Avid Technology: Contrarian Position

Wall Street analysts have given up on Avid Technology (4 neutral ratings, 3 sells, including two Focus Sells!). I think that times are about to change. Avid (AVID) is the worldwide leader in providing enterprise software for video broadcasting, and audio and video editing and production. Avid also has a consumer video production and editing business.

Having been a Wall Street analyst, I understand where they're coming from. The company has missed projections and generally underperformed for years, making any analyst look silly for recommending it. No client would listen to a bullish recommendation from them anyways.

Here are the facts - you decide:

• Market Cap: $855MM
• Enterprise Value: $705MM
• 2007 revenues: $930MM up 2% from 2006 levels
• 2007 Free Cash Flow: about $52MM
• Trailing Free Cash Flow Yield: 7.4% (52/705)
• Avid is in a good market. As broadcasters switch from videotapes to digital editing and production, new equipment will be required from inside the stations, to remote trucks, to cameras. The trend to HDTV requires new equipment and software, too. These are inevitable changes which will take place over years creating steady business for the technology providers.
• As a market leader in all three of its divisions, they should garner a premium valuation should this turnaround work, or sell off a piece or two along the way. Large-cap companies including Thomson, Harris Interactive and Oracle are potential buyers, not to mention private-equity players.
• New CEO, Gary Greenfield, has a track record as a turnaround CEO, most recently in the public market as CEO of Peregrine Systems after the company ousted prior fraudulent management. Investors who bought Peregrine debt upon his arrival did very well. Ken Sexton, joined Avid as Chief Accounting Officer, and has worked with Greenfield at Peregrine as well as brief stint at WebMethods leading up their acquisition by Software AG
• Management has indicated that large restructuring initiatives will be announced in July, that should drive Q4 operating margins to the 10-15% range, in our estimation. Not a reach for a large software company.
• Company has bought back over 4 million shares year-to-date, reducing sharecount over 10% to 37 million shares.
• New CEO and all new management incentive compensation is tied to incremental return on capital gains and stock price. CEO stock options strike at $23.36/share, so he is incented from here.
• Wall Street ratings are almost uniformly negative - with 3 sell ratings and 4 neutral ratings. What's more Avid finds itself on TWO "focus sell" lists - at JP Morgan and Kaufman Brothers. The thesis of these sell ratings are poor recent performance and lack of clarity on turnaround plans. I believe a call to any of the analysts with sell ratings will show that none of them have done any rigorous research. They are simply assuming bad results will continue.
• Blum Capital filed an amended 13D filing announcing its intention to raise its stake in Avid to over 25% of the company, from the high teens during Q1. With a representative on the board of directors, one should probably consider this aggressive insider buying.

Here's the punchline: Assuming that a restructuring allows Avid to reach 12% margins next year on $930 million in revenues (no revenue growth assumed) yields $110MM in operating profits. Put a 12x multiple on that gets you to $1.34B enterprise value add $100MM in cash (which assumes $50MM cash restructuring expense) and you have $1.44B market cap, which is $36/share. Assume that Avid participates in market growth and the numbers get bigger.

Disclosure: I own Avid. My clients own Avid.

Comments

[HappySam]

Avid underperformed during a bull market. Why do you think it will outperform in a bear market?

If you could convince me that the buyers of AVID's software/equipment were not coming under pressure, that their markets were instead expanding and growing then perhaps you may have a case.

Fact is that this is a mature market, margins will continue to contract and low priced competition will destroy their margins.

In my humble opinion

[User 200631]

It's seems obvious (to me at least) that Mr. Goldblum did research in all areas except one - the marketplace where Avid competes. Three words which are the root of Avid's (almost insurmountable) problems: Final Cut Pro. Apple has single-handedly changed the technical, AND more importantly, financial playing field. For all his misguided analysis and pointless number crunching, Mr. Goldblum totally misses the point that FCP is a juggernaut that has transformed the post-production landscape, and in doing so has drastically changed Avid's business model.

One additional quibble: "As broadcasters switch from videotapes to digital editing and production..."; I don't know where Mr. Goldblum has been, but the end of videotape ship sailed years ago. A more accurate statement would be "As broadcasters switch from 2nd (or 3rd) generation digitial editing and production...".

I'm not saying that Avid is going away soon, but the future will be quite and uphill battle for the company - and these are not the times that will be friendly...

[ullric]

Final Cut Pro is a software tool for prosumer and small productions.

Avid is not a prosumer company, it's main market is broadcast, hense the talk about video tapes. Avid also sells storage solutions which are replacing video tapes. Apple does not.

Avid has never made money from software. It makes money on hardware, turn key solutions, and service. Avid Media Composer has always been a loss leader.

Avid's future is in services, asset management for large entreprise, bigger contracts. Apple has no plans in that area, it is entirely concentrated on the prosumer market.

