|Shares Out. (in M):||39||P/E||0.0x||0.0x|
|Market Cap (in M):||234||P/FCF||0.0x||0.0x|
|Net Debt (in M):||-48||EBIT||0||0|
Every single time I have bought a security on panicked sell-offs due to non-fundamental reasons, I have done very well. Whether it’s a bankruptcy filing or a stock delisting or an FTC merger block, it doesn’t matter. (Don’t worry, I manage to screw up just about everything else in my life.) Let’s get this out of the way now: Avid has not reported financial results since 2012 and trades otc. If this is a non-starter for you, it won’t hurt my feelings. Sadomasochistically, I like any situation that causes the vast majority of investors to not bother. It keeps competition modest.
Avid is an application software company that makes non-linear editors (NLE’s) for professional audio and visual editing. The company has been around for over 20 years and is considered a leader in the niche space. Their products are needed for editing TV shows, newscasts, movies, commercials, music, etc, and they have an especially strong foothold among the really high-end users. For example, every Academy Award Best Picture nominee film last year was edited on Avid’s software. It’s a company that easily passes the “would it be missed?” test, even if most people have never heard of Avid or used its products.
Software is sold as a perpetual license, and customers typically sign maintenance contracts worth 10-20% of the total contract value. Avid continually updates its software with new features in the hopes that existing customers will upgrade. Avid also makes specialized hardware for high-end users who are running massive workloads and need a customized product that can handle their performance and collaboration needs. This is a nice differentiator for Avid and it helps entrench them at the high end, providing reliability and performance that most competitors can’t match. It also highlights that NLE’s can’t get disrupted by SaaS because they’re too data-intensive.
Avid’s reputation is generally very good on both the audio and video sides, although the industry is highly competitive. There are competing products by Adobe, Autodesk, Green Valley, Miranda, Apple, Harris, Harmonic, and a few others. Apple had been particularly troublesome for Avid since their Final Cut Pro product had taken share on the low end and moved up the value chain. Luckily for Avid, Apple had some recent stumbles with an update to Final Cut Pro, and customers have really soured on it. Avid actually sold their consumer business in 2012, whose performance was materially worse than the rest of the company. Proformas are available on their IR site which break out historical results adjusted for the divestment. Switching costs can be high because studios, post-production houses, and newsrooms have large teams, plus the software is fairly complex. People who get trained on a given product generally like to keep that product, as long as it’s doing a good enough job.
Apart from the competitive environment and losing share on the low end, since 2006 Avid has seen its revenue decline almost every year from the waning HD adoption cycle. Around 2001, plasma screen TV’s and HD started to become very popular. There was a virtuous circle effect as TV prices declined, more consumers bought them which further lowered costs. The more people bought HD-enabled sets, the more they demanded HD content, and the more HD content was produced, the more incentive OEM’s had to make TV’s and consumers to buy them. On and on it went.
As the market became saturated, Avid’s (and many others’) fortunes reversed. This decline has been evident in many businesses that touch TV sales. Chip companies focusing on HD processing, such as Trident Microsystems and Genesis Microchip blew up. Japanese TV OEM’s have had some notorious struggles in recent years. Best Buy’s TV sales have been terrible. You get the idea...after the whole world upgraded and got their new toys, the growth reversed. It turns out the industry is cyclical.
I see a reason to be excited about this industry, a reason to believe we are at the beginning of a new cycle, and it’s in the form of what’s known as 4k (or UltraHD). Basically, this is HD on steroids. It’s called 4k because that’s the resolution, since it’s quadruple the current standard of 1080. It looks fantastic, and I encourage anyone still reading to google around for more information. Best Buy sells 4k TV’s today and you can buy a Vizio 50” set for $1,000 or a Dell monitor for $700. I reckon there are a lot of couch potatoes, sports junkies, and Netflix addicts out there for whom 4k would be a worthwhile upgrade.
