2020 and positions us well heading into what is typically our seasonally strongest free cash flow quarter. Throughout the market challenges we faced during 2020, our product and engineering teams have been focused on developing innovative solutions to address our customers' evolving needs, bringing the several notable product releases in the latter part of Q3, which we expect will contribute to growth in Q4 and beyond.
First, we introduced several new innovations to enhance our MediaCentral platform for media enterprises. This included the new MediaCentral Collaborate application that streamlines production workflows and enables better collaboration across disparate teams, including remote journalists and production teams wherever they're working. We surprised the market also by announcing our joint efforts with Adobe to develop and market the MediaCentral Connector for Adobe Premiere Pro, which improves on the interoperability between Adobe and Avid environments opening up new market opportunities for Avid solutions including the MediaCentral platform, and NEXIS storage. We also delivered an important update to MediaCentral, subscription licensing, which expands our subscription offerings to address the end-to-end requirements of our enterprise customers.
In addition, we have continued to innovate around our creative tools to improve support for remote and cloud-based workflows. We introduced the new MediaCentral Reporter mobile app, enabling remote journalists to capture and edit content right on their mobile devices, and send it back to MediaCentral. We also released several important updates in Q3 for Avid Edit On Demand, a pure SaaS solution for cloud-based editing, which is currently in an early access program that has been made available to dozens of Avid's key enterprise customers. We've been putting the solution through its paces prior to our general release, which is planned for early 2021.
In addition to these major releases, we've delivered many more upgrades, including continued improvements in our creative software tools in support of our subscription business. While we are really happy with the amount of innovation we delivered to help address the challenges of our customers that we're facing today, we still have several major releases planned for the fourth quarter, including trailblazing innovation that we'll announce very soon, which we believe musicians and audio producers will be quite excited about.
In closing, coming off of a strong performance in Q3, I believe this team has done a great job navigating the current market environment and we're well-positioned to take advantage of the opportunities available as end markets continue their recovery, given our focus on operational improvements and structural cost adjustments, along with the many innovations that we're bringing to market. I have to say I'm truly excited about the opportunities in front of us.
Now, I'll hand the call over to Ken who will offer some more details behind our Q3 2020 performance. Over to you, Ken.
Ken Gayron -- Chief Financial Officer and Executive Vice President
Thank you, Jeff, and good afternoon, everyone. As noted above, Jeff and I are referring to non-GAAP figures unless otherwise noted. Overall, we are very pleased with our business and financial results for the third quarter. Our recurring revenue sources, including subscription and maintenance revenues, have remained healthy, and we significantly improved profitability and generated our strongest third quarter free cash flow since 2007. Additionally, the non-recurring portions of the business related to perpetual licenses and integrated solutions started to recover in the quarter. As we exit the third quarter, we are seeing a clearer path to sustained improvement in profitability, and higher levels of free cash flow that should result in a strong finish for fiscal year 2020.
With that, let's now turn to the details of our third quarter financial results. GAAP revenue was $90.4 million during the third quarter, down 3.2% year-over-year, but up 14.1% sequentially. Recurring revenue was strong as combined subscription and maintenance revenue was $48.7 million, up 11.6% year-over-year, while non-recurring revenue from integrated solutions, perpetual licenses and professional services was up 29.5% sequentially, although down year-over-year due to the continued impact of the COVID-19 pandemic on this portion of the business.
At constant currency, our third quarter 2020 revenue was down 3.8% year-over-year as the relatively stronger euro compared to the U.S. dollar negatively impacted revenue by 60 basis points.Gross margin was 64.9% for the quarter, up 280 basis points year-over-year. The increase was due to more favorable revenue mix of higher margin subscription and maintenance revenue as well as the impact of our cost savings initiatives on non-material cost of goods sold.
Non-GAAP operating expenses for the quarter were $41.4 million, a $5.9 million decrease year-over-year and a $900,000 increase from the second quarter of 2020. The year-over-year decrease in operating expenses was due to the benefit from our cost savings efforts, including $6 million from temporary furloughs, $2.8 million from travel reductions and $2 million from contractors and consulting, partly offset by a bonus accrual of $6.1 million, of which $3 million was related to a one-time catch-up for the accrual in Q1 and Q2 of this year, as we are seeing an improvement in our internal forecasts for certain metrics for Avid's 2020 corporate bonus.
