Avid Technology, inc (AVID) Q2 2021 Earnings Call Transcript

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Avid Technology, inc (AVID)
Q2 2021 Earnings Call
Aug 3, 2021, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Avid Technology's Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

Now, let me turn the call over to your host for today's call, Whit Rappole, VP of Investor Relations.

Whit Rappole -- Vice President of Corporate Development and Investor Relations

Thank you, operator. Good afternoon, everyone. And thank you for joining us today for Avid Technology's second quarter 2021 earnings call for the period ending June 30, 2021. 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 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, this presentation 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, except for revenue, which is always GAAP. 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

Thanks, Whit, and thanks to everyone for joining us to review Avid's second quarter results. We are pleased with the continued progress this quarter as we saw sequential revenue growth and strong year-over-year growth in revenue, earnings, adjusted EBITDA and free cash flow. At this point, we remain confident in our outlook for 2021. And we have raised our full year 2021 free cash flow guidance and reaffirmed all other full year 2021 guidance items. Now, there's a lot we want to share with all of you today, so let's get started. During the second quarter, the three main takeaways that I would like to review with you are: first, we continue to have robust year-over-year growth in our subscription business. Second, the gradual recovery we have seen in our Integrated Solutions business since late 2020 accelerated during the second quarter.

And third, we continue to deliver healthy profitability and free cash flow. These factors helped us to deliver a strong first half of 2021 and give us confidence in our ability to achieve the full year 2021 guidance that we gave earlier this year. Now, let me dig in a bit more and provide some additional specifics on each of these three areas. First, we saw a sustained robust year-over-year growth in our overall subscription business, including solid performance across our creative tools and continued strong adoption of our enterprise subscription offerings. Cloud-based software subscriptions grew 43.2% year-over-year as both individuals and enterprise customers continue to embrace the new business models, which is great to see. Subscriptions for our creative tools continue to be strong overall growth trajectory.

As the anniversary of the start of COVID passed, we saw increased purchases of certain creative tools during the initial months of the pandemic and as many customers adapted to remote work and stayed home restrictions. Demand for these products remain strong and growing. And we continue to innovate and invest in marketing to drive sustained growth in our creative tools. During the second quarter, we saw strong adoption of MediaCentral subscription offerings. We see global enterprises increasingly use subscription licensing to centralize license management as well as to ensure that their organizations are on the most recent releases of our software. We added the several new MediaCentral enterprise subscriptions with marquee enterprise customers during the second quarter. The annual price of that MediaCentral state subscription is generally multiples of the average annual price of our creative solutions and depending on the configuration.

So this growth is especially encouraging and we're just getting started with our enterprise customers. In addition, we saw increased contribution from our Avid Edit On Demand SaaS offering and other cloud-based solutions and the sales pipeline for these products remain strong. Next, during the second quarter, the recovery from the impacts of COVID, which we have seen since the third quarter last year really strengthened. The year-over-year and sequential recovery in our Integrated Solutions business was driven by strength in many product areas. Our storage business saw an increase in purchases of on-premise hardware by customers as their production schedules gradually returned to normal levels and they resume investing in capacity and updates to the latest technology to support their more distributed work environments. We also saw a strong increase in the Live Sound solutions due to the return of many music festivals and touring activities as the frictions have loosened up in certain parts of the world.

While they're still not back to pre-pandemic levels, Live Sound revenues were higher than in any quarter since the start of the pandemic. Our other audio integrated solutions, including Control Services and audio interfaces also continued to grow nicely. The recovery in integrated solutions volumes, particularly higher-margin storage also contributed to a significantly improved quarterly gross margin for integrated solutions overall. And third, during the second quarter, we continue to deliver healthy profitability and free cash flow. We realized strong revenue growth during the second quarter, driven by the ongoing recovery of our markets and the new product innovations we've delivered in recent periods, resulting in nearly 20% year-over-year revenue growth. Revenue growth combined with the benefits from the cost structure improvements and operational efficiency programs that we put in place last year, drove year-over-year improvement in our ability.

Now, while certain of these cost-saving measures were temporary during Q2 and Q3 2020, we have remained diligent in our spending controls as we continue to look at smarter ways to manage our business, resulting in a year-over-year increase in adjusted EBITDA and 108% year-over-year increase in non-GAAP EPS. Additionally, we delivered strong positive free cash flow and typically a weaker free cash flow quarter. Now, let me end my prepared remarks by talking a bit about where we see things going forward from a business perspective. We are expecting to see the gradual recovery from COVID globally to continue through the second half of 2021. However, we do remain cautious as the recovery in integrated solutions could be uneven due to the impact of the COVID Delta Variant or other factors. We expect creative individual subscriptions to continue on a solid growth trajectory, driven by new product offerings and innovations.