I was especially encouraged by what I saw at CES last month. I had been a bit worried that people might think of 4k as another 3D, which is to say a fad that fell flat. After CES, I don’t have any such fears. TV OEM’s focused on 4k sets, and why shouldn’t they? They want another upgrade cycle as much as Avid and other industry players do. But what really encouraged me was the content availability. For example, Reed Hastings said that Netflix was going to make all of its original programming in 4k, as well as its most popular streamed shows like Breaking Bad. Hearing Netflix commit to the 4k format was extremely encouraging.
Or what if Apple comes out with their long-rumored iTV and it supports 4k? I have no idea if that’ll happen, but I do know that Apple is getting deeper into the video delivery business one way or another, and given their commitment to quality I believe they’ll want to offer 4k content. At some point, I believe investors will start looking for ways to play the upgrade cycle.
While the competitive landscape among NLE’s remains tough, the upgrade cycle is the proverbial rising tide. Competitors may (or may not) take share from Avid, but I believe the magnitude of the upgrade cycle will offset any share loss and enable Avid to grow regardless. During the last go-around, Avid’s revenue grew organically by about 50%. The cycle is in the first inning.
Accounting Restatement and Financials
In late 2012, Avid discovered they had been accounting for certain software components incorrectly, booking some revenue upfront when it should’ve been amortized over time. The reason for the mistake? Pure carelessness, I suppose. There’s no excuse.
Accounting restatements are ridiculously tedious, time-consuming, and expensive, and unfortunately it’s shareholders who underwrite them. Avid has had to rebook over five million revenue transactions spanning eight years, 20,000 contracts, and 700 software upgrades. It’s an overwhelming amount of work, so much that they had to buy and install entirely new accounting software just to re-crunch everything. According to the company, they are now mostly through this process. The next step will be auditing those results, which should take another 4-6 months.
Avid last reported financial results in Q3 2012, and it was a truly horrible quarter. I believe this has amplified Avid’s perception problem since this was the last actual quarterly report people think of. Anyway, we can roughly estimate Avid financial results since going dark based on the restatement costs and the cash balance. Avid went dark with $72m in cash, reported having $52m in cash at 9/30/13 and $48m at 12/31/13. So let’s estimate what the restatement costs, then solve for underlying cash flow.
First thing I would point to is management’s recent estimate that they would have to spend $25-34m in 2014 related to the restatement. Combined with their estimate that it should conclude “mid year”, this means the restatement is costing them something like $12m/quarter.
Second thing is highlighting what Volt Information Sciences, a similarly-sized company, spent on their own restatement. Volt disclosed the expenses every quarter, and they spent about $10m per quarter on theirs.
With these two data points, I think a reasonable estimate of the quarterly restatement expense is about $10-12m. Avid has burned about $22-24m in cash over the past year, which means the underlying business is actually generating something like $16-26m in fcf, or about $.40-.65/share. Not only has this business not collapsed, it appears to be doing quite well and suggests that the stock is trading for less than 10x ev/fcf. Bottom line is that I think there is strong evidence to suggest that the business is doing just fine.
Nevertheless, the stock has been a disaster in 2014. On 1/7/14, management put out a press release that sent the stock down sharply. They disclosed (i) they were switching auditors from E&Y to Deloitte, (ii) they wouldn’t be able to complete the restatement by their original 3/31/14 deadline, (iii) they were adopting a poison pill, (iv) they were almost certain to get delisted by NASDAQ, and (v) management was working on providing investors with a strategic update.
It was mostly the auditor change which was not taken kindly, nor should it have. The issue was that E&Y has been named in various shareholder lawsuits. Because of their role in the original screw-up, they had shifted to full-on CYA-mode and management said that they were being counterproductive, taking too long and costing too much money. For better or worse (they insist better in the long-run), the decision was made to switch firms, and E&Y confirmed that they did not leave as the result of any dispute. But the whole situation was viewed as another slap in the face of shareholders and further evidence that Avid is mismanaged.
