Avid Technology: Limited Upside Following Underwhelming Q4

Summary

• Avid Technology reported its Q4 earnings which missed expectations.
• While management focused on the ongoing shift towards cloud-based subscriptions, growth has slowed.
• This is a great company, but we want to see an improvement in the top-line momentum to support more upside for the stock.
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Avid Technology, Inc. (NASDAQ:AVID) is a leader in digital media software across products like "Pro Tools", "Sibelius", and "Media Composer" recognized as standards in professional audio and video production. The company captured impressive growth in recent years, benefiting from the emergence of new platforms driving demand for more content including from independent creators leveraging social media networks. Indeed, shares are up nearly 300% from pre-pandemic levels.

We covered the stock back in 2021 with a bullish note highlighting a shift towards a subscription model as driving margins higher, supporting a positive long-term outlook. The update today takes a more cautious view of the stock based on the latest quarterly results that featured some mixed indicators. While the fundamentals remain solid, soft growth adds to risks, particularly in the current macro environment. The company is fine, but we don't see much near-term upside in AVID's share price.

Data by YCharts

AVID Earnings Recap

AVID Q4 non-GAAP EPS of $0.45, missed the consensus estimate by $0.03 and was also a tick lower from the $0.46 result in the period last year. Similarly, adjusted EBITDA at $24.8 million was down from $25.0 million in Q4 2021, even as their margin climbed by 40 basis points to 21.4%. Management explained that shipments of live sound control equipment, clearing out a prior backlog following some supply chain disruptions pressured margins based on the quarterly sales mix.

With top-line revenue at $116 million, down by -2.5% year over year, the story has been stronger creative subscriptions while the music-notation software "Sibelius" posted weaker numbers. For the full-year 2022, revenue climbed by just 1.8% y/y, while non-GAAP EPS of $1.41 was up 12.5% compared to $1.25 in 2021.

source: company IR

The company is focusing on the annual recurring revenue (ARR) metric as the total in Q4 reached $245 million, up 10.2% y/y or 13.4% on a constant currency basis. The company ended the quarter with 506k subscribers, up 23.2% y/y, although the sequential quarterly pace has slowed to 4% in Q4 compared to 7% in Q3.

The idea here is that as the proportion of the business that is based on recurring subscription climbs, the setup provides a runway for further growth and higher visibility of future cash flows. The level of recurring revenue over the past year as a proportion of the total now represents 85% compared to 78% at the end of 2021.

source: company IR

We can bring up that AVID maintains a strong balance sheet, ending the quarter with $35.2 million in cash against $183 million in total debt. Considering adjusted EBITDA of $82 million over the last twelve months, the net leverage ratio of 1.8x is stable in our opinion.

In terms of guidance, the company expects a Q1 to largely follow the trends from Q4, with flat top-line growth and some earnings pressure against tough comparables in the period last year. The expectation is for stronger trends into the second half of the year, capturing the ARR runway and some margin improvement.

The 2023 end-of-period ARR target between $270 and $280 million suggests 12% growth compared to the end of 2022. The conversion in sales from a climbing baseline of subscribers should be enough to support revenue growth in the 10% range. An EPS estimate between $1.53 and $1.75, at the midpoint, is 16% higher than the 2022 result.

source: company IR

Is AVID a Good Stock?

The way we look at AVID is that the company has an underappreciated layer of quality, considering its leadership position. This is an industry that has been strong with an expanding number of outlets for digital media consumption driving the demand for more and more content.

The core products and services cover highly-specialized tools that are often seen as critical elements for the professional production of video and audio content between blockbuster theatrical releases, TV station broadcasting, music studio recording, and even live concert-level audio control management. There are also entry-level options for hobbyists or social media creators to independently enter the segment.

At the same time, the concern here goes back to that top-line growth that was soft in 2022 with little reason to expect a re-acceleration of demand over the near term. In other words, metrics like the ARR and even the earnings bump expected in 2023 appear more on the shifting business model and pricing initiatives, more so than a resurgence in operating conditions.

From there, we question how much room there is for the company to significantly outperform the consensus estimates, as a catalyst for shares to run higher. Considering the turbulent economic environment, the risks should be tilted to the downside that metrics like subscriber trends, ARR, and earnings underperform.

source: company IR

In terms of valuation, we can bring up Adobe Inc (ADBE) which is a reference point in the creative industry through its "Photoshop" editing software and "Premier Pro" video editing tools. Notably, Adobe is a structurally more profitable company with a consistently higher gross and operating margin relative to AVID. This helps explain AVID's discount, trading at 17x forward EPS multiple compared to ADBE at 22x.

Data by YCharts

AVID Stock Price Forecast

We rate AVID as a hold, with a price target for the year ahead at $32.00, representing a 19x multiple on the current consensus 2023 EPS. Even as this price point is about 10% higher, it's not enough upside to warrant a buy rating in our opinion.

On the downside, it will be important for shares to hold to remain above $25.00 as an important area of support. Weaker-than-expected results over the next few quarters would open the door for a leg lower in the stock. Monitoring points include the ARR metric and adjusted EBITDA margin.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.