Adjusted EBITDA was $19.3 million in the third quarter, up 51% or $6.5 million year-over-year, as the benefits of higher gross margin and lower operating expenses far outpaced the 3% revenue decline. Adjusted EBITDA margin was strong at 21.4% in the third quarter, a significant improvement from 13.7% in the prior year period. Non-GAAP net income per share was $0.27 for the third quarter, up to $0.17 year-over-year, reflecting the increase in non-GAAP operating income.
Free cash flow was $15.5 million in the quarter, up $20.2 million year-over-year due to the improvement in adjusted EBITDA. Our free cash flow for the quarter could have been higher but we chose to repay $4.4 million of accounts payable to drive better pricing with our key vendors. Working capital was a source of cash of $3 million a quarter, as we are clearly seeing an improvement in Avid's working capital cycle as our business moves to more software and annual paid upfront subscriptions.
Now moving to recurring revenue and annual contract value. The percentage of our revenue that is recurring continues to increase. For the 12 months ending September 30, 2020, 71% of total revenue was recurring, up from 59% in the 12 months ending September 30, 2019. The percentage of recurring revenue increased due to highest subscription revenue and revenue from long-term agreements, plus lower non-recurring product and professional service revenue in 2020.
While our strategy is focused on building the recurring revenue portion of our business, we believe the percentage of recurring revenue has been elevated in the last few quarters due to the impact of COVID-19, which has caused volatility in our non-recurring integrated solutions, perpetual licenses and professional services revenue. As such, the recurring revenue percentage could be uneven during the next few quarters, as those non-recurring revenue streams continue to recover. Annual contract value was $271.9 million at the end of the quarter, up 6.5% year-over-year, benefiting from increased subscription revenue, offset in part by decreases in maintenance and long-term agreements year-over-year.
During the third quarter, we renewed three of four long-term agreements and added one new long-term agreement. As was the case last quarter, the one agreement we did not renew was with a channel partner who serves the live sound market. We expect to revisit the agreements with these two partners when the live sound market recovers. As we look into the detail of our revenue streams, we continue to be encouraged by the resilience and growth of our subscription base, which reached a new high in paid subscriptions.
In the third quarter, we added roughly 27,000 net new subscriptions for our creative software solutions. And our total subscription count reached approximately 269,000 at quarter end, an increase of 58% year-over-year. Also, during the quarter, we signed five multi-year enterprise subscription agreements resulting in $1 million of revenue in the quarter. Overall, the growth in subscriptions has accelerated since the third quarter of 2019 with a combination of new product innovations, improvements in pricing strategy, and increased digital demand generation efforts.
Subscriptions growth was strong in all creative tools with Pro Tools up 68.5% year-over-year, Media Composer up 41.3% year-over-year and Sibelius up 43.6% year-over-year. Additionally, we continue to see a shift toward annual paid upfront contracts, which we believe are higher quality revenue streams for Avid when compared to monthly paid subscriptions. Annual paid up subscriptions grew 209% year-over-year in the third quarter, and now represent 23.5% of total subscriptions, up from 12% a year ago.
We believe that the share of annual paid upfront subscriptions will continue to grow as more of our enterprise customers adopt subscriptions and we continue to optimize our pricing models. Finally, when we look at our total creative tools users, both subscriptions and active maintenance agreements, the total number has grown 20% year-over-year, as the growth in paid subscriptions far exceeds the decline in active maintenance contracts.
Now moving to the composition of our revenues. The continued growth in paid subscriptions for our creative tools, as well as new revenue from enterprise subscription and cloud drove continued growth in subscription revenue during the third quarter, reaching $17.9 million or an increase of 74% year-over-year. Maintenance revenue was $30.8 million during the third quarter, down 7.6% year-over-year, but up 0.8% sequentially. We continue to see small impacts from decreasing non-cash revenue and from the end of support from legacy storage solutions last year.
Excluding these factors, maintenance revenue would have been down 4.7% year-over-year, due primarily to reduce first year maintenance revenue from lower product sales in the last three quarters as a result of the impact of the COVID-19 pandemic. Perpetual license revenue was up 3.5% year-over-year, as demand for our MediaCentral enterprise products and perpetual licenses for our creative tools started to recover in the third quarter. Gross margin on software licenses and maintenance was 85.2% in the quarter, down 150 basis points year-over-year, due to a one-time credit in Q3 '19. But otherwise, the gross margin remains stable.
The company's hardware integrated software or integrated solutions revenue was $26.8 million in the third quarter, up 28.8% sequentially as demand started to recover from the COVID-19 downturn. However, due to the continuing impact from COVID-19, our integrated solutions revenue was down 21.7% year-over-year. Gross margin from integrated solutions was 30.3% in the third quarter, down 390 basis points year-over-year, as lower production volumes did not absorb as much as the manufacturing overhead in the quarter. However, gross margin improved 450 basis points sequentially on the higher volumes and the mix shift toward higher margin storage in the third quarter compared to the second quarter.