This past Monday was the really big puke. On 2/24/14, Avid confirmed that the NASDAQ was delisting them the following day, although they stated that they anticipated having the restatement complete by “mid year”. I was actually relieved to see this since it meant the end of the process was within sight and wouldn’t drag into 2015. The stock was sent down 30% on news that it would be delisted from the NASDAQ. Despite not being current in its financial reporting for almost 18 months and saying a month before that it was certain to be delisted, this revelation evidently came as news to many, many shareholders. Avid has 39m shares outstanding, while it’s float is 32m. I further know of another 6m shares that were either buyers or not-sellers, which means the effective float on the offer yesterday was 26m shares. Incredibly, 13m shares traded on Monday while another 7m traded on Tuesday. Impressive for a stock whose ADV was 130k and hadn’t traded more than 2m shares in a single day during the previous five years. Abrupt shareholder rotation is a great place to look for things to buy.
(A good friend of mine told me something very interesting which could explain the extraordinarily volatile trading on Monday. Evidently, many mutual funds frequently engage in a type of market manipulation of stocks the day before they are punted from indexes. Say you manage a mutual fund and your benchmark is the NASDAQ Composite. You own 1m shares of Stock ABC and know that today is its final day of listing. You wait until five minutes before the close, then you put in a 200k market-sell order. The stock gets destroyed and your benchmark gets dragged down with it. But you know that the closing mark isn’t “real” and expect it to pop the next day. When it does, your fund gets the performance on your remaining 800k shares, but your benchmark doesn’t participate. I suppose if you can pull this off enough times in a year, it might give you a modest advantage in beating your benchmark, which is the only thing that matters in that world. Diabolical. If you look at the intraday trading in Avid on Monday, it certainly seems consistent with this tactic. Aside from thinking this was interesting as hell, it helps show that the big sell-off was stupid.)
When I look at past examples of “real” companies going dark on financials or delisted (or both) for reasons other than insolvency, history suggests they are usually great buying opportunities. Volt’s stock fell from $8.50 to $6 on their delisting (juuust about the low) then rose to $11 four months later...today it’s at $10. Globalstar was delisted in December 2012, falling from $.42 to $.30 on the day it got delisted. That day was the low, and today the stock is at $2.30. Comverse’s stock was flat on its delisting day in 2007 despite 43% of the shares outstanding trading. The stock actually climbed for a few months until the mayhem of the financial crisis rolled around. Navistar’s stock did nothing, then it doubled four months later.
Other situations seem similar to me. Olympus was accused of being a fraud and having the Yakuza running the company in 2011, and everyone panicked that the stock would get delisted, quickly sending the stock from Y2500 to Y500. It had almost tripled two months later, and today it’s at Y3300. Diligent Board Member Services trades in New Zealand (although oddly it’s registered with the SEC and files K’s and Q’s) and went dark last year for almost identical reasons as Avid. In December they warned that their own restatement would take an extra couple months and that delisting from the NZX was possible. The stock gapped down from $4 to $3 on the news, yet today it’s almost at $5.
It’s good to be buying stuff from guys who Just Need Out.
What Is Avid Worth?
I’m not a fan of the ev/sales multiple, but it has its use and it’s made me money in the past. It can be imprecise and misleading, but it can also be helpful in pointing you in the right direction. Avid trades at .5x ev/sales while competitors average 4.3x. The second lowest multiple I can find is 1x, and for that I have to go to France for a company that sells software/hardware to the textile industry (Lectra, I’m looking in your direction).
Another clue that Avid is probably significantly undervalued is the multiple it trades on of its maintenance revenue. Avid is generating ~$160m in service revenue, the majority of which is maintenance and therefore more-or-less recurring. I’ve looked at acquisitions in the application and enterprise software space over the past few years, and the average multiple (excluding the high outliers) is 7.4x. The lowest multiple was 4.9x. Avid is trading at 1.1x. There has got to be a way to monetize this.
Grass Valley is a strong competitor to Avid and they were acquired by Belden (NYSE: BDC) on 2/6/14 for $220m while generating $290m in revenue and $24m in ebitda. That ev/sales multiple today on Avid would make it worth $9.30/share, so about 60% upside. It also shows that a ~10% operating margin should be achievable for this business. If Avid could muster a 10% operating margin, the deal implies a $13/share valuation for Avid, or about 120% upside. Keep in mind this is just on what I believe are today’s numbers. Also, a 10% operating margin at Avid currently would produce $1.30-1.40/share in fcf, so I think the shares would likely be worth more than $13. Also remember that the 4K cycle should help tremendously over the next couple years, so there could be a lot of upside from here anyway.