We continue to deliver new subscription software solutions, including one we announced late last week, Sibelius for mobile, which fully integrates the Sibelius music notation experience across the world of mobile and desktop and premise users to work on their iOS device, their laptop or both. Our recent notable releases include new feature-rich Pro Tools and media composer software releases and adding the capability to now publish Dolby Atmos music tracks to apple music from our at the play service. Enterprise subscription continues to strengthen, and we expect will become a larger part of our overall subscription business, largely driven by MediaCentral, but also from expanding deployments of our creative tools across many of our enterprise customers around the globe. As we continue to add new innovations and educate our customers about the benefits of the subscription offerings, we expect to see continued robust growth, and we expect continued success in getting customers to adopt and expand their usage of our cloud solutions, including Edit On Demand, which was introduced at the end of the first quarter.

Finally, we continue our efforts to improve efficiency and maintain the cost discipline that we've been so focused on for the past 15 months. We have reduced spending on our certain legacy products, allowing us to increase spending on new product innovations in our growing subscription and cloud areas. In addition, as we have discussed previously, we have made certain investments to support our digital animation and various infrastructure improvements to enable us to more profitably scale our subscription and SaaS business. We believe the new products and features we have recently introduced, combined with the operating improvements we made during the past several quarters, position us well for further growth and improve profitability, while generating strong free cash flow as we move forward through 2021 and beyond.

So now, with that, let me turn the call over to Ken to review more of the financial details. So take it away, Ken.

Ken Gayron -- Chief Financial Officer and Executive Vice President

Thank you, Jeff, and good afternoon, everyone. We are pleased with our business and financial results for the second quarter of 2021. Our year-over-year growth driven by continued strong growth in our creative and enterprise subscription revenue and a recovery in our Integrated Solutions business, together with our efficient cost structure delivered strong profits and free cash flow. Our focus for the remainder of 2021 will be to continue building our subscription revenue and to improve the nonrecurring portions of the business related to integrated solutions. We expect these efforts to result in continued improvement in our key financial metrics, including higher levels of profitability and free cash flow in the second half of 2021. With that, let's turn to the details of our second quarter financial results. We are encouraged by the continued growth of our subscription base, which reached a new high in paid subscriptions. Our total subscription count reached approximately 346,000 at the end of the second quarter, an increase of 43.2% year-over-year.

In the second quarter, we added roughly 19,000 net new subscriptions, including 15,000 net new subscriptions for our creative software solutions as well as 4,000 net new subscriptions for MediaCentral. Our enterprise solution, which we expect to drive our next stage of subscription growth. This is the first quarter that we are including MediaCentral subscriptions in our reporting as the count has now reached a material number. MediaCentral subscriptions are sold as a number of seat licenses. And these seats are included in our subscription count. At the end of the second quarter, we had approximately 7,000 MediaCentral subscriptions. We started offering MediaCentral subscriptions during the fourth quarter of 2020. And we have revised the total subscriptions count for the fourth quarter and first quarter of 2021 in the chart to include the MediaCentral subscriptions. We will continue to include MediaCentral subscriptions in the count going forward.

Subscription growth was strong for all of our creative tools, with Pro Tools up 40% year-over-year, Media Composer up 50% year-over-year and Sibelius up 30% year-over-year. Annual paid upfront subscriptions for our creative tools continue to grow nicely, increasing 101% year-over-year and now represents 31% of our total subscriptions, up from 22% a year ago. In addition, MediaCentral subscriptions are at least one year duration. And as Jeff mentioned, the annual price of MediaCentral seat subscriptions is generally multiples of the average annual price of one of our creative solutions. Now, moving to the composition of our revenue. The continued growth in the number of paid subscriptions for our creative tools as well as new subscriptions for MediaCentral drove continued year-over-year growth in subscription revenue during the second quarter, reaching $21.5 million, an increase of 30.9% year-over-year.

We believe demand will continue to be healthy and growing for our creative subscriptions and new enterprise subscription offerings as we are driving more innovation and additional marketing spend to capture this large and growing market opportunity. As mentioned during our first quarter 2021 earnings call, the first and fourth quarters provide the largest natural opportunity for us to convert enterprise customers from their existing perpetual licenses with maintenance contracts to subscription agreements, given traditional enterprise budget cycles and the number of existing maintenance contracts that renewed around the calendar year-end. As a result of this seasonal pattern, we expect year-over-year subscription revenue growth to lag total subscription growth in the second and third quarters. And for year-over-year subscription revenue growth to exceed total subscription growth in the first and fourth quarters.