The balance of our revenue comes from our professional services business. Professional services revenue was $5.9 million in the third quarter, down 14% year-over-year as certain projects were pushed back out due to the COVID pandemic. However, professional services revenue was up 27.4% sequentially on improved ability to complete service delivery during the quarter. Gross margin in professional services was strong at 23.7% in the quarter, up 920 basis points year-over-year due to the ability to work remotely and other cost saving measures.
Now, let's turn to free cash flow. You can see that Avid is on a path to generating sustainable levels of stronger free cash flow and significant improvement in the conversion of adjusted EBITDA to free cash flow as we projected during our Investor Day last November. As a result of our strategy of driving higher quality recurring revenue, we are seeing stronger profitability, higher margins and lower investment in working capital. With this transition in our business, Avid reported its strongest third quarter free cash flow since 2007.
Free cash flow in the third quarter was $15.5 million, up from negative $4.6 million in the third quarter of 2019. The company generated positive $3.2 million in free cash flow year-to-date in 2020, up from negative $4.5 million in the first nine months of 2019. And during the last 12 months, the company generated $20.2 million in free cash flow, up $7 million or 53% year-over-year. As the company enters its seasonally strongest quarter, Avid is well-positioned to drive further improvement in free cash flow, just shifting our business to more predictable and higher margin recurring revenue streams and an improved working capital position, with a significantly reduced amount of accounts payable and higher accounts receivable both sequentially and year-over-year.
Now, let's move to the balance sheet. The company ended the third quarter with $49.1 million in cash after fully repaying the $22 million outstanding balance on its revolving credit facility in September. Accounts receivable was up $6.8 million sequentially and up $6 million year-over-year on the strength in billings at the end of the third quarter. That should also help augment our cash collections in the fourth quarter.
Inventory remained low at $28.4 million as we are seeing the benefits from the transition the manufacturing supply chain vendors completed in 2019. Accounts payable was reduced and was $13.5 million at the end of the third quarter, down $4.4 million sequentially and down $22 million year-over-year. With the lower accounts payable balance we are seeing improved pricing from our vendors that will allow for continued improvement in profitability.
Now, let's move to our capitalization and credit metrics. The company ended the third quarter with a healthy cash balance and net debt of $159.1 million. The strong free cash flow in the third quarter and the year-over-year improvement in adjusted EBITDA resulted in a reduction in the company's total leverage to 3.6 times at the end of September 2020 and net leverage at 2.7 times. With Avid's improving credit metrics and a clear path to improve free cash flow, the company is well-positioned for a potential reduction in borrowing costs during 2021.
Finally, let's turn to our outlook. We expect the external markets to continue their gradual improvement in the fourth quarter and into 2021. And this improvement should result in a sequential benefit to revenue in the fourth quarter.
In addition to the expected continual gradual improvement from the COVID downturn, we anticipate typical seasonality to benefit Avid in our fourth quarter revenue. We expect continued growth during the fourth quarter in subscription revenue from both additional paid subscriptions from our creative tools and growth in enterprise subscription and cloud, as well as the expectation for improvement in non-recurring perpetual license integrated solutions revenue in the fourth quarter.
We ended the temporary furloughs we implemented during the second and the third quarter at the end of September. But we continue to be on track to deliver the cost saving targets we set in the second quarter. We expect adjusted EBITDA margin in the fourth quarter to be higher year-on-year on higher gross margin and lower operating expenses than in Q4 2019.
The seasonally higher revenue expected in the fourth quarter, combined with the higher adjusted EBITDA margin and improved working capital position at the end of the third quarter, positions Avid for seasonally strong free cash flow in the fourth quarter. Also, as we exit 2020, we expect approximately 60% of the cost savings in fiscal year 2020 to continue into 2021 as we realign our cost structure, so that Avid exits the pandemic as stronger company that is well-positioned to generate sustained improvement in profitability and free cash flow.
With that, I'd like to turn the call back to Whit.
Whit Rappole -- Vice President Corporate Development and Investor Relations
Thank you, Jeff and Ken. This concludes our prepared remarks. We are now happy to take your questions. Operator, please go ahead.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. We'll take our first question from Steve Frankel with Colliers. Please go ahead.
Steve Frankel -- Colliers -- Analyst
Good afternoon and thank you for the opportunity. Just like to ask a little bit about these enterprise subscription agreements. Could you give us some details on maybe the size of the number of users covered in these agreements and what the term length is?