Avid's solution are not incompatible with final cut pro, they are complementary

[User 200631]

AvidUser, you really need to do research before you make wildly erroneous statements that you present as facts. For the record, I am an Emmy award-winning editor who uses both Avid & FCP.

"Final Cut Pro is a software tool for prosumer and small productions."

You mean like BBC? NBC? CNN? MTV? Fox Promos & Sports? The production companies in Hollywood that supply programming to all the major tv & cable networks? Just about every Hollywood ad agency? Oh yeah, did I forget to mention David Fincher, Peter Jackson and Walter Murch? Please....

"Avid also sells storage solutions which are replacing video tapes. Apple does not."

I suggest you look at Apple XSan. There are facilities using large (135TB+) systems for HD multicam editing.

"Avid has never made money from software. It makes money on hardware, turn key solutions, and service. Avid Media Composer has always been a loss leader."

While the failure of Xpress Pro has shown you first sentence to be correct (Avid has discontinued it), your comment that MC has been a loss leader is a head scratcher. That was Avid's bread and butter from the beginning until just a couple of years ago when they were forced by the market to introduce a high-end SOFTWARE solution. Their exorbitant markups flew out the window once the software could be purchased for $2,500. The Unity is facing rising competition to more cost-effective and equally viable solutions. As for service, I suggest a visit to the almost any online Avid forum for non-partisan views on the problems with the company's assistance program.

"Avid's future is in services, asset management for large entreprise, bigger contracts. Apple has no plans in that area, it is entirely concentrated on the prosumer market."

With all due respect, are you NUTS? Do you really know nothing about FCP Server which was shown at NAB last year?

Listen, there are projects that Avid excels at, and the same is true for FCP. There are powerful tools in both. But with the exception of ProTools, Avid & FCP do NOT complement each other. Having been involved with Avid products since V1.0, I can safely say that the current problem with Avid is that it's a bit of a rudderless company without a vision - which is quite the opposite with Apple.

Please, at least do a little research before you make such wildly inaccurate pronouncements.

[oh yeah!]

User 200631
Your views are as biased as Avid User

FCP is a serious contender in Post / Film markets but it still is a follower; the whole interface echo's the Avid "look and feel". The latest Avid DX offerings are sweet music for the LA market, Avid still leads the field.

The storage solutions are still ahead of Apple and cost of like for like equipment is similar. Avid have far better end to end solutions than Apple and the Apple focus is consumer (in all its markets) whereas Avid have made decisive moves into the Broadcast domain. Although the post market is a major factor for Avid, it is not the only factor, unlike FCP. Don't mention Apple content management solutions they have a few years to go yet and Avid scalability out strips Apple as well.

As for your tape comment; many post and broadcast customers use it and from an archiving perspective they have too! The tape format may change but it remains tape. Post and Film markets tend to be early adopters but they are not all 100% digital. As for Broadcasters, some still use 2 /3 machine edit bays; offering a huge potential to Avid’s future in this product line.

A cynic would say the only reason FCP survives is Avid started working with Microsoft in the late 90’s and Mr. Job’s decided to capitalise on the LA markets love of a single button mouse.

Avid have shifted focus a few times in their past and Avid have had a lot of management change over the past few years. They now have a solid board and upper management structure that has a focus in preparing the company for an eventual merger or buy out with a larger organisation. I believe this, because of the involvement of Blum Capital and also the selection of the CEO, Mr. Greenfield -check his history.

So from an investment point of view, I think Mr. Goldblum is correct and I believe that the Avid shares will top out around +$35 to$40, prior to their being acquired. This may take a further two years or more. The biggest unknown is what broadcasting market and post / film customer will do in an overall market that is hurting from higher than normal oil prices.

I own a few Avid but no Apple shares; so I suppose I am also biased.

[User 200631]

Oh yeah,
Other than saying my views are biased, I have no quibbles with your points - they were well thought out and reasoned. As I pointed out in my post, there are benefits to both editing solutions. My issues with Avid User was his wildly inaccurate statements and assumptions about FCP - its place in the market and his demeaning its feature set with what is apparently very little knowledge.

Is FCP successful in the prosumer world? Obviously yes. But it is also a success in the professional world. As an editor who began in film, moved to tape, then to the NLE world, I can say that ALL systems steal from each other and are followers - Avid most of all. I can point out the numerous feature sets in Avid that made their first appearance in either Montage, Dvision, Lightworks or Discreet edit - just as these products borrowed liberally from Avid. The editing paradigm as we know it did not originate with Avid. Source/Record windows were around way before Avid began in the late 80s.

I didn't start as an Apple fanboy until I began using FCP 3 years ago after Avid TOTALLY dropped the ball with our company in with its lack of HD and Unity support. Service was a particular strength that Avid User was touting, I can easily tell you of additional first hand horror stories about problems that will curl your hair.

Again, not saying FCP is the best and Avid blows - just trying to keep the facts straight.