Avid Technology: Bullish On Climbing Demand For Digital Media Production

Summary

• Avid Technology reported its Q3 results which beat expectations highlighted by strong trends in subscriber growth.
• The company is benefiting from increased global spending towards media content produced on its market-leading software.
• We are bullish on the stock and expect more upside through 2022 as the company continues to consolidate its industry leadership position.
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Avid Technology, Inc. (NASDAQ:NASDAQ:AVID) is a leader in specialized software and hardware used in digital media production. The company's editing products like "Pro Tools", "Media Composer", "Sibelius" and related content management systems are recognized as standards for professional audio and video production. The attraction here is the growth in new forms of media platforms like streaming services and social media which have fueled demand for content driving new sales. The company has been able to translate that momentum into strong profitability highlighted by its latest quarterly results which beat expectations with solid operating trends. While the stock has already been a big winner this year, climbing nearly 100%, we remain bullish and expect more upside as AVID continues to consolidate its industry leadership.

(Seeking Alpha)

AVID Earnings Recap

Avid reported its Q3 earnings on November 9th with non-GAAP EPS of $0.27 which was $0.02 ahead of consensus expectations. Revenue of $101.6 million climbed 12.4% year-over-year and was also ahead of estimates. Favorably the gross margin reached 66.3%, up 40 basis points year-over-year. On the other hand, non-GAAP operating expense climbed by 24% compared to the period last year which resulted in a lower adjusted EBITDA margin at 16.8% from 21.4% in Q3 2020.

Management explains that the comparison period last year included the benefit of several cost-cutting initiatives implemented during the pandemic and savings from temporary employee furloughs. In this regard, the trends over the first nine months of 2021 with EBITDA climbing 36.6% y/y and a higher margin better reflect the positive financial trends. Earnings are up and free cash flow has accelerated this year.

(source: company IR)

A big part of the story is the strength in subscriptions through Avid's soft-as-a-service "SaaS" model for its suite of software products and enterprise-level media content management tools. Subscriptions climbed 56.4% y/y to $28.0 million representing about 28% of the total business. This has balanced the more modest trends 16.3% revenue growth from the Integrated Solutions segment which covers the proprietary hardware systems across consumer-level devices to professional studio production and live TV broadcasting equipment. Separately, Avid offers maintenance services through a team of specialists that cover everything from design, installations, upgrades, and possible repairs which all combine to create a revenue flywheel.

(source: company IR)

It's encouraging to see that Avid now has 389K subscribers, up 35% y/y, with growth across the main software groups. 77.1% of revenue is recognized as recurring over the trailing twelve months, up from 71.2% in Q3 2020. The annual contract value at $328 million compared to $272 million in the period last year reflects the sales mix towards more high-end solutions.

Avid ended the quarter with $50.5 million in cash and equivalents against $172.7 million in long-term debt. Considering adjusted EBITDA over the trailing twelve months at $71.5 million, the company has a net debt to adjusted EBITDA leverage ratio at 1.7x. We view the balance sheet and liquidity position as a strong point in the company's investment profile.

The Q3 results were strong enough that the company revised higher its full-year revenue guidance to a range between $398 million to $404 million, from a prior midpoint of $392 million. If confirmed at the high end of the range, the result will represent an increase of 12% compared to 2020. The guidance for non-GAAP EPS was tightened to a range between $1.18 and $1.26, compared to a prior midpoint target of $1.16. Impressively, the EPS estimate is over 85% from the $0.65 per share result in 2020. The higher profitability trend reflects the benefit of the rising contribution from high-margin subscriptions.

(source: company IR)

AVID Stock Forecast

It may seem like a lifetime ago, but Avid initially faced disruptions at the start of the COVID pandemic last year considering there were cancellations and postponement of film and television projects, major sporting events, and live music which all incorporate some of Avid's hardware and software. In this regard, 2021 has been defined by a strong turnaround while setting up a long-term outlook we believe is stronger than ever.

Within the audio and video production industry, a major theme has been the growth of new streaming platforms like Disney+, HBO Max, Peacock, Paramount+ in recent years following the success of leaders in Netflix, Inc. (NFLX) and even Amazon.com, Inc. (AMZN) Prime Video. According to estimates from the "Motion Pictures Association", the number of global subscribers across all subscription video on demand platforms is set to climb from 1.1 billion in 2020 to 1.6 billion subscribers by 2025. As it relates to Avid Technology, we believe the company is well-positioned to benefit from this continued growth.

The key here is to recognize that the streaming platforms along with traditional media outlets are supporting a surge in demand for new content. Digital creators use Avid tools as part of the production process. The same report noted that media production spending reached a record worldwide in 2020 despite the pandemic challenges and is expected to accelerate in the coming years.

(source: Visual Capitalist)

In our view, Avid Technology represents a "pick-and-shovel" play on these high-level tailwinds across professional segments, independent content, down to amateurs in both video and audio. It's worth noting that while "Pro Tools" is the music industry standard for audio recording, it's also used for mastering the soundtrack of videos.

(Source: Company IR)

To be clear, there are several competitors in this arena that focus on different segments of video or audio production tools. Adobe Inc. (ADBE) is recognized for its "Adobe Premier" which is a widely popular suite of tools for video editing. Even Apple Inc. (AAPL) distributes "Final Cut Pro" as software on the Mac systems. That said, one advantage of Avid in video is its more technically advanced features suited for big-budget film production and commercial TV projects.

Is AVID Overvalued?

According to consensus estimates, the forecast for full-year revenue at $402 million and EPS of $1.22 are in line with the management guidance. Notably, these were revised higher following the stronger than expected Q3 results. Looking ahead, the market expects revenue growth to average around 10% per year through fiscal 2024 while earnings can climb even higher by 23% in 2022 to approach $1.50 based on climbing subscriptions adding to margins. In our view, we believe these estimates could prove to be conservative particularly on the sales side. The ability of Avid outperforming expectations represents a bullish catalyst for the stock.

(Seeking Alpha)

In terms of valuation, AVID is trading at a 25x forward P/E or 21x on the consensus 2022 EPS. We believe these multiples are compelling given the financial trends, operating momentum, and the company's segment leadership. We also highlight that AVID trades at a large discount to Adobe Inc which is priced at 47x 2021 consensus EPS as well as a 34x EV to forward EBITDA against AVID at 20x. Recognizing that the two companies have key differences, we believe AVID can climb and narrow this spread.

Data by YCharts

Is AVID a Buy, Sell, or Hold?

There's a lot to like about Avid Technologies benefiting from several tailwinds and overall solid fundamentals. We rate AVID as a buy with a 2022 price target of $42.00 representing a 27.5x multiple on the current consensus 2022 EPS. As long as the company can maintain the operating momentum and trend in margins, we believe shares can command a higher premium.

In terms of risks, there is an aspect here of the underlying demand that has exposure to macro and business cycle dynamics. A slowdown of the global economy which could be driven by either persistent inflationary pressures or renewed Covid disruptions would likely pressure results and force a reassessment of the earnings outlook. Monitoring points for the next few quarters include the subscriber trends as well as cash flow levels.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AVID over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.