Jeff Rosica -- Chief Executive Officer and President
Hi, Steve. This is Jeff. I think it gives us a general sense. So the agreements can run anywhere from one year to five years. Typically, they're two or three years in length, the ones that we're doing. And as far as number of users, they can be anywhere from, let's say dozens of users for the smaller accounts to hundreds of users on larger accounts. It just depends on the size of the account because we deal with everything from a larger company, be a large media broadcast company to a large higher educational institution, smaller maybe more post production companies that may have dozens of users.
Steve Frankel -- Colliers -- Analyst
So the vast majority of the sequential improvement in cloud subscriptions were from Tier three, probably similar kind of base that you've been growing so nicely over the last year or so.
Jeff Rosica -- Chief Executive Officer and President
Yes, yes. But it was helped some by the start of the enterprise. But as we mentioned, the enterprises subscription has just started in September, so its impact is still fairly limited compared to the rest of the business. But yes, most of the growth is from the growth in individual creative professionals and small businesses who are subscribing to our creative tools.
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yes, Steve, in terms of adding to the color there, our license count was up 58%, revenues were up 74%, the enterprise subscription accounted for roughly 8% to 10% of that growth, $1 million. So, again, that's going to be our second stage of growth, but we're in the early phases, and we see a lot of opportunity ahead.
Steve Frankel -- Colliers -- Analyst
Okay. And how long do you think it's going to take for the live sound business to recover? Is that something we have to think about, maybe late next year or into '22, before that starts to rebound?
Jeff Rosica -- Chief Executive Officer and President
I would say that's probably a good estimate, Steve. We may see a little bit of opportunity in the second half of 2021. It really depends on how the pandemic evolves on a global basis, because it's not just a regional to mount a lot to or a lot of events, you need some regional improvement. But it really will depend on how things evolve, and how things open up from, not 20 or 50 people, but how hundreds of thousands of people can come together. So, I think we're right now expecting late '21 the earliest, and probably more like 2022.
Steve Frankel -- Colliers -- Analyst
And then in the core business, do you expect to see a normal level of your budget flush this year? Is that giving your confidence in this Q4 and the sequential gains in Q4?
Jeff Rosica -- Chief Executive Officer and President
Yes. It means there will be a typical flush or a typical investment at the end of the year. And there's also just typical timing of things that happen naturally at the end of the year. I think we'll see that happen. It will be on a different base, obviously, this year than in prior years. But we do see that as a benefit for Q4. As you know, Q4 is a seasonally strong quarter for us, both on level of business, but also in our free cash flow performance.
Steve Frankel -- Colliers -- Analyst
And in any update on cloud storage trials that you've done with a couple of your large customers?
Jeff Rosica -- Chief Executive Officer and President
Yes, there are doing well, I'll say, in general, we are -- we allow -- these larger companies don't allow us to name them anytime soon. But we're working with large media companies, large broadcasters, sound studios, and even post production companies. And the tests are going well, and in fact, more than tests, some are in production. And, in fact, feature films have been in production in the tool. We've also got pretty important content that's being produced for television in the cloud already. So it's progressing well, and we're happy so far with the progress.
Steve Frankel -- Colliers -- Analyst
Okay, great. Thank you.
Jeff Rosica -- Chief Executive Officer and President
Thanks, Steve.
Operator
We'll take our next question from Josh Nichols with B. Riley.
Josh Nichols -- B. Riley -- Analyst
Great, thanks for taking my question. And good to see such a strong showing for free cash flow this quarter as you rebound from the lows 2Q. I was going to ask -- one thing I wanted to just hit on is, if you could talk about strengths or weaknesses that you're seeing in various geographies, just because the way COVID has evolved and it's popping up in some places and coming back down in others, what you're seeing on that front?
Jeff Rosica -- Chief Executive Officer and President
Yes. I think in general, what I would say is that when we look back at Q3, Europe actually performed quite strong over Q3. It actually was up slightly year-over-year. So we saw really solid performance in Europe. Asia and the Americas were down slightly from a year-over-year perspective, I think that's more also based on the regional business that we have in those areas and Hollywood, obviously, is a big driver. And so is large broadcasters in the U.S. So I think it really depends on the different markets but we did see a lot better situation in Europe than we did see -- we saw a bit of recovery everywhere, but we saw better results in Europe than we did in other parts of the world.
Ken Gayron -- Chief Financial Officer and Executive Vice President
I should say Europe and Middle East actually, across the whole EME.