Overall, we expect to continue to see strong year-over-year growth in our subscription revenue each quarter throughout the year as more of our enterprise customers move to subscription models. Maintenance revenue was $30.4 million during the second quarter, down 0.4% year-over-year and up 2% sequentially. Maintenance revenue remained stable as we saw improving renewal rates on our maintenance contracts and contribution from the stronger product sales in the first half of 2021, offset by the transition of certain enterprise customers for maintenance software contracts to subscriptions in recent periods. Looking forward, we are seeing an improving trend in the renewal rate of maintenance contracts related to integrated solutions, which we expect should provide stability and growth for our hardware maintenance revenue moving forward as our integrated solutions business continues to recover with the overall market.

Total subscription and maintenance revenue increased year-over-year by 10.5% in the second quarter as subscription revenue growth was diluted slightly by the slight decline in maintenance revenue. Subscription revenue is getting closer to maintenance revenue, the combined subscription and maintenance revenue growth should more closely track subscription growth going forward. Perpetual license revenue was $5.9 million, down 14% year-over-year in the second quarter as we have deemphasized perpetual licenses and focused on strategic subscription revenue. Total software revenue from combined subscription and perpetual license increased year-over-year by 17.7% in the second quarter. Our Integrated Solutions business continue to make a strong recovery off the low in the second quarter of last year due to COVID. Integrated Solutions revenue was $31.3 million in the second quarter, an increase of 50.5% year-over-year and an increase of 19.5% sequentially.

Within integrated solutions, revenue from our storage products was up sharply, both year-over-year and sequentially as our enterprise customers continue to recover from the pandemic. Live sound product revenue was also up significantly year-over-year and sequentially due to continued market recovery as many festivals and touring acts resumed. The live sound recovery was ahead of our expectations for the quarter. Audio control services revenue also increased nicely year-over-year as many larger studios began to add new capacity. Pro Tools audio hardware revenue increased year-over-year in the second quarter, driven by sales of Pro Tools carbon interface introduced during the fourth quarter of 2020. Finally, video service and Graphic Solutions revenue were down year-over-year as we have deemphasized certain of these solutions and the revenue from these product lines remains below pre-pandemic levels. The balance of our revenue comes from our professional and learning services businesses.

Professional services revenue was $5.7 million in the second quarter, an improvement of 23% year-over-year. Now, moving to recurring revenue and annual contract value. In the second quarter, LTM recurring revenue was 76% of total revenue, up from 70% in Q2 of 2020. The LTM recurring revenue percentage increased due to higher subscription revenue and revenue from our long-term agreements and from lower nonrecurring product and professional services revenue in the last 12 months. Annual contract value was $293.1 million at the end of Q2, up 10.5% year-over-year. ACV benefited from the strong year-over-year growth in subscription revenue, an improvement in contribution from strategic purchasing agreements with our channel partners. ACV was down sequentially due to the impact of the greater enterprise subscription sales during the first quarter of 2021 associated with the maintenance contracts that renewed around calendar year-end as we have discussed before. During the second quarter, we added one new strategic purchase agreement. We successfully renewed all five strategic purchasing agreements that were up for renewal.

Now, let us look at the rest of our financial results for the quarter. Total revenue was $94.9 million in the second quarter, an increase of 19.7% year-over-year and a slight sequential increase. At constant currency, our second quarter 2021 revenue increased 16.2% year-over-year. Non-GAAP gross margin was 63.9% for the second quarter, down 150 basis points year-over-year due to the sales mix from greater integrated solutions revenue as well as two non-onetime events, an $800,000 royalty license accrual true-up related to our creative software solutions and a $400,000 in costs related to a strategic professional services commitment. Absent those nonrecurring items, non-GAAP gross margin would have been over 65% in the quarter. Non-GAAP operating expenses for the quarter were $47 million, a $6.5 million increase year-over-year. Operating expenses during the second quarter of 2020 included significant temporary cost savings initiatives put in place due to COVID, including temporary employee deferrals. While many of the temporary cost-saving efforts are no longer in effect, we have continue to exercise similar discipline in managing our expense structure. Overall, we remain on target for approximately $119 million in non-GAAP operating expenses for fiscal year 2021.

Non-GAAP net income per share was $0.25 for the second quarter, up from $0.12 in the second quarter of 2020, reflecting the increase in operating income and the reduction in interest expense. Adjusted EBITDA was $15.8 million in the second quarter, up 17.1% or $2.3 million year-over-year due to the increase in gross profit from higher revenue. Adjusted EBITDA margin was 16.7% in the second quarter. Free cash flow was $5.6 million in the second quarter, an improvement of $10.8 million year-over-year due to the improved operating results and favorable working capital trends as we continue to move more subscribers to annual paid upfront subscriptions. We also paid the last $3.5 million of the employee 2020 bonus in cash during the second quarter. Working capital was a use of cash of $6.5 million in the quarter. We are continuing to see improvement in Avid's working capital cycle as our business moves to more software and annual paid upfront subscriptions. Capital expenditures were $1 million during the second quarter, down slightly from the second quarter of 2020.