Belden also bought another NLE company called Miranda Technologies on 6/5/12 for $345m while it was generating $185-200m in revenue and $36-40m in ebitda (another 9x multiple). This deal would value Avid anywhere between $11-23/share.
The timing of the Grass Valley deal was interesting when you consider Avid adopted a poison pill just a month before and Belden appears interested in gobbling up NLE firms. A little consolidation could do some good. I think it’s reasonable to assume that Belden approached Avid about a deal. While the poison pill is in some ways frustrating (especially when management credibility is as poor as Avid’s), it’s reassuring to know that someone out there wants to buy this company. The new CEO of Avid sold his previous company to Fiserv a year ago, by the way.
I can’t figure out any reason why Avid shouldn’t be fixable even with stagnant revenue. Just some revenue stabilization should help achieve this and based on my estimates of their financials, I think we’ve got that today. When the restatement concludes, I believe management will focus on profitability and generating acceptable returns for shareholders. If they could simply eke out a 5-6% operating margin, it would generate about $.65 in eps and fcf. I think this is conservative, and a more likely goal is a 10% operating margin (I have relied on some old anecdotes from other shareholders and industry folks for this target).
The 4k cycle is where the numbers could get silly. Could Avid grow revenues to $600-750m? Yes, if the cycle ramps up, this is perfectly reasonable. What if they could do a 10% operating margin? Again, this is an achievable target for a company like this. It works out to anywhere between $1.50-2.10 in eps and fcf. Could it get a multiple of 15x? Could operating margins go higher than 10%? See what I mean? It’s not often that I can make a decent case for a stock to be worth 5x in a couple years. The last time I had this feeling was Virtus.
I put these things together and a side of me begrudgingly admits that management might have done the right thing by adopting the poison pill. I’m not terribly interested in selling the company at ~$9/share today when it appears all hope is lost and it could be worth $20-30/share in two years.
Risks here, obviously. The most likely one is that the restatement drags on longer than expected, which will cost more money and create more unease. I don’t think liquidity will be an issue as they have almost $50m in cash and $60m available on a Wells Fargo credit line. The burn to get them through the restatement should be $15-20m.
Also, sorry I didn’t post this a day ago.
|Entry||02/25/2014 08:42 PM|
I have followed AVID for years without participating. Their position with professional video editors is secure. I have spoken to video editors that would not think of using anything but AVID.
However, mgmt has always seemed to screw up the business of what should have been a very profitable niche product. What do you think about new CEO?
|Subject||Blum & Others|
|Entry||02/26/2014 06:43 PM|
Are you worried about shareholder rotation? I like the concept of taking advantage of those who have to sell but I am wondering about those who have been in it for years and aren't selling - i.e. Blum. They own a huge chunk and their cost basis has to be way-way higher.
Thanks again for posting.
|Subject||Market manipulation a la AVID for Utah|
|Entry||03/14/2014 11:41 AM|
This is off topic, but is the same thing going on in AH today that went on in AVID? Is this going to get pummelled in order to manipulate the indices?
|Subject||RE: Market manipulation a la AVID for Utah|
|Entry||03/14/2014 12:36 PM|
Evidently I'm not the only one paying attention to AH today.
I have no idea what's going to happen. AVID was only down 5% for three hours, then went bananas, particularly in the last 30 minutes of the day. AH seems quiet so far and volume is comparatively light. I'm kinda hoping it pukes to $6 or below, maybe I'll buy some right at the close if so. But I've also been following AH for a while and haven't ever bought any. The stock was wildly expensive heading into the accounting restatement and today I would reckon it's only reasonably priced. But the balance sheet is fine and they're probably fcf positive.
|Subject||RE: Come on, Utah|
|Entry||09/12/2014 12:06 PM|
Avid is, at best, a single digit grower. They've benefited somewhat recently when Apple pissed off the professionals by dumbing down Final Cut. Since then Apple has made changes to appease the professionals and will be a formidable competitor again, esp with pricing that is much lower than Avid's.