Josh Nichols -- B. Riley -- Analyst
And then how should we think about the sales mix a little bit, more if we think about separated between like distribution, direct and e-commerce. I assume e-commerce is going to continue to play a very big role in the company sales or an increasing role as time evolves based on the current economic backdrop?
Jeff Rosica -- Chief Executive Officer and President
Yes, I think as we reported, again, this quarter, e-commerce had a growth that was north of 40% year-on-year. That trajectory hasn't led up for us in several quarters. I mean, it's plus or minus a little bit beyond that. But we're seeing some really strong growth, very strong double-digit growth in e-commerce. If you look at Q3, we did see a nice sequential recovery in the Tier one or the large media enterprise business, it was north of 50% improvement quarter-over-quarter.
So that was nice to see. We also saw double-digit increase -- improvement sequentially in the channel part of the business. So it's progressing, I think. The business will evolve as we go to more subscription business and more SaaS business. That's more of a direct digital engagement through web store through digital selling. But channel and our direct sales teams, I'd call them the large enterprise accounts, are still a significant portion of the business.
Josh Nichols -- B. Riley -- Analyst
And then, I think you mentioned in your earlier comments that you saw a pretty nice rebound from the storage business. I was wondering if you could elaborate a little bit on maybe what the outlook looks like for 4Q, because that's a pretty favorable margin contribution business on the integrated hardware side piece, right?
Ken Gayron -- Chief Financial Officer and Executive Vice President
So I think we don't give specific guidance, but I would say, recover we saw, we expect that recovery to continue and we expect the storage business to continue to be a strong contributor for us. There was a lot of pent up demand and catch up going on in Q2, but there's also a lot of -- that demand is still being fulfilled and Q4 is typically also a pretty strong quarter for us, relatively strong quarter for our storage business.
Jeff Rosica -- Chief Executive Officer and President
Yes, I'd say -- generally what I would tell you is we expect a similar trend to continue.
Josh Nichols -- B. Riley -- Analyst
And then last question for me, and then I'll pass the baton and hop back in the queue. If you could comment a little bit -- pretty phenomenal growth from the subscription piece of business. Are you expecting -- I guess, if I'm looking at 4Q, relatively similar, like quarter-over-quarter growth rates, I look at that relative to last year or subscriber increases, or what's the pace that you're seeing on that front?
Jeff Rosica -- Chief Executive Officer and President
I think, well if you look, you've probably seen a similar pace over the last couple of quarters. I think at the moment, we're assuming that, that pace is going to continue into the fourth quarter. Fourth quarter is typically a strong quarter because of the holiday shopping, especially for our music customers, it's typically a very strong quarter. So, we're obviously encouraged with the level of the market adoption and the response we've had to our subscription offering for our creative tools. As we look to -- everything from Cyber Monday all the way through the holidays, we expect that to be a typically strong period for us.
Josh Nichols -- B. Riley -- Analyst
Thanks, Jeff.
Jeff Rosica -- Chief Executive Officer and President
Thanks Josh.
Operator
We'll take our next question from Nehal Chokshi with Northland Capital Markets. Please go ahead.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Yeah, thank you Anna great free cash flow. Awesome free cash flow. Congratulations on that. Regarding the soft guidance saying expect normal seasonality for revenue. If I look at the past six December quarters at the average of about 3% Q-over-Q and a standard deviation of 11%. So I'm not really too sure what is normal seasonality. Can you just help us define that a little bit better?
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yes. No. I would say in the fourth quarter, normally, do we see improvements in our subscription business that Jeff mentioned earlier due to holiday buying especially in music with Pro Tools. But also, we see improvements in certain integrated solutions. So in general, there is an uplift in the fourth quarter. I think, historically the fourth quarter has revenue increases of generally $15 million to $20 million over Q3. And that's kind of historically when you look back. So I think that's a good estimate of kind of the traction that the company had historically. And I think that's -- although we're not providing guidance, I think those are some goal posts to help you with your model.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Okay. Great. And then, Ken, you did mention that there was a spread between subscription revenue increasing 74% year-over-year and subscribers up 58% year-over-year. And I think you said about 1,000 basis points came from the beginning of the enterprise subscription. A, is that correct? And B, what's the remainder for that spread?