As we previously have mentioned, we expect that capital expenditures and prepaid expenses will increase by several million dollars during the second half of 2021 as we will be investing in internal operations to support our expanding subscription business. Now, let us turn to the balance sheet. The cash balance at June 30 remained strong at $53 million. Accounts receivable increased $5.8 million year-over-year due to an increase in billings. Net inventory decreased $5.4 million year-over-year due to increased integrated solutions shipments in the quarter and improvements in operational efficiencies and forecasting that drove reductions in hardware inventory levels. Accounts payable increased $3.9 million year-over-year to support the growth in our business, while DPO continued to trend down. Total debt decreased to $182 million at the end of the second quarter as we continue to strengthen our balance sheet following the refinancing completed in the first quarter. Net debt was $128.8 million at the end of the second quarter.

Our strong free cash flow and growth in adjusted EBITDA continues to improve all of our credit metric with net debt to adjusted EBITDA of 1.7 times at the end of the second quarter, down from 3.4 times in the prior year period. Overall, we are pleased with the health of our balance sheet as the reductions to long-term debt and to total leverage provide the company more flexibility to operate and grow its business and to explore capital allocation alternatives to drive long-term shareholder value as we outlined at our Investor Day earlier this year. Let us now turn to guidance. Given our favorable performance in the first half of 2021 and the recovery in the end markets, we are raising our guidance for full year 2021 free cash flow. And we are reaffirming the rest of our guidance for full year 2021. We are also providing third quarter 2021 guidance as follows: our total revenue guidance for the third quarter of 2021 is $94 million to $100 million, a range which represents year-over-year revenue growth of 7% at the midpoint.

Our subscription and maintenance revenue guidance for the third quarter of 2021 is $51 million to $55 million. Our non-GAAP net income per share guidance for the third quarter of 2021 is $0.20 to $0.28, assuming 47.2 million shares outstanding. Our adjusted EBITDA guidance for the third quarter of 2021 is $14 million to $18 million, a range that will result in LTM adjusted EBITDA at the end of the third quarter of $71.1 million at the midpoint. We reaffirm our full year 2021 guidance for revenue, subscription and maintenance revenue, adjusted EBITDA and non-GAAP net income per share that was issued on May 5, 2021. Our total revenue guidance for 2021 remains $382 million to $402 million. Our subscription and maintenance revenue guidance for 2021 remains $217 million to $225 million. Our adjusted EBITDA guidance for 2021 remains $69 million to $79 million, and our non-GAAP net income per share guidance remains $1.05 to $1.27 per share for 2021. We are raising our guidance for full year 2021 free cash flow to $49 million to $57 million as our first half free cash flow performance and our trajectory gives us confidence in our 2021 free cash flow.

With that, I'd like to turn the call back to Whit.

Whit Rappole -- Vice President of Corporate Development and Investor Relations

Thank you, Ken, and thank you, Jeff. That concludes our prepared remarks.

And we are now happy to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

[Operator Instructions] And we will go first to Josh Nichols of B. Riley Financials.

Josh Nichols -- B. Riley Financials -- Analyst

Yeah, thanks for taking my question and great to see the breakout for MediaCentral with some strong transaction in just over two quarters of subscription revenue sales here. I guess, could you kind of elaborate on that. Is the pace that you're currently seeing, do you think that that's sustainable or would you expect that to accelerate? I'm just trying to get a little bit of frame of reference for how quickly the enterprise subscription business may grow over the back half of this year and into next?

Jeff Rosica -- Chief Executive Officer and President

Yeah. Thanks. So it's a good question. I think I appreciate you've been on the call. So I think as Ken said, Q1 and Q4 are always going to be stronger enterprise quarters because that's where the biggest opportunity to convert some of the enterprise customers over to subscription AR. But that said, we are seeing a pretty continuous opportunity quarter-by-quarter to move them over. Look, I think we're really early in the process. I think as Ken kind have commented, it's -- we're still very early in this opportunity to convert the enterprise customers. So there's a lot of opportunity ahead of us. I think there's going to be a lot of conversion possible. And I think we see that trend continuing. I wouldn't want to say what we predict each quarter. But I think when you look at year-by-year, we're going to see a lot of very positive momentum from enterprise subscription customers.