The bulk of Avid's video revenue is actually not SW, but proprietary HW (including storage). This HW part of biz is rapidly being commoditized. Ask any Avid customers and they complain that Avid storage is super expensive.
Avid's management has also been clear to investors (if you talk to them privately) that they will do a secondary as soon as they can to rebuild their balance sheet and make acqusitions. Net cash is close to zero after paying out restatement expenses.
|Subject||RE: RE: Come on, Utah|
|Entry||09/12/2014 02:24 PM|
Can you quantify "bulk"? Once quantified, do you have an estimate of how fast hardware sales will decline, impact on margins, profitability, earnings, etc.? I assume, given the assertion, single digit grower would be very optimistic. No?
So, management has told you they are planning to do a secondary?
|Subject||bookings and ebitda|
|Entry||09/12/2014 02:25 PM|
I'm guessing some investors are relying on two metrics AVID gave today and thinking the stock must be cheap base on these metrics. I have some issues with these metrics:
1. Bookings: according to AVID, "bookings represents that total amount of revenue that we expect to earn over the term of the agreement..." AVID's TTM bookings of $531m is not equal to annual revenue. This amount could be spread over 2-3 years -- depending on the terms.
2. Adjusted EBITDA: AVID stated that its revenue in 2012 and 2013 were inflated by over $175m and $125m respectively due to revenue amortization. Essentially, AVID had to restate/lower pre-2011 revenue and book a huge deferred revenue balance to draw down thru 2016. Thus, "adjusted ebitda" from 2012-2016 must be inflated as well. Anyone can figure out what the "cash ebitda" should be -- taking out impact of non-cash revenue amortization?
|Subject||RE: RE: RE: Come on, Utah|
|Entry||09/12/2014 02:34 PM|
Dennett, thanks for asking.
According to today's 10-k, Video Storage and Server solution (HW) was 56% of Video Products and Solutions segment in 2013. Professional Video Creative Tools and Media Management Tools (SW) were 44% of the same segment.
Yes, management said they'd like to do a secondary, but obviously not when the stock was at $6. I don't know what prices they'd like to go out at, but they've indicated their desire to shore up the balance sheet and have ammo to make acquisitions. They most likely won't do it until after analyst day -- after they get their chance to tell their story.
|Subject||RE: RE: bookings and ebitda|
|Entry||09/12/2014 04:34 PM|
we have similar analysis . . . $500mm revenue; 15% op margins normalized; 15x multiple --> $750mm
also note that trades at 2.3x service revenue, which should provide a floor even if cheaper solutions prevail so long as mgmt is responsible.
this could be a target for either a strategic or a financial buyer as well.
|Subject||RE: RE: RE: bookings and ebitda|
|Entry||09/12/2014 05:24 PM|
Not sure how you get to 15% normalized margins. From 2003 to 2010, the best PF op margin AVID did was 12%. In today's investor video, the CFO kept emphasizing two things: (1) while rev is being amortized thru 2017, costs are not; (2) this creates margin headwinds as rev amortization is burned off. Therefore, here's what I have on their 2014 op income: assume your $500m in "cash" revenue, 59% in GM, opex $265-275m, I get op income of $20-30m. This is 4-6% op margin. GM and opex are based on management guidance in slide 51 of today's preso.
CFO also explained that $44m in FCF in 2012 was a result of strong working capital improvement. He didn't think this was repeatable.
|Subject||RE: RE: RE: RE: RE: RE: bookings and ebitda|
|Entry||09/12/2014 08:55 PM|
Sorry, Nathanj, I didn't even see Straw's post with the 15% margin number until just now, I thought you were replying only to my post.
|Subject||Maintenance (recurring revenue) run rate|
|Entry||09/26/2014 11:50 AM|
In our view, knowing the maintenance run rate of a software company is pretty critical. We think for Avid, going forward, it's even more critical because of the "lumpiness" (presumably of larger product sales) they kept mentioning.
