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Avid Technology, Inc. (AVID) Q1 2019 Earnings Call Transcript

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Avid Technology Inc. (NASDAQ: AVID)
Q1 2019 Earnings Call
May 6, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Avid Technology Q1 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Whit Rappole. Please go ahead, sir.

Whit Rappole -- Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for joining us today for Avid Technology's First Quarter 2019 Earnings Call. My name is Whit Rappole, Avid's Vice President for Corporate Development and Investor Relations. With me this afternoon is Jeff Rosica, our Chief Executive Officer and President; and Ken Gayron, our Chief Financial Officer and EVP. In their prepared remarks, Jeff will provide a strategic overview of our business, and then Ken will provide a detailed review of our financial and operating results, followed by time for your questions.

We issued our earnings release early this afternoon and we have prepared a slide presentation that we will refer to on this call. The press release and the 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.

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During today's call, management will reference certain non-GAAP financial metrics and operational metrics. In accordance with Regulation G, both the appendix to our earnings release today and our investor website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP measures and also definitions for the operational measures used on this call and in the presentation. Unless otherwise noted, all figures noted by management during the call are non-GAAP figures.

In addition, certain statements made during today's presentation contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our comments and answers to your questions on this call as well as the accompanying slide deck may include statements that are forward-looking and that pertain to future results or outcome. Actual future results or occurrences may differ materially from these forward-looking statements. For more information, including a discussion of some of the key risks and uncertainties associated with these forward-looking statements, please see our press release issued today and our 10-K for the year ending December 31, 2018 filed with the SEC.

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

Jeff Rosica -- President and Chief Executive Officer

Thank you, Whit. And thanks, everyone, for joining us on our call today.

For Q1, Avid's results showed continued evidence that our business and financial performance are improving and delivering results according to our strategy and plan. Along with our CFO, Ken Gayron, we'll provide insights into Avid's ongoing progress with our major initiatives, new product introductions and the positive customer momentum, all of which are resulting in better business performance and good value creation for our investors. We're also eager to discuss our achievements and excitement we've been gathering from our efforts at the Avid Connect and NAB events in April, and then we'll give plenty of time for answering your questions. So, let's get started.

So first of all, I'm very proud of the focus and the hard work from everyone across team Avid. The strong momentum we had exiting 2018 sustained through Q1 2019 as we continued executing on our strategy. I am pleased with the results we delivered in Q1, and together, we're continuing to optimize our operations and focus our product innovation to help drive more profitable and sustainable growth and to deliver greater shareholder value.

Overall, I do remain encouraged by the results we are seeing, especially in Avid's revenue growth, adjusted EBITDA, and free cash flow generation. I also have confidence that we'll continue to be successful in aligning our business model toward higher-margin recurring revenue that's going to provide us with greater visibility and the ability to better project future results.

As announced last month, we realized an important benefit of Avid's improving performance by also amending our credit facility at more favorable terms in order to secure the funds to address the upcoming maturities of our convertible notes. Ken will discuss this in more detail in a moment. While we're optimistic about our forward-looking prospects, the team will stay focused on executing against the plan, including completing our supply chain conversion by July 2019 and releasing our announced new products so we can continue to deliver improved financial results.

A key part of our plan is to enable product innovation that we can bring to market quickly. We're particularly happy with the very positive customer response we had at our initial introductions at the Avid Customer Association's Connect 2019 Conference and the NAB Show back in April. With new offerings spanning creative tools, the enterprise platform, and integrated solutions, we have bolstered our own confidence for continued growth in 2019 and beyond.

Our product strategy, I think, uniquely positions Avid as a trusted partner that enables customers to reimagine the way they work. And we continue to sign enterprise agreements with large media enterprises to secure their advantages with our products over multiple years.

As a first example, as we announced in April, HBO has virtualized the Media Composer editing and NEXIS storage resources available to hundreds of editing end users in its Manhattan facility. HBO's groundbreaking approach achieved entirely new levels of scalability and economy in their promotional content production workflows.

In another example, during Q1, Avid signed a multiyear enterprise agreement with CBS News that will upgrade the organization's Avid-based production infrastructure across multiple sites in the U.S. and Europe to the latest Avid MediaCentral Cloud UX platform, Avid NEXIS storage, Asset Management, as well as a host of professional services and training. The upgrade will give CBS new tools and solutions for enterprisewide search, retrieval and content repurposing, and will focus them on preparing a CBS News operation to be cloud-ready in the future.

Now let's look at Avid's Q1 performance which shows the continued momentum and indicates that the overall improvement plans and the changes we've been putting in place are indeed making an impact. GAAP revenue was up 5% versus the same quarter last year. This outcome represents the second consecutive quarter of GAAP revenue growth, which was driven by strong overall performance of our product sales, with the integrated solutions category showing solid growth, including storage, which had another very strong quarter.

E-commerce and subscriptions also continued to make major contributions, with revenues from our e-commerce activities growing 33% year-over-year in the quarter. Likewise, software subscriptions continued their strong growth trend, surpassing 137,000 paying subscribers at the end of Q1 2019, which was up 43% year-over-year.

Gross margin improved for the fifth consecutive quarter. While margins continued to improve through our targeted efforts and initiatives, in the first quarter, it additionally benefited from a favorable mix in high-margin storage. That said, we expect our margins to continue to improve in the second half of this year as we transition to our new supply chain partner, which today is progressing as planned and is expected to bring all the affected product lines into production by July 2019.