Ken Gayron -- Chief Financial Officer and Executive Vice President

Yeah. I'd like to add Josh, to echo Jeff's thoughts, we have over 1,000 enterprise subscription -- enterprise customers that are candidates for moving two subscription models. Some of these customers may buy a dozen or two dozen licenses, but there are larger customers that could buy 1,000 seats. And as the model for enterprise matures in the coming years, there's a tremendous opportunity for additional growth. And as Jeff pointed out, we've only converted a very small percentage of these customers. So there's an incredible opportunity to drive not only license growth but revenue growth. And as we move those customers, that will expand our gross margins and profitability.

Josh Nichols -- B. Riley Financials -- Analyst

Then one follow-up question for me. I guess, good to see the return of the integrated solutions here. That was like the one piece of the business, right, that had been hit worse during the pandemic. I guess, could you kind of help frame a little bit what you're seeing and how sustainable that growth would be with the return of live music? And as we start to think about '22 a little bit more, we've heard a lot of positive industry data points about concerts and things like that. I guess, how much of a jump could we see in this business segment, if we kind of compare it to pre-COVID levels?

Jeff Rosica -- Chief Executive Officer and President

Well, I don't want to necessarily compare to pre-COVID or talk about quarter-to-quarter to jump in any period, Josh. But I think that what we are going to see as we've talked about is we're going to continue to see a gradual recovery in these markets. Now, we did see a very strong recovery in Q2. But as we look ahead, we are continuing to see the signals from the market is that, I think it's kind of three major categories I would say. The more production customers that are working on TV and film are continuing to give really good signals about their return to production and they're continuing to bring back full production around the world. Again, there's different situations going on in different parts of the world. But we're seeing them from a global perspective I'll say. We're continuing to see that market strengthen. I think the larger enterprise customers, the broadcasters and media companies, they're definitely greenlighting their bigger projects again.

And so, we're seeing -- we're continuing to see a solid funnel and a good opportunity to do some of these bigger projects with the enterprise customers. And in the live sound market, I think we've all seen in the news, music concerts and festivals and also fixed facility. People who invest in churches or concert halls or things like that or broadway shows, we're starting to see those come back online. So I think overall, we're seeing a great trend. And again, it could be lumpy depending on how things unravel with COVID. But I think what we're seeing is a trajectory that's positive, and we're seeing recovery continuing around the world.

Josh Nichols -- B. Riley Financials -- Analyst

Thanks guys, appreciate it.

Jeff Rosica -- Chief Executive Officer and President

Thanks, Josh.

Operator

And we'll go to our next question from Steven Frankel with Colliers.

Steven Frankel -- Colliers -- Analyst

Good afternoon and thanks for the opportunity. Jeff, I just wanted to dig into the subscription numbers. And yeah, I really appreciate you breaking out MediaCentral from the creatives. And while it's up nicely year-over-year, that creative tool net add number is relatively much smaller than we've seen for several quarters. How much of that is a function of those people buying last year during the pandemic that now maybe are back to work and therefor their subscriptions are lapsing or is there another dynamic at play here?

Jeff Rosica -- Chief Executive Officer and President

Well, I think yeah. There's a couple of things. First of all, the comp, as we know, Q2 is a tougher comparison given the abnormal condition we saw last year due to COVID. But I'll say that we continue to see really strong subscription adds across the portfolio and gross license. Don't forget too Steve that Q2 is -- if you take -- you got to kind of look at COVID has a kind of a weird anomaly and also even seasonality. But if you remember going back a couple of years, Q2 has always been one of our seasonally weaker quarters for net adds just because you've got the calendar of education markets. And so, that's always going to weigh on Q2 from a net adds. But again, we delivered a very, very strong net adds for the quarter and we're very happy with that progress. I think it's just -- again this is a tougher comparison given where we are last year. But we like what we're seeing on the trajectory of the market. And we like what we see as we look toward the second half and we look toward '22.

Steven Frankel -- Colliers -- Analyst

And how large does MediaCentral has to get before it starts to have an ability to lift overall ARPU in the subscription business?

Jeff Rosica -- Chief Executive Officer and President

Well, I think every ad that comes from MediaCentral is going to increase ARPU. Obviously, you can do the math as we continue to -- as that new gold bar gets bigger and bigger, obviously compared to the other bars in the chart, it's going to continue to have a positive benefit on ARPU. So for us, it's -- that's all upside from an ARPU perspective as we add more enterprise customers.

Steven Frankel -- Colliers -- Analyst

Okay. And you'd expect software margins to recover in Q3 -- Q2 that was really the one-off nonrecurring charges that put the Pro Tools?

Ken Gayron -- Chief Financial Officer and Executive Vice President

Yeah. Overall software margins should recover given those two one-off items. And overall, the total gross margins of the company we should track north of 65%, which would have been the gross margin in Q2, absent those one offs. So the team is doing a lot of great work in terms of looking at our gross margins and software, but also in hardware. And we're looking at continuing to optimize our gross margin profile moving forward. We feel very confident about the margin trajectory in the company.