Having talked with Tom from IR yesterday, we are more confused than ever so was wondering if anyone had come up with a thesis on what a more normalized maintenance run rate is and whether it's growing (similar to the question asked on the conference call).
The answer given was that ~70% of service revenue is maintenance, that it was like others' maintenance in terms of margin (e.g. higher than company average), and then Lou proceeded to talk extensively about limiting R&D on maintenance but still expecting it to grow.
Let us know if we are wrong on this, but the 70% number only allows for a very general ballpark reference because:
a) We don't know what service revenue/bookings/cash receipts will be in 2014 (guidance is not broken down)
b) We don't know what % of the pre-2011 amortized revenue is coming from the service line (in either 2013 or hypothetically in 2014)
We do know that Service revenue grew quite nicely between 2011-2013, even though it theoretically had a headwind of less amortized revenue each year.
Any thoughts on how people are looking at this are welcome.
|Entry||10/24/2014 10:28 AM|
Avid is going on the road in early December. Contact either Robin Weinberg at their IR firm (email@example.com / 212-687-8080) or Tom Fitzsimmons at the company (firstname.lastname@example.org / 978-640-3346) if interested.
|Entry||06/05/2015 03:48 PM|
Anybody still following?
This has been a super idea.
We have been lightening our position here. The operating results have not been overwhelming, but the stock seems to be getting bid on possibility of a sale. Probably still cheap if sure of a sale, but otherwise, seems to be fully priced.
|Subject||Re: Re: Short report|
|Entry||06/25/2015 12:50 PM|
Thanks for your detailed comments over past month.
Copperfield report is garbage, no doubt.
You guys are a bit more optimistic in your upside $2/shr FCF than I am, but we have been adding back the shrs here that we sold at $18 . . .
As Katana predicted, it might get to $30 via $10. Prescient.
|Subject||Re: Re: Re: Re: Short report|
|Entry||06/26/2015 02:15 PM|
just a spectator here but have to admit I'm shocked the stock reacted negatively to that report. I typically have a lot of respect for the short sellers and think teams like Citron and Muddy Waters provide a great service to investors. That beind said Copperfield seems like a a group of sketchy no talent hacks, clearly the worst of the public short people, and this maybe the first time I've honestly thought a short report was put out to drive a stock down for a future long investment. A growing, recurring software company with big insider buying is really the best target they could come up with in this insane bubble bull market?!
|Subject||Re: Updated thoughts?|
|Entry||08/11/2015 11:09 AM|
This is an interesting reaction . . . it seems to me that market is saying that mgmt has lost all credibility. The market is not buying mgmt excuses for the huge Q2 revenue shortfall.
If you think mgmt really does have the H2 visibility that they claim and will meet the forecast, then cheap. If you think that mgmt is full of it, then not sure.
|Subject||quite a round trip|
|Entry||11/06/2015 10:24 AM|
Any updated thoughts? They are certainly making Copperfield look prescient if not accurate. I do think they would be much better served by presenting their results excluding the benefit of pre-2011 deferred revenue and maintenance accounting changes though- it is obvious no one values them based on their presentation of profitability.
|Subject||Re: Re: quite a round trip|
|Entry||11/06/2015 04:11 PM|
Given the dismal guidance, how does this play out from here?
At $6, TEV = $323mm.
They have $130mm of recurring revenue.
Including stock comp and using bookings, we get Q3 EBITDA = $0. But this is a bit unfair as there does appear to be some incremental costs associated with the Deferred Revenue (based on quarter-by-quarter comparison) and these costs go away in two years.
They may bump into some liquidity issues in a year . . . secondary? convert?
It seems to be entering the territory of not-worth-much as a standalone company, and I do not want to over-react to that guidance, but perhaps its value only declines to an acquiror over time.
Does this cause CEO to sell? Or too weak a hand at this point?
How much overhead could be taken out here by a strategic acquiror?
I hate stocks where the only possible catalyst is a sale, but in this case, I continue to believe it has great strategic value.