Now due to the strong revenue and improving gross margin, we realized better-than-expected adjusted EBITDA and net income in the first quarter. The team's overall execution, combined with the initial results of some of our key initiatives and improvement programs, also underlie the increased profitability. Finally, thanks to the improving financial performance of the company and strong execution overall, we were also able to deliver improved free cash flow generation in the quarter.

Now as I stated earlier, while we're encouraged by the results, we delivered in the first quarter, I want to encourage or continue to emphasize that our team still has a lot of work ahead for us. We are enthusiastic about the progress we've made in our product road map reprioritization and the new product innovations across almost every category. This remains our top priority, along with our renewed commitment and the new discipline for only introducing offerings that are expected to be ready within one quarter of the announcement. This includes the unveilings at the recent Avid Connect and the NAB Show.

Avid took the industry by surprise quite pleasantly, I would say, with our all-new Media Composer 2019 introduction, which is a complete reimagining of our flagship creative tool. The market's overwhelming response or positive reception has been unlike anything we've experienced in quite some time here at Avid. It better positions Avid to increase our adoption of our video creation tools, which will help to accelerate subscription growth with every type of user. Upon general availability later this quarter, we expect that Media Composer 2019 will raise the industry bar for performance and capabilities in editorial tools.

Avid also unveiled and made available in April our new and unique NEXIS Cloudspaces, which is a SaaS storage offering. Leveraging Microsoft Azure, it enables all of our more than 2,500 NEXIS on-premise storage customers to effortlessly take advantage of the power of the cloud today. This is Avid's most significant SaaS offering yet and it immediately solves the critical need for production teams to free up local storage in their workflows as well as allowing any customer to start to try out the cloud in their environment today.

Additionally, working in close collaboration with Microsoft, Avid has also achieved early adoption by large media companies and studios for their strategic initiatives to bring several crucial workflows into the cloud. This has included remote editing, archiving and disaster recovery based on several Avid solutions, including the MediaCentral, Cloud UX platform, and NEXIS cloud storage. While we aren't able to mention these customers by name right now, we do hope to be able to do so in the near future.

Team Avid turned in a remarkable effort also to fully capitalize on Avid Connect and the NAB Show. In my 30-year history in this industry, I've rarely witnessed such an effective execution of a group of people nor such a resoundingly positive response from the market and our customers. And while our April events primarily featured new offerings for video customers, we're preparing new product announcements also for our pro audio and music customers that will be unveiled at the 2019 summer NAMM conference in Nashville. Management anticipates that our new product deliveries will impact our results beginning in the second half of this year. In fact, we already are seeing pipeline improvement stemming from our performance at the recent industry events.

Now with our continued focus on aggressively executing on our strategy combined with our operational improvement plans, we expect to deliver further performance improvements this year as we build on the recent positive momentum.

Looking forward though, I'd like to remind everyone that, historically, Q2 is a seasonally weaker quarter for Avid. And given that a significant portion of our factory production is transitioning over to our new supply chain partner during this quarter, we are taking a cautious outlook for Q2. That said, we remain optimistic in our outlook for the full year 2019. As mentioned before, by delivering against our product road map with the key new products, which will contribute to revenue growth starting in Q3 2019, combined with our continued efforts to further improve gross margins and lower operating costs, we expect to see continued improved financial performance during the second half.

Now we believe our performance in Q1 shows how we're successfully increasing our focus on delivering a more predictable financial model built on more recurring revenues from growth in our software subscriptions and through long-term agreements. We will continue to focus on moving to higher-margin software and SaaS offerings for sure, as well as adding integrated solutions with good margins and strong near-term growth prospects.

And our performance also underscores how we're driving sustainable and profitable growth through our innovation efforts, with more efficient operations and then combined with an optimized and more effective go-to-market approach.

With that, I'll now turn the call over to Ken to provide his remarks on our financial performance for Q1. Go ahead, Ken.

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. As noted above, Jeff and I are referring to non-GAAP figures unless noted.

As Jeff outlined earlier, we are making good progress on our initiatives to improve our financial performance. We ended fiscal year 2018 with strong momentum, and we have seen that momentum continue through the first quarter of 2019. Overall, we are pleased with our results for the first quarter as we met the high end of guidance for our revenue and exceeded our guidance for adjusted EBITDA in the quarter. For those new to Avid, seasonality in our fourth quarter results impact sequential comparisons, so it's important to look at year-over-year comparisons to assess the performance of our business.

In the first quarter of 2019, we had favorable year-over-year growth in revenue, gross margin, adjusted EBITDA, net income, and free cash flow, which demonstrates that our strategy is leading to improved financial results. We are also seeing continued year-over-year progress in our forward-looking metrics, consisting of revenue backlog, annual contract value, and recurring revenue. With improving forward-looking metrics and our well-defined plan to achieve $20 million in cost savings, we anticipate favorable improvement in revenue, adjusted EBITDA, and free cash flow in the remainder of 2019.

Let's now get into the details. Turning to the income statement, GAAP revenue of $103.3 million for the quarter was at the high end of our guidance and up 5% year-over-year. This was our second consecutive quarter of year-over-year GAAP revenue growth. We continue to see good growth in our e-commerce and subscriptions for Pro Tools, Media Composer, and Sibelius. Storage was strong again for the quarter and additionally benefited from a multimillion-dollar transaction at favorable margins during the quarter. Additionally, we saw favorable growth in our audio business related to live sound and control services product lines.

Gross margin was 61.3% for the quarter, up 240 basis points year-over-year. This was our fifth consecutive quarter of gross margin improvement. The Q1 increase is due primarily to a 620-basis point improvement in gross margin for our hardware and integrated software category, including above 300 basis points from our favorable mix toward high-margin storage in the quarter.