Steven Frankel -- Colliers -- Analyst

Okay, great. Thank you.

Jeff Rosica -- Chief Executive Officer and President

Thanks, Steve.

Operator

And so we go to our next question from Nehal Chokshi.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Yeah. Thank you, and congrats on yet another strong free cash flow quarter, raised free cash flow guidance, that's great. And also, definitely that subscription is up 30% year-over-year, that's robust than almost in anybody's book. Was this though in excess of your expectations that embedded that subscription plus maintenance guidance would grow 13% year-over-year for the quarter?

Ken Gayron -- Chief Financial Officer and Executive Vice President

Yeah. So our subscription plus maintenance business continues to perform well. I would say that when we look at subscription plus maintenance, we raised guidance last quarter Nehal. We continue to see the trajectory moving forward very positively. And we expect to have a very strong second half. So we're very confident in achieving the higher subscription and maintenance guidance for the year.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Okay. Understood. And then, just I believe that this has been addressed in the past, but just to make sure it's clear for everybody here. A lot of investors that are new to Avid are not familiar with the accounting that could create Q-o-Q declines in the subscription revenue. Can you just go over that real quickly?

Ken Gayron -- Chief Financial Officer and Executive Vice President

Yeah. So in terms of the accounting, we follow accounting ASC-606. So with respect to certain seasonality, especially with respect to our enterprise agreements, we have a lot of renewals that come in at the calendar year-end for maintenance. And then, we will be converting those enterprise customers to subscription. Likely more in the first and the fourth quarter, that's where the heavier amount of the enterprise subscription revenue will be driven. And because of the accounting, there is an upfront portion that's recognized at the time of signing the agreement. So when the enterprises with the weight of the renewal being in the first and fourth quarter, we expect stronger subscription revenue in those periods. So that is a function of both the accounting, but also the pattern of when our enterprise business contracts its maintenance cycle. And then, obviously, we're trying to move those customers to subscription.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Understood. And then, I know also a lot of investors try to do an ARPU calculation on your subscription. And there's an implied year-over-year decline here. I believe this has a lot to do with the seasonality of the enterprise subscription. But can you just walk through that as well?

Ken Gayron -- Chief Financial Officer and Executive Vice President

Yeah. So in terms of the ARPU, again, we -- because of the seasonality of the enterprise, the first quarter and the fourth quarter will have more enterprise revenue. Those are at higher values in terms of price per seat. So that's when you would expect to have stronger ARPU in those periods. Again, we feel very good about the direction of the subscription business. And as a result, we're reaffirming the higher guidance that we gave in subscription plus maintenance last quarter.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Right. Okay. And so, to be crystal clear here, then, you haven't seen any pricing pressure or more than usual discounting on any of the pieces that composed subscription at this point in time, correct?

Ken Gayron -- Chief Financial Officer and Executive Vice President

Nothing out of the ordinary. We do run promotions like every company. But we are very diligent in terms of driving favorable gross margin for our business. And we had a couple of one-offs that we mentioned in the call. Absent that, we would have been over 65% gross margin. So we feel good about the direction of our margin profile and the discipline that we have in the sales organization.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Okay. Great. And then, my final question is that -- so now, you're anniversarying the cohorts of pandemic in pandemic accretive. Have you seen any change in renewal rates between the -- what I'll call the pandemic cohorts versus pre-pandemic cohorts?

Ken Gayron -- Chief Financial Officer and Executive Vice President

No. We have had, I would say, the renewal, what I would call, the retention rates continue to remain stable. And at this point, we are very optimistic on the subscription business. The team is continuing to invest more in customer success in nurturing programs to continue to even strengthen that as we look out in our model. So we feel very good about the direction of the retention.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Excellent. Thank you very much.

Jeff Rosica -- Chief Executive Officer and President

Thanks, Neal.

Operator

And we'll go next to Jack Vander of Maxim Group.

Jack Vander -- Maxim Group -- Analyst

Great. Solid results, guys. Jeff, in your prepared remarks, you talked about live sound. So to Ken, I believe too, we followed up with it. But revenues were higher than any other quarter during the pandemic, still below pre-COVID. But just wondering how much -- as you look at your 2021 guidance decision during this quarter here, wondering how much of a role the delta variant, just kind of the uncertainty with that and just COVID in general, how much role that played in your decision to maintain the revenue guidance for 2021? Just because of uncertainty maybe relative to what you're thinking about that a month ago or two months ago?

