The present and future of post production business and technology | Philip Hodgetts

Apr/13

20

What’s the truth about Avid’s Financial Position?

There’s been a lot of speculation about Avid’s Financial Position – some of it by me for sure – that I decided to spend a little time examining the most recent accounts I could find to work out what the facts are.

I should preface this by saying that Avid have postponed their full year 2012 (and 4th quarter) figures:

…to evaluate its current and historical accounting treatment related to bug fixes, upgrades and enhancements to certain products which the Company has provided to certain customers.

This puts them in breach of NASDAQ rules, and they have received the expected letter from NASDAQ letting them know they’re in breach of the rules. It’s hardly a big deal: they have until the end of May to file a response, explaining how they will have the accounts ready before September (when there would be a problem).

I doubt that any reevaluation as above will materially affect Avid’s cash in bank.

For about ten years of my life back in Australia I was a Fellow of the Australian Institute of Company Directors (reservered for those on five or more corporate boards) and back then was pretty good at looking at company accounts.

On that face of it, the first three quarters of 2012 don’t look much brighter than a year earlier: the net loss for the 9 months to Sept 30 2012 is $69,617,000, an increase from the same period a year earlier when the loss was $23,477,000. And that is the official loss for the company, but because of a set of rules known as the Generally Accepted Accounting Principles (or GAAP) not all losses are cash losses.

For example, when a company buys an asset it has a value at the time of purchase. The cash balance goes down by the purchase price, and the asset (balance) goes up by the purchase price. However, over time, that asset loses value (at different rates for different types of assets), so each year the company depreciates the asset. This reduces the value of the asset on the balance sheet, and the drop in value (depreciation) is charged to the Profit and Loss account. Yet no money has left the bank.

Avid provide a reconciliation between GAAP and non-GAAP figures, which is useful to assess the performance of the company on a cash basis. Better but still not brilliant: the nine months to Sep 30 2012, accumulated loss is still $14,560,000.

While GAAP gives us a good long term picture of the health of a company  and non-GAAP gives a good idea of the health of the company as it would be without being burdened with a history, it doesn’t really help us determine whether or not Avid has the cash to survive. This is where there is good news.

While total assets have fallen by about $48 million, the one we most care about – Cash and Cash Equivalents – went up from $32,885,000 at Dec 31, 2011, to $71,359,00, although there is a balancing $29 million drop in accounts receivable. That is still a net increase of about $20 million in the bank.

Overall Avid’s current assets are down just under $7 million for the 9 months to Sep 30, but current assets still sit over $250 million. Total assets are on the books at around $555 million but  most of that are “intangible assets” like “goodwill” at $238 million. Essentially the value of the Avid brand. This continues to have value as long as we all believe it has value. The sad reality is that goodwill can evaporate if outside events force a change in the industry.

For reference, on April 19, 2013 Avid’s NASDAQ value is $244,450,551. The market does not (currently) value the Avid brand and intangible assets as highly as Avid does. The NASDAQ valuation is only slightly higher than the value of current assets.

Short to mid term I see no problem with Avid’s financial position. Keep watching the cash-in-bank and current asset figures: they tell us most about ongoing viability. I think the results also attest that Gary Greenfield did a pretty good job turning Avid around.

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14 comments

  • Chris Wilby · April 21, 2013 at 2:14 pm

    Unless Avid bring their prices down further, I don’t think there is a ‘long-term’ future for them. Sad – because I like the look of MC version 7.

    • Author comment by Philip · April 21, 2013 at 2:16 pm

      Well, the cause of most of Avid’s financial woes are the dropping prices. If they still could maintain the price structure of 10 years ago they’d be doing fine now! But they can’t. Dropping prices too far too fast is a guarantee they’ll go Chapter 11. But they haven’t.

      And the professional NLE products are not crucial to Avid’s financial future. See my next blog post. (Hint, 11% of net revenue in 2001, dropping consistently year on year with dropping prices.)

      • Chris Wilby · April 22, 2013 at 12:37 am

        Do I see an elephant in the room then?
        Will there be a ‘tipping point’ when people realise that they no longer need to spend huge amounts of money on Avid hardware (because less and less people use the software)?
        A user ‘death spiral’ if you will…

        • CraigS · April 22, 2013 at 10:20 am

          Given the industry evolution, the value proposition of their hardware will continue to decline. I just don’t see Avid making any effort to turn that around… to date.

          Maybe the declining software sales (do we know for sure it’s declining) results in declining hardware sales is a bit of a red hearing. I think Avid’s recent price cuts with Media Composer (and Symphony add on) is banking that they’re addressing that problem.

          My hunch is that is only a small part of the issue though. Wider use of MC will not necessarily result in increased sales of Isis. I think the market is driving towards lower cost “commoditized” hardware solutions amongst other things.

          I don’t doubt companies like EditShare with Lightworks (nearly free and with Hollywood credentials) are gunning for a bit of that hardware business.

          I don’t think they or any one company will be the downfall of Avid. I believe it will be an ongoing and inevitable erosion baring a significant shift in business model.