Operating expenses for the quarter were $53.1 million, down $1.6 million from Q1 2018. The improvement in operating expenses resulted from the realization of our smart savings initiatives that we began in the third quarter of 2018.

Adjusted EBITDA of $12.6 million for the quarter exceeded our guidance and was up 99% year-over-year. Adjusted EBITDA margin of 12.2% was up 570 basis points year-over-year. The improvement in adjusted EBITDA and adjusted EBITDA margin was driven by improving revenue, gross margin and better management of operating expenses mainly driven by our smart savings initiatives.

Free cash flow was $4.6 million in the first quarter of 2019 compared to $3.3 million in the first quarter of 2018 driven by the improvement in adjusted EBITDA, offset, in part, by the investment in working capital to support the growth in the business.

Now moving to annual contract value and recurring revenue. The percentage of our revenue that's recurring has steadily increased, providing us with more confidence in the predictability of our business. For the 12 months ending March 31, 2019, 57% of total revenue was recurring, up from 50% in the 12 months ending March 31, 2018. We expect recurring revenue to continue increasing over time given the growth we are seeing in subscriptions and our focus on adding new long-term agreements. We reaffirm our goal of reaching 70% recurring revenue in the next 2 to 3 years.

ACV was $237 million at the end of the first quarter, up 7% year-over-year driven from our strategy to focus on high-margin software subscriptions and long-term agreements. We expect to see continued growth in ACV over time given our strategy toward signing more long-term agreements and growing our subscription business.

At the end of the first quarter, our ACV was down $11 million sequentially due to a $9 million annualized reduction in maintenance and a seasonal reduction in subscription ACV. Subscription revenue peaks traditionally in the fourth quarter due to holiday promotions, and the sequential decline in ACV is, in part, as a result of this seasonality. The decline in maintenance was in line with our internal forecast and is related to the ongoing transition from perpetual to subscription for our creative software products. We expect maintenance to flatten during the remaining quarters of 2019 as the recent uptick in hardware and in integrated software revenue should provide a catalyst to our maintenance business.

Now moving to the composition of our revenues. In the first quarter of 2019, revenue from high-margin software licenses and maintenance, which includes both subscriptions and perpetual licenses, was $49.4 million, down slightly by $1.5 million year-over-year due to the decline in perpetual license sales and maintenance revenue, partly offset by the increase in our subscriptions. Software licenses and maintenance was 48% of our revenue during the first quarter. We expect this category to continue to grow modestly and continue to produce software gross margins of 80%-plus.

Moving to the next revenue line. Hardware and integrated software, which we also called integrated solutions, had revenues of $46.3 million in the first quarter, up 23% year-over-year on strength in storage and audio hardware, and integrated software contributed 45% of total revenue in the quarter. These solutions, which combine hardware and high-value, high-margin software, generate attractive margins. We believe with the introduction of new products in audio and video in 2019 and the transition to our new supply chain vendor, we will see continued gross margin improvement from our hardware and integrated software business in 2019.

The balance of our revenue comes from our professional services, which is the smallest portion of our business and where we are driving programs internally to increase the gross margin contribution moving forward. Professional services revenue was $7.6 million in the first quarter, down 18% year-over-year as we are being more strategic and selective in our professional services business. This revenue by-type presentation is included in our 10-Q starting this quarter.

Now turning to free cash flow. Free cash flow was $4.6 million in the first quarter, up from $3.3 million in the year-earlier period. We made a $200,000 bonus payment in the first quarter. Adjusting for this payment, free cash flow was up $1.5 million year-over-year. Free cash flow benefited from the improvement in adjusted EBITDA, offset by a higher use of cash and working capital amounting to $5.6 million to support the growth in inventory and accounts receivable.

Although we paid a portion of the 2018 bonus payment in the first quarter, we paid the remaining $6.4 million in April 2019, which will impact our free cash flow for the second quarter. We expect free cash flow to improve in the second half of 2019 and benefit from lower levels of working capital, particularly in inventory, once we complete the transition to the new supply chain vendor.

Now moving to the balance sheet. At March 31, 2019, we had cash of $55.3 million, up $7.3 million from March 31, 2018. Our cash balance excludes $9 million of restricted cash, including $8.5 million of cash used to collateralize a letter of credit issued in favor of one of our supply chain vendors. We expect the restricted cash to come back as unrestricted cash by July 2019 as we expect to be completing the transition to our new supply chain vendor at that time. Cash balance is down slightly from December 31, 2018 due to a $3.6 million cash use in January to repurchase convertible notes.

We ended the first quarter with $61.3 million of accounts receivable, up $8.8 million from March 31, 2018. Our DSO was 53 days at March 31, 2019 due to strong billings toward the back half of the quarter. We expect our DSO to normalize back to the mid-40s as we move forward into 2019.

Inventory was $34.3 million at the end of the first quarter, up $1.4 million over March 31, 2018. Inventory levels are expected to decline in the second half of 2019 as we complete the supply chain transition.

Contract assets totaled $18.7 million at the end of the first quarter, up from $11.8 million at March 31, 2018 as a result of favorable growth in our subscription business.

Deferred revenue was $101.3 million at March 31, 2019, down $5.1 million from March 31, 2018 primarily due to the amortization of $6 million in noncash revenue. Deferred revenue was up slightly over December 31, 2018 as a result of maintenance billings that are seasonally at a high point in Q4 and Q1 during the year.