Jeff Rosica -- Chief Executive Officer and President

Yeah. I think -- well, look, I think the COVID situation is different every month. And I think that what I'd say is the industry -- our industries have started to adapt and are starting to manage our way through it. So I don't know if there's going to be that big of an impact one way or the other on the markets. Again, we got to be careful. It's -- I think the best way, I think I said before is we're cautiously optimistic. That's the way we're proceeding with things. I'd say we're being balanced in our approach. And we're trying to stay very balanced in what we're doing. And we're keeping an eye out in the future. But so far, look, even remember that the trends are global. We're not just looking at U.S. trends, we're looking at trends in every country of the market. So every market is different situation. What we are seeing is live sound and live events are coming back. As I said in my remarks, it could be uneven at times, and that's why we're being, I'd say balanced in our approach.

But we like the trend and we like what we're seeing going forward. We like the funnel we're seeing ahead of us. So overall, I think it's -- I think we're going in the right direction. It is going to be a gradual recovery. It could be uneven at times for these integrated solutions part of our business. The pricing -- a lot of our business remember is 75% of our -- 76% of our business now is recurring revenue. So it really is the part that can, let's say be uneven is becoming a small and smaller part of our business. So as we've seen through the whole pandemic, our recurring revenue business has been very stable and very predictable. So again, it's a piece of our business that we have to keep an eye on. But we like the direction that the markets are heading and we like what we're seeing.

Jack Vander -- Maxim Group -- Analyst

Great. I appreciate that added color there. And then, maybe a question for Ken, also maybe for Jeff as well. But it's good to see the subscription growth remains robust. MediaCentral enterprise subscriptions got that. That's very clear. If you factor those in now and retroactively. There's a limited bread crumb trail here to trace pack. But just wondering if you can dig into the momentum trend a little bit more of your MediaCentral enterprise subscription additions that you've had in the fourth quarter, which is probably the partial quarter and then the first quarter '21 and now the second quarter '21, where you added 4,000 of them. Just what are you seeing in terms of that trend? Is it noticeably picking up?

Jeff Rosica -- Chief Executive Officer and President

Well, it's -- again, as Ken said, there is seasonality, some seasonality to it. Look, every quarter, the sales team is focused on closing enterprise subscription business. And so, we'll have success every quarter. Part of it in Q1 and Q4, the reason why those are bigger is because the normal effort that our sales team is doing to get people on subscription. There is a bigger opportunity because there's a natural conversation that our sales team has at the time of renewal of a maintenance contract for the software maintenance contract at least to have that subscription discussion. So there's always going to be more energy and more opportunity in Q4 and Q1. But I will say this, that our Chief Revenue Officer, Tom Cordiner. He's got the team very focused on the subscription engine for our enterprise customers besides all of our creative tools too.

And I would say the sales team, as we've said, Ken and I said during Investor Day and even I think Tom talked about it. Our sales team is very focused on this. They're well incentivized to secure the subscription enterprise business. And we're going to see I think good efforts every quarter. Again, it will be different by quarter, but we like the momentum. We like what we're seeing. And as Ken said, a very, very small percentage. I mean, we're talking about a small -- very small single-digit percentage of our customers have been converted. And so, it's -- the opportunity stands ahead of us.

Jack Vander -- Maxim Group -- Analyst

Got you. And then, maybe just as a follow-up with that, just given your commentary on the very small percentage of enterprise customers who have converted. You also talked about like the range or the volatility kind of like in terms of the size of the initial deployment of the enterprise subscription. Any noticeable trends or interesting takeaways in terms of like the end vertical of those enterprise customers that have adopted the subscriptions in terms like what they actually do from a function?

Jeff Rosica -- Chief Executive Officer and President

Yeah. So it's a lot of different applications. I think you could kind of probably put the enterprise subscription market in a couple of big buckets. One is the larger broadcasters and media companies. And they're using them for newsroom, for sports production, for program production, news -- actually, the actual news creation. And so, and there's also the back office. And MediaCentral is not just about creative tools or supporting the creative workflows. It's also about ingest workflows and media management workflows and distribution workflows. So there's a lot of workflows that that encompass what MediaCentral can do. Now obviously, for the enterprise customers, our sales team is not just working on the MediaCentral. MediaCentral is a big part of it because there's a lot of applications that MediaCentral is focused on.

But they're also converting the creative tools, the editing tools, the sound mixing tools, etc, like Pro Tools and Media Composer. So it's a lot of opportunity they have in these customers from an application standpoint. There's also the post-production market, so whether it's audio post-production or video post production, there's opportunities there. Those are generally smaller to medium-sized businesses, but there's a large number of those around the world. And those customers are in the dozens to 50, 100 kind of license size opportunities. And as Ken said, our enterprise customers, you can get from hundreds to thousands in those customers for a number of seats that we convert just with one customer.