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yes. No, so you're absolutely correct. So we are seeing the benefit of revenue being higher than the license count because of, number one, continued traction in annual paid upfronts, both for creative users, but also as enterprises start migrating, you get better upfront revenues, they're signing typically the upfront agreements and there's better revenue recognition on those agreements. So roughly, excluding the enterprises, we would have been up 65% with the enterprise licenses that we talked about was up 74%.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Okay. Great. And then my final question is that on your slide deck, you provided a nice breakout of the subscribers between Pro Tools, Sibelius and Media Composer. It looks like Pro Tools was a major contributor to that Q-over-Q increase. And you did give a metric out, I think, about total subscribers. That's the perpetual, plus the subscription subscribers still being up 20% year-over-year. I guess the bearish pushback that I've heard on this before, I'd like to get your take on is that, well, are you just simply potentially harvesting perpetual users that had stopped paying the maintenance that wouldn't show up in that maintenance space. Can you address that argument there?
Ken Gayron -- Chief Financial Officer and Executive Vice President
I think looking at the subscription and the active maintenance contracts being up 20% year-over-year highlights that we are growing the pie. I think that's one piece of data. I think also subscription plus maintenance continues to grow double-digits at 11.6%. So we are expanding the pie. It's just not moving one piece of revenue stream to the other. So we're expanding the pie and we're increasing gross margin. And you can see that in the total consolidated gross margin in the company and the nice attractive EBITDA and free cash flow we're generating.
Nehal Chokshi -- Northland Capital Markets -- Analyst
Great, thank you very much. Congratulations again on the great free cash flow.
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yeah. Thanks, Nehal.
Operator
We'll take our next question from Samad Samana with Jefferies. Please go ahead.
Samad Samana -- Jefferies -- Analyst
Good evening, gentlemen. Thanks. for the time today. First, I hope everybody is doing well. And maybe just diving right into the questions. So I want to maybe ask a follow-up on the subscription side. If we take maybe a step back, could you maybe help us understand what you view as kind of either the TAM or what is the kind of logical end market? I mean we've seen really strong durable growth in cloud subscriptions. How should we think about maybe that total market opportunity from your perspective?
Jeff Rosica -- Chief Executive Officer and President
Yes. This is Jeff. I mean I don't want to necessarily give you just -- well, I won't want to give you in precise numbers, but I'll say this, if you look at our music space where you've got Pro Tools and Sibelius, though we have very large market share, we're still only a relatively small portion. Even in music, we're probably one-third of the market. There's still two-thirds of market that uses other tools. In Sibelius, it's even a bigger difference. In video editorial, we're probably -- it's total TAM, maybe 10%, less than 10% of the market.
So there's still like -- you can do the math. There's a pretty large opportunity for the company to expand this. I would also say that the pie itself is growing in that you're seeing growth, whether it's on the music side or on the video editorial side, content creation is growing. And so there's -- for us, we have a lot of runway left to continue to grow our opportunity here.
Samad Samana -- Jefferies -- Analyst
And then on the enterprise side of this, I appreciate the color around its contribution to growth. When we think about the opportunity there, at least, let's call it, maybe over the next six, 12 months, is it more about attaching subscriptions to the existing base? Or do you view it more as a new customer acquisition strategy to have these enterprise subscriptions?
Jeff Rosica -- Chief Executive Officer and President
So it's a little bit of both. I will tell you that the first rollout of the subscription is around what we call fusion packages, which are preset workflow packages around the MediaCentral platform. And these are designed to either get greater share of a current account or to, in other words, take a competitor out with a specific workflow or application of the customer, but it's largely also to get new customers on to the platform. And so while we are converting some existing customers over to these offerings, we're also having great success in getting new customers on. And so it is designed to be a new customer acquisition tool.
One of things we found in subscription, the subscription really does open up opportunities for customers that maybe thought or maybe even improperly felt they couldn't enter with an Avid solution. I think we learned pretty quickly that when you offer a subscription offering, it really allows people a lower entry point, an easier entry point into our solutions. So we do see it as a very important driver of new -- again, new opportunities. And that's why we did these subscription packages to make it also very easy around enterprise customers to be able to acquire the right solution and then deploy it.
Samad Samana -- Jefferies -- Analyst
And then maybe, Ken, a couple of questions for you. I heard you mention on the enterprise license agreement, the renewals there and the one that you guys will come back to later. But maybe, again, stepping back and more broadly looking at, as contracts are coming up for renewal, how should we think about the general maintenance renewal rates? Are you getting pushback on price? Are you getting requests for discounting? Or you're renewing -- maybe how should we think about kind of the dollar-based retention on that maintenance?