Total revenue backlog, which includes deferred revenue in contractually committed backlog, was $459.7 million at March 31, 2019, up $24.7 million from March 31, 2018, and up $2.9 million from December 31, 2018. The growth was partly due to the signing of new long-term agreements. And I'm confident we should start seeing backlog continue to increase in 2019 given our market opportunity, our leading blend, and new product introductions. Additionally, we added more incentives to our sales commission program to drive new long-term agreements.

At the end of the first quarter, long-term debt was $218.2 million, up $14.9 million from the first quarter of 2018 due to the increased term loan from the May 2018 refinancing, offset by the repurchase of convertible notes. Long-term debt was down $2.4 million from the balance at December 31, 2018 due to repurchase of convertible notes in January 2019. We were compliant with the leverage covenant ratio at the end of the first quarter and have significant cushion with our required covenants.

And finally, to strengthen our ability to achieve our business objectives, we have completed several of the milestones to address the long-term capital structure for the company. In early April, we announced that we had entered into an amendment to our existing financing agreement that provided for a new $100 million term loan to repurchase the convertible notes. In addition to providing significant funds to repurchase the notes, the amendment also reduces the interest rate on the entire $225 million term loan, keeps the principal amortization payments the same, maintains only one leverage covenant, and provides additional flexibility to operate our business. The new $100 million term loan and our existing term loan both mature in May 2023, providing us 4 years of stable financing.

On April 11, we launched a tender offer for the $102 million in convertible notes and the offer is scheduled to close on May 9. Assuming that we can repurchase all the convertible notes and using the current LIBOR rate, we expect our cash interest expense to increase by approximately $1.6 million per quarter.

As a result of the transaction, there will be an immaterial change in our long-term debt following these transactions as the funds from the new term loan will be used only to repurchase the convertible notes. Also, our 2019 free cash flow guidance includes $19 million in cash interest expense as we had factored in the additional interest costs related to this transaction. With that review of the first quarter, let's turn to guidance.

As we finish the first quarter of 2019 with good momentum, we are pleased with the progress we are making. With that said, we are in the middle of a supply chain transition, and that transition contains inherent risks. So, we remain appropriately conservative in our second quarter guidance.

In the second quarter, we expect GAAP revenue to be between $97 million to $105 million, showing continued year-over-year revenue growth at the midpoint. In the second quarter of 2019, we expect adjusted EBITDA to be between $8.5 million to $13.5 million. We are also reaffirming our full year 2019 annual guidance we provided at our Analyst Day in November 2018.

Our 2019 revenue guidance remains $420 million to $430 million. Our 2019 adjusted EBITDA guidance remains $60 million to $65 million. Our 2019 free cash flow guidance remains $12 million to $17 million.

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

Jeff Rosica -- President and Chief Executive Officer

Great. Thanks, Ken. So, we're approaching the second half of 2019 with growing excitement for our opportunity, thanks to the momentum we demonstrated in Q1, which shows in our revenue growth as well as our increased adjusted EBITDA and free cash flow. Our focus on investing into high-value product innovations that we can deliver immediately, including major upgrades of Avid's flagship creative tools and our first major cloud storage offering, gives us confidence that we'll be able to continue this momentum through 2019 and beyond.

I'll close by simply thanking everyone who joined the call today and let you know that we do really appreciate your time. With that, I'll turn the call back to Whit so that he can organize our Q&A.

Whit Rappole -- Vice President of Investor Relations

Thank you, Jeff and Ken. That concludes our prepared remarks, and we are now happy to take your questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please signal by pressing * 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press * 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal.

We'll take our first question comes from Nehal Chokshi with Maxim Group.

Nehal Chokshi -- Maxim Group -- Analyst

Thank you. Congratulations on great results. Maybe on GAAP net income and free cash flow, $4 million at least relative to ours, so that's huge and that's great. But flip side of that is that you are maintaining your full year guidance, and does this then imply lower back-half expectations? If so, why? If not, then why not raise your overall guidance?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. Sure, Nehal. Thank you for your question. So, we're pleased with the progress that we're making. However, at this time, as we talked about, Q2 is seasonally a challenging quarter and we're in the middle of the supply chain transition. As we move through Q2, we'll then reassess our annual guidance. But at this point, we feel good about the business and we're reaffirming our 2019 full year guidance.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. And can you remind us why -- I do see that there is typically a sequential decline for Q2 to 1Q -- I mean, 1Q to 2Q, so I don't question that, that happens. But can you remind us as far as why does that happen?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. I would just say just in terms of on the revenue side, we have a major trade show called NAB and Connect, where we outline a lot of the new products that are going to be introduced, and those typically, the product introductions then are commercialized at the end of Q2.

Also, in Q2, we have the marketing expenses associated with those two trade shows, which are more significant in the quarter. So as a result, there's typically higher marketing expenses in Q2, and typically, there's a seasonality decline in the revenue, with new product introductions really enhancing our second half performance in Q3 and Q4.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. And why did we not see that seasonal downtick in 2Q '18 on the revenue side, at least?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

So, it was relatively flat on revenue and on EBITDA. If I recall, we were down about $1 million to $1.5 million because of that marketing expense.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. And my final question, and I'll get back in the queue, is that you mentioned that you did have strong performance in storage, the big reason for the product gross margin up 600 basis points, year-over-year, about 50% of that. Where is this mix of storage relative to where you expected to be on a mid-term and long-term basis?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. So, storage was a good contributor to our second quarter. I would say that our storage revenue was probably in the neighborhood of 25% to 30% higher than our initial forecast, and that came in at stronger margins. So that, obviously, helped us in the quarter in terms of our gross margin. That's why we wanted to call it out as an enhancement of about 300 basis points to the hardware margin, which is about 150 basis points to our overall gross margin.