          Of course a debt free company can keep going for some time… as long as they keep downsizing. Avid may not face a sudden collapse but it looks like they are in the long slow fade to black. When the niche becomes too small and the revenues so low, that key people in company simply move on and elsewhere, the fade will be complete.

          • Author comment by Philip · April 22, 2013 at 10:28 am

            89% of Avid’s income is NOT from professional editing software. The company is mostly about big organization infrastructure and that business is relatively healthy. They also have a fairly healthy consulting business to the “Media Enterprise”. That is their focus, not individual editors.

            Avid’s software NLE business is probably the least important part of their overall business. And at the high end infrastructure, the only real competition was Pinnacle and Avid bought them.

          • CraigS · April 22, 2013 at 10:37 am

            “The company is mostly about big organization infrastructure and that business is relatively healthy.”

            Given the number of years they’ve been in decline, even though the decline has slowed a bit, I’m not sure I’d describe that as “relatively healthy.”

            We’ll know when they do eventually produce the next report but, honestly, I’d be surprised if they showed a significant uptick.

          • Tim Johnston · May 8, 2013 at 12:44 pm

            “Avid’s software NLE business is probably the least important part of their overall business.”

            …although the *entire rest of all the business* is based on the NLE business. No one will buy an overpriced Isis or consulting services if they’re not using the NLE.

  • CraigS · April 22, 2013 at 10:33 am

    Regarding their current situation delaying their reporting, I believe the issue revolves around accounting procedures in handling upgrades and bug fixes and charges around that.

    The legal ramifications is that their previous reports going back a year and possibly longer may have promulgated inaccurate information which financial institutions and individuals based their investments on.

    This has resulted in a plethora of “vulture” law firms investigating class action law suits. Apparently they’re still seeking “evidence” that such information was inaccurate and that it resulted in stock purchases that might not have otherwise happened.

    I also suspect that Avid caught this (or at least spotted the potential accounting issue) and decided to delay the report as it would have only continued to compound the potential legal issues.

    They may dig their way out of this. It’s conceivable it might involve an out of court class action law suit settlement. If the latter happens it will be another financial ding for the struggling company.

    The problems with Avid aren’t simply profitability or revenue but seem to be tied to issues in management. Some of this may be the reason they changed CEOs.

    Of course even if the result ends up having no legal cost, there’s some serious misgivings about how the company is managed. That not only impacts stocks but I think it may negatively impact sales as well.

    Their “GlassDoor” ratings are very low (employees) and they primarily point to management.

    There’s just too much going wrong with Avid to see them surviving in their current state.

    • Author comment by Philip · April 22, 2013 at 10:40 am

      The whole article I wrote explains why i think their financial position is “relatively” strong.

  • Robert Monaghan · April 22, 2013 at 12:14 pm

    It is interesting to read the article and comments. But one thing that has me concerned is this:

    Where is the innovation going to come from, if the customer expects software pricing to drop to “Free”?

    While everyone is concerned about the Big Players, people forget that the innovation comes from a lot of small companies. Companies that are quickly dying off, because they have to drop their prices just to “stay in the game”. These smaller outfits are doing a better job than the “big players” can in many cases, but can’t survive on the “$5 App Store” pricing model.

    Avid MC/Symphony is the last to join the race to the bottom. But the vortex being created by Apple, Adobe, Black Magic and Avid is going to do a fair bit of damage to a traditionally technically innovative industry.

    I hope that I am wrong.

    bob..

    • Author comment by Philip · April 22, 2013 at 3:53 pm

      I definitely prefer selling $495 pieces of software than $5 – but that can only happen where there are interchangeable products. Where you are the only game in town – and can likely stay that way – margins can be maintained. We’ve done better than expected with Event Manager X. I bet we’d do better if we could get it in the App Store (which we can’t, we tried) because that’s where people look now.

      What Apple, and I think Adobe, realize is that “video production” is now a form of literacy, practiced by (ultimately) all to some degree. Taking the read/write analogy for literacy, some do extremely well from their literacy skills alone; others use them as an adjunct to their primary occupation. That expands the market enormously. Apple had 2 million FCP 1-7 + FCE seats where there are only 32,000 film and TV editors in the USA. (Or 26,500 depending on which Govt department you want to favor). Clearly the growth (from their expected 20-25,000 seats in the first 2 years, when they did about 120,00) is that the market for production tools is no longer limited to “Hollywood”.

      Philip

  • Kamil Dobrowolski · April 23, 2013 at 7:29 am

    It will be interesting if Avid MC being priced at $1,000 attract new users to the NLE or just offer a discount to their existing users who have already invested in their hardware. When FCP was $1,000 a decade ago that was a staggering good deal compared to Avid’s prices back then and FCP was far from ready for serious use until FCP 3 two years after its launch. Now MC 7 is far more polished then those earlier FCP versions yet I don’t believe they will fly of the shelves. As mentioned at the Editors Lounge Pre- NAB meeting, Avid has an image issue. Young editors have no desire to purchase $1,000 software than isn’t optimized until you add on additional hardware. FCP X being $299 will continue to attract the next gen. of filmmakers. Apple is almost giving away the software but we can’t forget that each FCP X seat needs $1,000+ of Mac hardware to play on.

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