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yes. No, I would say, in terms of the renewal rates, obviously, the ones that were impacted both this quarter and last quarter were more on the hardware side with live sound, and we expect to revisit that as that market recovers. But in general, the renewal rates for maintenance have been relatively stable, although we did see a little bit of weakness the last two quarters just because of the impact of the environment with COVID. And -- but we have been selectively increasing pricing to compensate for that, so to keep the dollars hold. So we saw sequentially our dollars in terms of maintenance revenue actually went up slightly. But we continue to, I would say, not look at big discounting to hold on to revenue. We've been able to kind of work in terms of actively working on our -- actively going out to negotiate the maintenance contracts to make sure that we continue to have strong and stable maintenance revenue.
Samad Samana -- Jefferies -- Analyst
Got you. And then just one last one, and then I'll cede the floor. But if I think about the cohorts of, call it, individual creatives that you've sold cloud subscriptions to. Any noticeable well differentials in the trends between the early cohorts versus the more recent quarters in terms of either retention or unit economics?
Ken Gayron -- Chief Financial Officer and Executive Vice President
So, we've actually -- on the retention rates, we've actually seen a slight improvement on the retention rate both on the annual paid monthly and annual paid annual. We continue to focus on providing the right level of customer service and nurturing those customers. In terms of the economic economics, we've been successful at driving price increases. We did that last July and still have accelerated revenue since those price increases. So we continue to drive more life time value with those customers. We expect that to continue over time because of: number one, our products are leading brands. They're well-regarded in the market, and people get a lot of joy from using them. So there's a lot of good momentum that we have in the marketplace.
Samad Samana -- Jefferies -- Analyst
Got you. Thanks again for taking my questions. We appreciate the color and great to see a good quarter.
Ken Gayron -- Chief Financial Officer and Executive Vice President
Thank you so much, Samad, appreciate it.
Operator
We'll take our next question from Jack Vander Aarde with Maxim Group. Please go ahead.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay, great. Hey Jeff take an exceptional results. Yes, a strong quarter. I think all the other analysts have been driving home that point as well, so appreciate you taking my questions. I'll start with a question for Jeff or Ken as well. In terms of LTAs, you mentioned you renewed three of those four LTAs that were up for renewal, but you also added a new enterprise customer under LTA. Just wondering if you -- are you able to share any additional color on this particular new LTA customer, maybe in terms of the duration of the agreement? Is it the typical three to five-year duration or/and what kind of types of product solutions are included in this LTA?
Jeff Rosica -- Chief Executive Officer and President
I don't -- we can't go too specific on this because it's not something we disclose and plus the customers don't want to disclose it if it's found out. But let's say, the one -- the -- first of all, yes, we've been renewing LTAs. The one area that's been more difficult is one related to live sound, as Ken mentioned in his remarks. We believe the live sound partners will come back on board once they really see their end market start to come back together. And again, that may be a year out. We've also been bringing in new agreements. And so we have been still keeping a very strong performance in this area of the business. The LTA that you're talking about is a three-year agreement. It does include several products from our portfolio, and it's probably the general -- it's probably the most I can give you the moment on that one.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. No, that's helpful. And I appreciate any color you can provide. I understand it's not necessarily publicly available information or things you want to provide, but that's helpful. And then just of the -- I guess if I just continue with this customer though. Of the products that they are for, are you able to say if anything, how that relates maybe to the three new releases that you made in Q3 with MediaCentral and Avid Connector and enterprise subscriptions for MediaCentral. Are any of those three categories, is there a chance that they are going to be involved in this contract? Or are they interested and maybe already paying for?
Jeff Rosica -- Chief Executive Officer and President
Look, it's not -- well, I -- not directly were they involved, but they -- anybody who does who -- anybody who is a MediaCentral customer has the ability to add any of the modules or applications that we have in that. And again, I don't have all the details of again what they're allowed to within agreement or not. But I would say there are a lot of our larger customers, before they sign agreements like this, they do look at our roadmaps. They want to understand when they sign a multi-year agreement, where are we heading. It's not that we make any commitments to them, but they generally want to know what we're investing in and where we're heading generally. And so they've all -- when people sign those, they've got a pretty good idea what our innovation plans are in general.
Jack Vander Aarde -- Maxim Group -- Analyst
Sure, sure. Absolutely. I appreciate the added color there. And then I'll switch gears quickly. Maybe a question for Ken. Subscription business momentum continues to accelerate. A major bright spot for you guys. Obviously, you've talked a lot about this call and previous calls that annual paid upfront subscriptions are increasing in mix. I believe you referenced like a 23.5% or so of those total subscriptions are annually upfront, which is almost double the mix last year. But my question is, in terms of total subscribers added during this quarter and even previous quarters, recent quarters, can you provide any color on what the percentage of new subscriber adds are in terms of like on a geographical basis, you provide three regional kind of segments. Wondering if you could talk about subscription strength, new subscription adds in each region, where the strongest adds coming from maybe and how the annual paid upfront mix happens in each of those three regions?