Nehal Chokshi -- Maxim Group -- Analyst

Got it. Thank you. I'll get back in the queue.

Operator

Thank you. We'll now take our next question from Steven Frankel with Dougherty.

Steven Frankel -- Dougherty -- Analyst

Good afternoon. I'd like to start with the OpEx, which did decline year-over-year, but they're higher than they were in Q4 and Q3, and you've been on this program to drive additional savings. When are we going to see that, and is that designed to drive OpEx kind of down to below $50 million a quarter?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. So, actually, our OpEx was in line with our forecast, so we feel like our smart savings initiatives are on plan. When I look at OpEx year-over-year, we're down $1.6 million. So annualized, our OpEx is about $6.5 million better than last year. I will say, your comparison to Q4 '18, as I relayed in our prior comments, Q4 '18 did have a true-up of the bonus accrual so that was a onetime benefit that helped that quarter. So, you would have to add that benefit back for a comparison.

Also, in the first quarter of 2019, we did have a trade show called NAMM that was in January, that have additional expenses, so that also impacted it. But when I look at really year-over-year, is really what I focus on in terms of where I'm seeing the benefits in terms of the smart savings and OpEx. I'm seeing a $1.6 million benefit, which is about $6.5 million annualized. I have a clear path to seeing the remaining $10 million of savings that will come to OpEx, so I've got about $4 million to go, and I expect to achieve that. And then the other $10 million of savings that I expect to receive, and Jeff and I are working toward, is the supply chain initiatives, and those are on target as we contemplate transitioning the supply chain in July 2019 and that will give us $10 million of savings. So, we'll be able to achieve our $20 million annual savings commitment.

Steven Frankel -- Dougherty -- Analyst

Okay. And then to try to better understand this dynamic of ACV being down from where it's been for the last few quarters, what's happening on the booking side? And traditionally, you have disclosed what quarterly bookings are. What were they in the quarter?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. So, we're moving people toward backlog as kind of the key forward-looking metric. When we look at bookings, we're no longer reporting bookings as we don't believe quarterly bookings is a good metric because there's lumpiness in the timing of when we sign a long-term agreement. One multiyear enterprise agreement or strategic purchase agreement with a big reseller can swing quarterly bookings by a large amount. So, we're trying to focus the investors on backlog and recurring revenue. But overall bookings for Q1 were positive as our backlog did grow. Our ACV is up 7% year-over-year. So, we see efficient year-on-year growth in our funnel metrics and our forward-looking metrics to support our annual revenue guidance.

Steven Frankel -- Dougherty -- Analyst

Okay. And the increase in receivables, is this because the quarters are getting increasingly more skewed to the end of the quarter? Or do enterprise deals, by their very nature, just have terms that are more lenient than your typical business?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

No. We had a good billings quarter. We had good revenue growth, and as a result, receivables up. I will say that we did have a very good March, and that helped drive the receivable balance, but that helps our growth in receivables and will help cash flow throughout the year. But it's really just a factor of growing the business. So, our receivables are up $8 million, and we think that's a good sign.

Steven Frankel -- Dougherty -- Analyst

Okay. And then just the bonus payment, last year, when was it paid and what was the relative size versus what you're doing this year?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

So last year, the bonus payment was paid in the second quarter and it was $8.3 million. This year's bonus payment, that was $6.6 million. $200,000 was paid in the first quarter, $6.4 million was paid April 2019. So that will impact our second quarter cash flow.

Steven Frankel -- Dougherty -- Analyst

Okay. And just one more time on this decline in maintenance. Is that your traditional customer base moving to subscription? Or you're just saying you've got faster growth in the subscription products and those don't carry traditional maintenance, and that's the $9 million delta?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. So, first, our maintenance revenue was right on plan with our forecast. We expected a decline because of the transition from the perpetual to subscription. So that was forecasted. We are optimistic, Steve, that given the growth that the businesses had on the hardware and integrated software and the attachment rate of maintenance that comes with those products, that the maintenance revenue won't decline in Q2 and will start flattening out for the remainder of 2019. So that's kind of what we see at this point in terms of maintenance.

Steven Frankel -- Dougherty -- Analyst

Again, maybe I'm being a little dense, but is the maintenance decline coming from traditional customers that used to be on maintenance that are now purchasing differently? Or there were some customers that churned out and that growth is now in the subscription products which don't have traditional maintenance?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

I would say, it's a mix. I think it's all customers, it's both new and existing. I don't know, Jeff?

Jeff Rosica -- President and Chief Executive Officer

Yes, I think, so Steve, it's obviously, as product ages, there's always churn because people stop using products 7 or 10 years later and they stop doing support, and so there's always a bit of churn as products age out. So, there's always going to be some of that within the noise of the numbers. And then there's also move from perpetual to subscription, a lot more people, a lot of their perpetual revenues, where everything from individual creative professionals, all the way up to enterprises, who bought their software as a perpetual license and now they're moving to subscription. So, you just see a lot of movement over to the subscription line from the perpetual licensing line.

Steven Frankel -- Dougherty -- Analyst

Okay. And then the last question. Where do you think we are in the S6L life cycle? Are there still a lot of orders to be shipped there? Or are there new products that are coming later this year in that live sound area to keep the growth going?

Jeff Rosica -- President and Chief Executive Officer

Actually, live sound just started its growth trajectory. I think we've got, I can't predict every quarter, but the extension of the product line that we did has been very, very successful. It's been well received. And that line just, I mean, we still have one more product in that line extension that comes into delivery this quarter. I think it's planning for the end of this quarter. And so, we're just beginning to mine the opportunity for the live sound business for us currently. Remember, we announced that a year ago, but products became available over time, and the most significant products became available in the second half of '18. So, we're just getting started with that product line.