Jack Vander -- Maxim Group -- Analyst

Got it. And then, just one more question for me. Just given the Olympics are taking place right now. And you guys are heavily connected to the Olympics and your customers. Just wondering, is this sort of a onetime revenue catalyst in the cyclical kind of four year Olympics show with how this generates your revenue? Is this a onetime cost at all or growth cost for the third quarter in '21 or is it kind of immaterial and the grand scheme of things?

Ken Gayron -- Chief Financial Officer and Executive Vice President

Well, no, any revenue that is regarding the Olympics has already been taken. I mean, we have to be a little careful. Some of the Olympics business that we do, they're on already enterprise agreements or some kind of multiyear agreements. So that's already being recognized as a part of our recurring revenue. Now, there is things that are onetime at the event. I mean, they may do a small storage upgrade, or maybe just something like that. That business, if it's product-related has already happened, that happened -- well, some stuff happened a year ago, some stuff happened months ago. The only revenue that would be in quarter, I got to be careful, I'm looking over at our Chief Accounting Officer. There could be some project-related revenue that they would take when the Olympics is over or some PS revenue they would take when the Olympics is actually happening, but it's fairly small numbers and the scale of things. It's not significant. I'm looking at -- to make sure I'm answering that question right.

Jack Vander -- Maxim Group -- Analyst

That's good with me. Fine by me. That's it for me. I appreciate the results. Again guys, thanks.

Jeff Rosica -- Chief Executive Officer and President

Thank you.

Jack Vander -- Maxim Group -- Analyst

Great, thank you.

Ken Gayron -- Chief Financial Officer and Executive Vice President

Thank you.

Operator

And we'll hear next from Jordan Burick of Jefferies.

Jordan Burick -- Jefferies -- Analyst

This is John Barrett on for Samad. I wanted to ask a quick question about the go-to-market motion. S&M was pretty consistent quarter-to-quarter. Have you seen any notable changes or trends there, like with the reopening, maybe in person versus digitally that you think are worth calling out?

Jeff Rosica -- Chief Executive Officer and President

Well, we still are doing most of our sales engagement remotely. I mean like in certain markets, like our London team can go into London and see customers or some of our German teams can go into certain Germany customers or New York or whatever. So there is some face-to-face. But I'd say 95% of our engagements are still Zoom engagements or teams engagements or picture tool. So there's still fairly remote engagements. The one thing that's nice about the software subscription conversion is that unlike hardware business where you've got a larger project involved, our sales team is, to be honest, COVID really helped.

I think, teach our sales team and our commercial teams how to do those motions in a pandemic and how to do software business even though maybe people aren't physically in a site. I think the one thing that the pandemic helped us is people realized they needed more flexibility, and need more remote worker or distributed work capability. And so, that motivated people to really engage with us and engage with our commercial team to talk about a new way of commercially buying and deploying this technology. So it's really been a help for our sales team as they run their go-to-market or their sales motions customer by customer.

Jordan Burick -- Jefferies -- Analyst

Great. And then, kind of along those same lines. Given that the hiring environment has been a bit tough lately, how is sales higher during the quarter maybe versus your initial expectations heading into it?

Jeff Rosica -- Chief Executive Officer and President

I think it's running about -- I mean, you're right. In especially in tech businesses, the hiring is a little different than let's say in prior quarters. I think we're bringing on new people and we haven't had -- I'd say it's a little slower fill rate than we probably saw pre-pandemic. But I don't have exact numbers. I would hate to say something on the call that's not accurate. But I'd say the fill rates are a little bit longer, but I'm not sure like if I could got the data to really give you a precise answer, but happy to circle back on that.

Jordan Burick -- Jefferies -- Analyst

Awesome. Well, congrats on a great quarter.

Jeff Rosica -- Chief Executive Officer and President

Thank you.

Ken Gayron -- Chief Financial Officer and Executive Vice President

Thank you.

Operator

And so at this time, I will now turn the call back to our presenters for any additional or closing comments.

Whit Rappole -- Vice President of Corporate Development and Investor Relations

So thank you, operator, and thank you to everyone for your participation and your questions. So behalf on everyone at Avid, I want to extend our best wishes for the continued safety and health of everyone who follows and collaborates with us. We're deeply grateful for your continued support. So goodbye for now.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Whit Rappole -- Vice President of Corporate Development and Investor Relations

Jeff Rosica -- Chief Executive Officer and President

Ken Gayron -- Chief Financial Officer and Executive Vice President

Josh Nichols -- B. Riley Financials -- Analyst

Steven Frankel -- Colliers -- Analyst

Nehal Chokshi -- Northland Capital Markets -- Analyst

Jack Vander -- Maxim Group -- Analyst

Jordan Burick -- Jefferies -- Analyst

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