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yes. No, I would say that we're global. The subscription business continues to be impressive in terms of its growth rate. It is sold mainly through our e-commerce engine, but also sold through partners. It really is sold globally. In terms of breaking out geographies, that's something that at this point that we just don't do. And we'll look at potentially providing other metrics related to subscription over time. But at this point, we're not breaking out geography.
Jack Vander Aarde -- Maxim Group -- Analyst
Okay. Fair enough. And regardless -- I mean, the business, the subscription momentum is exceptional and accelerating. So that's certainly a bright spot. Congrats on that. And then I guess, lastly, I'll just squeeze in a question more related to fourth quarter outlook. You guys talked about free cash flow. Free cash flow is exceptional again in 3Q. I mean a record high really. And given your comments that you expect Q4, there'd still be a seasonally strong free cash flow quarter. I'm trying to figure out what that implies then for the EBITA comments you've provided for the fourth quarter. So EBITDA is supposed to be up year-over-year, I believe you said. But I'm not sure you've necessarily said on a Q-over-Q basis. I guess, one, is that correct?
Ken Gayron -- Chief Financial Officer and Executive Vice President
I mean, I would say our outlook is that we expect our fourth quarter to obviously have sequential improvement in revenue. We expect good performance in terms of sequential improvement, in terms of the dollar of EBITDA and year-over-year improvement in EBITDA margin. And then when you think about free cash flow, stronger EBITDA is one component, but our working capital position is very favorable right now with very high receivables which will help our collections and low payable. So we think we will generate very strong free cash flow in the quarter and our LTM free cash flow should progress over -- in over time. So we have a clear guidance to improving free cash flow and improving conversion of EBITDA to free cash flow.
Jack Vander Aarde -- Maxim Group -- Analyst
Yes. That makes a lot of sense. I appreciate the color there. And then just as it relates back to the EBITDA and the revenue growth sequentially here as you look at the fourth quarter, in terms of gross margin because it's very sensitive to revenue mix, obviously. And just wondering if -- I mean, would it be reasonable to assume in software and hardware products, it's starting to recover, not quite to the normalized levels, but it's getting there. So that is a lower margin, though, I believe so. Is that -- I mean where do you see gross margins, I guess, on a sequential basis for the fourth quarter, assuming that, that trend continues with an increasing mix of hardware revenue?
Ken Gayron -- Chief Financial Officer and Executive Vice President
Yes, so I would sequentially we do expect, as Jeff pointed out, our integrated solutions to kind of continue to perform better in the fourth quarter. As we think about gross margin those -- some of those revenue lines will have lower gross margin than, let's say, our subscription or software. So that will impact overall gross margin, but we'll have more gross profit dollars, which will add to the EBITDA. So gross margin sequentially could be impacted on the negative side slightly because of the increase in revenue from the integrated solutions in the fourth quarter. The other part of it is -- yes. So I think those are -- that's the main theme you would expect.
Jack Vander Aarde -- Maxim Group -- Analyst
Thanks so much. Appreciate it.
Operator
And ladies and gentlemen, this will conclude today's question-and-answer session. I would like to turn the conference back to Jeff Rosica for any additional or closing remarks.
Jeff Rosica -- Chief Executive Officer and President
Well, thank you, operator, and thanks again to our investors, our analysts and others for joining us today. As I said earlier, we're very pleased with Avid's third quarter performance, the resilience we've shown in our business and a uniquely strong position to capitalize on our market recovery as a result of our commitment to our strategy and operational and fiscal discipline. Look forward reporting our progress when we deliver our fourth quarter and full year results next year and hope everyone will remain safe and healthy until we have the opportunity to speak with you again. So have a good evening.
Operator
[Operator Closing Remarks]
Duration: 59 minutes
Call participants:
Whit Rappole -- Vice President Corporate Development and Investor Relations
Jeff Rosica -- Chief Executive Officer and President
Ken Gayron -- Chief Financial Officer and Executive Vice President
Steve Frankel -- Colliers -- Analyst
Josh Nichols -- B. Riley -- Analyst
Nehal Chokshi -- Northland Capital Markets -- Analyst
Samad Samana -- Jefferies -- Analyst
Jack Vander Aarde -- Maxim Group -- Analyst