Steven Frankel -- Dougherty -- Analyst

Great. Thank you, Jeff.

Jeff Rosica -- President and Chief Executive Officer

Yeah. Thanks, Steve.

Operator

Thank you. We'll take our next question from Hamed Khorsand with BWS Financial.

Hamed Khorsand -- BWS Financial -- Analyst

Hey. Just a follow-up on Steve's questioning. So first off, this maintenance revenue decline, especially on a cash basis, are these your enterprise customers? And if they're your enterprise customers moving to subscription, are they buying the same amount of subscription seats as they would have on their maintenance license kind of scenario?

Jeff Rosica -- President and Chief Executive Officer

I can probably answer that. So, it's all customer types. Hamed, by the way, hi. It's all customer types from individual creative people that subscribe to a product. Remember, people used to buy Pro Tools or Media Composer, or Sibelius as a perpetual license. They would buy the product and then they would have maintenance to continue to get software updates and support. We're finding that a lot of customers, especially on the audio side, where a lot of customers are moving to subscription. So, it's everybody, from that individual creative professional, and we have, as you know, hundreds of thousands of them, up to the big enterprises. And there's some we can't name, I mean, I know we can only name the ones that allow us to name them. We talked about Full Sail, which is a big educational institution that went for perpetual subscription. I would tell you though, a lot of media enterprises are starting to move that way. So, as they move, those software revenues move from maintenance over to subscription.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. And then could you just talk about these long-term agreements that you were talking about? Are you doing discounts, and how much of discounts are you providing to your resellers entered into these long-term agreements with you?

Jeff Rosica -- President and Chief Executive Officer

Well, I think, again we have talked about this before, but clearly, I'll try to define it a little more. So obviously, there's always been discounts for the business over time, that were, a lot of the time, these discounts were happening at the end of a quarter, historically, or they were happening because a partner would come in and say, "We have a big load of business for you, what can we get for it?" And so that behavior we really wanted to stop. And so what we did is moved to a model where if a channel partner or a customer wants to benefit from a -- if they want to, let's say, just put it this way, if they want to continue to benefit from those opportunities, they have to commit, and they have to commit to more business than they did previously. And that's what long-term agreements are and what they give us.

I think I would say, and by the way, if people aren't on long-term agreements, generally, we're pretty hard lined on what their discount capability can be or contractual discount capability, unless, of course, there's something very strategic that comes through the door. I would say this, in general, our discount behaviors and our pricing strategies are a lot more careful than they were before we had long-term agreements. You could just look at the margins to know that these long-term agreements are not watering down our margins, is the best proof point I can give you.

Hamed Khorsand -- BWS Financial -- Analyst

Well, it's not about margins, but it's really about are you generating short-term free cash flow for the possibility you're losing out on long-term business?

Jeff Rosica -- President and Chief Executive Officer

No, no, I don't think we're trading free cash flow at all. We're trading economics for a bigger commitment from a customer and/or a partner. Cash flow behaves just like it normally would with a customer, whatever their takedown is, it's a regular thing. Remember, these agreements, as a partner takes delivery, they pay the bill like normal. As a customer takes delivery or whatever the billing arrangement of that enterprise agreement is with the customer, that billing and that cash flow is under a normal cadence.

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. We're just getting a bigger share of the wallet of a customer, and we've been able to do that because of the wide platform that we have, the number of products that we can provide a media customer, enterprise customer. And all that has led to more recurring revenue and better margins. So, we're pleased with the progress of this business.

Jeff Rosica -- President and Chief Executive Officer

Yes. We will keep going with the strategy. It's been a winner.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. Thank you.

Operator

Thank you. We'll now move on to our next question from Orin Hirschman with AIGH Investment Partners.

Orin Hirschman -- AIGH Investment Partners -- Analyst

Hi. How are you? Congratulations on the results. Some of the new products, when do you think those are really going to start making a difference in terms of the customers adopting them in terms of actually driving revenue? That's question number one. Question number two, in terms of moving customers to the SaaS model, I know you've indicated before that you've really touched the smaller customers primarily and the medium-sized customers, but not really the big ones yet. When does that massive SaaS transition begin to happen on the big customers? And do they want SaaS, or do they want a hybrid model, hence the product having a hybrid capability?

Jeff Rosica -- President and Chief Executive Officer

That's a good, good question on both. So first of all, on the new products that we unveiled at NAB and Avid Connect, the products like Media Composer 2019, that's the all-new, kind of reimagined or redid that product, an all-new product. That product will be available, we're currently targeting late in the quarter. So, we'll get a little bit of revenue in Q2 from it. But we'll see most of the benefit of that in the second half for that product's growth potential.

On the SaaS for offering for the specific product offering because I'm going to go to your second part of your question in a moment, that product will start to generate revenue in the second half also. It's been made available already for people to try out, but they do get a trial period before they actually have to start paying for it. So, we've modeled the revenues to start to grow in the second half.

I will say this; I don't think it's going to be explosive. It's going to take time for that revenue to grow because it is a gradual building. Just like subscription revenues, they take time to build. And that leads to my answer to your second half of the question, which is the bigger SaaS moves. As I mentioned in our prepared remarks, we've been working with a number of large media customers and film studios on doing strategic moves of some of their workflows to the cloud. We've already moved several of those and that trend is continuing, and we'll start to see revenues -- well, actually revenues have started at a small scale already in Q1. But we'll see those revenues, as those projects continue to deploy, we'll see those revenues grow over the second half and into 2020.

Again, I'll say this, it's not going to be explosive. This industry will migrate gradually, and they will, I think, largely be a hybrid, multi-cloud approach for most of these customers. It will take time to migrate over, which, to be honest, is a good thing because if they went too fast, you could see too aggressive of a hit to the cash flows of the company. Because they are doing it gradually, you kind of avoid that kind of massive J curve kind of impact to the businesses' cash flows. So, I think the industry will go hybrid and will go gradually. And for us, I'll remind you, Orin, also, a lot of our early SaaS offerings, we're looking to add on services not take away from stuff that we do today. Even though there are some ways you can deploy in the cloud different than we do on-prem. We're really focused on, especially in the early days, adding complementary SaaS services to the business.

Orin Hirschman -- AIGH Investment Partners -- Analyst

And just one that's a quick follow-up. Can you actually increase the revenue ultimately for a customer by adding on those features that started to add on the SaaS side, so you can actually come out maybe not net-positive on day 1, but overall, much better, much net-positive?

Jeff Rosica -- President and Chief Executive Officer

Yes, we can. We've done a lot of modeling in that regard. There's a lot of opportunity. Obviously, the licenses moving to the cloud, there won't be that big of a difference in revenue between a subscription and a cloud SaaS for a subscription. But the fact that, first of all, when we sell our solutions today, we're just selling the software licenses and that, really, not a lot of hardware. The hardware that we sell today is really hardware that won't go to the cloud anyway, except for storage, which I'll talk about in a moment. So, they're really controlled services and I/O, things that you get in and out of a cloud environment. And the licensing revenues will hold from a subscription model.

The advantage to the cloud is that when we're selling a SaaS service, remember that we're selling the entire infrastructure as a service. We're selling all the storage, network, infrastructure, building, people, air conditioning. SaaS is an all-in offering that we don't obviously take a part of all those revenues today. And so, it does have, what, I'll call it, a bigger build material, so it has a bigger opportunity, I think, for Avid to create top line revenue.

I also think that for Avid to storage, where there will be a move from hardware on-prem to cloud storage, is that we're only a high-performance collaborative storage tool today. Our work with Microsoft allows us to expand that IP into all levels of storage, to near line, archive, et cetera, and even cold storage, and that gives us a big opportunity to leverage a bigger share of wallet of a customer storage number than we can today. So, I do think the long-term picture or the medium-term picture for most customers is a bigger share of wallet that we can get.

Orin Hirschman -- AIGH Investment Partners -- Analyst

And then just one last quick question, if I may, and then I'd queue up again or just go offline with you. You mentioned the number of paying customers on the SaaS side and the increased payers was substantial. I don't know if you've mentioned it before in terms of the total number of downloads that are actually active and if there's anything you could do to convert more and more from nonpaying customers that kind of had a taste of Avid and maybe higher end of what Avid can provide versus one of the competitors or both of the competitors?

Jeff Rosica -- President and Chief Executive Officer

Yes. So, exactly. There's about 1.4 million in first users between the 3 products that we have, Pro Tools, Sibelius, and Media Composer. That will continue to grow. I know that are marketing team, under the leadership of our CMO, Melissa Puls, is really focused on developing a much bigger demand-gen engine and a way to really nurture those customers through a journey to get them more to the paid. And I'll say this, today, our paid conversion is, I would say, almost at best practice, industry standard, which is great because I don't think we're yet at best practice from a marketing standpoint. I don't mean that as a dig. I know Melissa would say the same thing, is that we really have a lot of opportunity to mine the opportunity there better. But it shows the passion of the customer base, that even with the efforts that we make today, that we're able to get really top-industry averages for our conversions today. But there's a big opportunity there that we already are going after and will be going after even more aggressively later this year and in next year.

Orin Hirschman -- AIGH Investment Partners -- Analyst

Great. Congratulations on the results.

Jeff Rosica -- President and Chief Executive Officer

Thank you.

Operator

Thank you. We'll take out next question from Michael Staiger with Odeon Capital.

Michael Staiger -- Odeon Capital -- Analyst

Thanks for taking my questions. Nice results. Most of them have been asked, but maybe just one kind of clarification with respect to the storage, the SaaS storage piece. It sounds like the margins are similar, or shouldn't they be a little bit higher? And if we were thinking downstream, what percentage of storage business would you see actually convert into a more of a SaaS model? And that's it for me.

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes, as it moves to the SaaS model, our gross margins with storage will improve, typically by a magnitude of 15 to 20 percentage points in terms of gross margin. So, not only do we think we'll get a bigger share of wallet, we believe the margins on storage will start to migrate because the SaaS margins are higher than our integrated solution today.

Michael Staiger -- Odeon Capital -- Analyst

And then, and a follow-up to that, is this something that you could target more actively to existing accounts to do kind of a partial conversions to potentially accelerate that migration?

Jeff Rosica -- President and Chief Executive Officer

Yes. This is what we're going to do. So, this was the strategy behind what we call Cloudspaces. The best way I could explain this, Michael, is Avid's a collaborative storage tool, and it works in what they call workspaces. And so, you assign workspaces to groups and they do their work, and you give them bandwidth and you give them storage capacity, et cetera, you assign capability to them. We're basically allowing that in a cloud so that what we've done with NEXIS Cloudspaces is that every customer who already bought a NEXIS, that's why I mentioned the more than 2,500 customer installations we have to date, all those customers, when they download, because most storage customers have not, almost all run a maintenance plan, they get to download the software update as a part of their maintenance program. And that software update immediately lights up the Cloudspaces, which basically is additional workspaces in the Microsoft Azure environment and allows them to start to try the cloud for their storage expansion. And it's meant for near line and archives. So, it is the first step for us as a company beyond the near line product we have available today to really show people how they can park and archive stuff in the cloud very easily and efficiently. And it literally lights up when they download the software, then they just decide what they want to do.

And with the help our partnership with Microsoft Azure team, they actually have given a free use of 2 terabytes of storage for people to get started in the first 90 days. So really, our strategy is to get people to try it and try it for free, love it, hopefully, and then start consuming the NEXIS Cloudspaces, which will give us an additional revenue stream for the archive piece. Does that make sense?

Michael Staiger -- Odeon Capital -- Analyst

Great. Thanks a lot. Yeah. It makes sense.

Operator

Thank you. We'll now take our follow-up question from Nehal Chokshi with Maxim Group.

Nehal Chokshi -- Maxim Group -- Analyst

Yeah. Thank you. So, I believe in the press release, it said subscription revenue was up 10% year-over-year. Is that off of the $8 million or so that was reported for a March 2018 quarter, is that correct?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes, that's correct.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. And then that would imply that it would be down q-over-q from the $10 million or so from the 4Q. What's the reason behind that?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. So, subscription, there's holiday promotions in the fourth quarter, Black Friday. So typically, the subscription revenue in the fourth quarter is impacted by those promotions, and we didn't have a big promotion in the first quarter in line with that. So, that's the reason for the decline.

Also, ASC 606, when you have an enterprise deal or even a large consumer deal, under the 606 standards, you book 80% of it roughly in the quarter. So, there were just more transactions in the fourth quarter due to those promotions that resulted in the revenue being recognized in that period.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. But clearly, the number of subscribers is up q-over-q.

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. So, we're comfortable. Obviously, that will continue to see growth. It's just the sequential comparison with the promotions in Q4 and the accounting rule made it a little more challenging on the sequential.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. Understood. And given that maintenance revenue has been a topic of significant discussion here. Would it be fair to characterize that given the 7- to 10-year life cycle of the hardware, which is what's generating the maintenance revenue, is it fair to say then that this maintenance decline is a reflection of the large historical declines that have happened over the past 7 to 10 years, and that under the continued stabilized hardware scenario, you would continue to expect pressure on that particular line item? But that would not be a reflection of what has been effectively an increasing number of seats or increasing value per seat as reflected by your total backlog that you've been reporting. Is that a fair assertion there?

Jeff Rosica -- President and Chief Executive Officer

Well, not completely because I think that when you see the decline, we don't look at revenue declines now because, remember, there's a lot in the noncash.

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

There was a noncash piece.

Jeff Rosica -- President and Chief Executive Officer

We look at the billings and the installed base that's in the marketplace that's going on there that generally have leveled off a number of years ago from what we have at standpoint. I'd say that, again, two things, you're going to always have the move from the licensing partner to subscriptions. And as MediaCentral is now doing, our enterprise platform is doing subscription, we're going to see more and more of that move from perpetual licensing to subscriptions. That will always put pressure on that line.

On the hardware side though, and the same, as Ken said, we're also dealing with we're doing the conversion of renewals from low product sales that were over a year ago, which we pay the price today for the maintenance line. And as Ken was alluding to earlier, we've been having, as you've seen, very strong product sales on the hardware and integrated software side, which is going to equate to putting growth back in on that outline item for the maintenance. So, there's a mix of dynamics going on there. I have to say that if you look at most companies that are going through a subscription transition, they hit that kind of so-called J curve pretty aggressively. We managed our way through that pretty smoothly, looking at all the different parameters of this. And as Ken said, just getting back to flattening the situation and avoiding decline in maintenance for this year is going to be a big win for us.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. Understood. And then my final question is that do you have an update on where the number of LTAs stand for at the end of the March quarter and distribution between end customer and partners?

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Yes. In terms of the number, we have roughly, in terms of value, we have about $320 million. $200 million of it is in enterprise agreements, and $120 million is kind of in the channel. That's in terms of value. And in terms of the number of agreements, I want to say there's probably about 14 enterprise agreements and roughly, say, 50 of the SPAs.

Jeff Rosica -- President and Chief Executive Officer

Actually about 40.

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

40, 42.

Jeff Rosica -- President and Chief Executive Officer

Yes.

Nehal Chokshi -- Maxim Group -- Analyst

  1. Okay. It sounds like the SPA had a strong quarter in terms of the LTA signings then.

Jeff Rosica -- President and Chief Executive Officer

No, actually, it was generally pretty good. We also had a strong enterprise agreement, including CBS News.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. Very good. Thank you.

Jeff Rosica -- President and Chief Executive Officer

You're welcome.

Operator

That does conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Rosica for any additional closing remarks.

Jeff Rosica -- President and Chief Executive Officer

I know that we've gone on long enough, so thanks again. Thank you, everybody, for joining us today, tonight on our Q1 earnings call. I'll just say we look forward to our next call when we're reporting the Q2 2019 results. Until then, have a great evening.

Operator

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.

Duration: 60 minutes

Call participants:

Whit Rappole -- Vice President of Investor Relations

Jeff Rosica -- President and Chief Executive Officer

Kenneth Gayron -- Executive Vice President and Chief Financial Officer

Nehal Chokshi -- Maxim Group -- Analyst

Steven Frankel -- Dougherty -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Orin Hirschman -- AIGH Investment Partners -- Analyst

Michael Staiger -- Odeon Capital -- Analyst

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