Saturday, March 29, 2014

AVID: Revisiting Avid Technology, Inc.

We are revisiting Avid Technology (AVID), a company that makes software and hardware that companies within the media and entertainment space use to create, edit, and add effects to film, video, and audio; in other words, its products help enhance and increase value of digital media assets.  The Company has improved its products to not only enable content creation and enhancement, but also to help secure and monetize those digital media assets efficiently.  AVID remains a turnaround story; not only in terms of improving the top and bottom-line, but also to get relisted on NASDAQ.  We think the stock could be worth $11.18, but investing in this name requires patience.  We will discuss why the stock is where it is, and also will touch on what we consider to be near-term and long-term catalysts that could push it higher.  We will then discuss our estimates and valuation in a bit more detail. 

We introduced AVID in Dec. ’12 with a $9.00/sh valuation.  At that time the stock was at $6.83.  As shown below, since then, it has had its good and bad days.  The stock hit $8.00 a few times and went as high as $8.89 in Dec. ‘13.

During those 16 months, the Company encountered many issues, the main one being that it had to review the way it treated software maintenance revenues.  This was related only to the timing of revenue recognition, not the total amount of revenues that it generated.  In addition, according to management, the necessary restatements (due to the accounting review), which have not been completed yet, will not impact cash receipts related to those revenues.  Given that the Company could not complete its review nor file quarterly and annual results (since Q3 ’12), its stock was delisted from NASDAQ on Feb. 25 of this year.  As shown in the chart above, the stock slid 25% on Feb. 24 and closed at $4.93.  The stock has recovered a bit since then, as management finally provided some color regarding not only the review process but also the Company’s forward strategy.

Foreseeing a significant downturn in the stock due to getting delisted from NASDAQ, the Company also introduced a flip-in poison pill plan on Jan. 7, hoping that its possible dilutive effect on AVID shares would turn away potential acquirer(s) or force it to pay much more.  This could also be viewed as AVID having confidence in completing its restatements, getting relisted on NASDAQ, and improving its operations, which hopefully would push the stock higher. 

Below are what we view as near-term catalysts for the stock. 
  • Presence at the upcoming NAB (National Association of Broadcasters) conference; April 5 - 10.  AVID likely will impress investors, in addition to current and potential clients, with its latest product strategy and demos.  The Company also will be hosting its first ACA (Avid Customer Association) event, Avid Connect.  AVID, along with its clients and media industry leaders, created ACA to have a better perspective of the current and future state of the industry, and to develop future strategies.  We think some investors also may attend Avid Connect, where they will witness its customer brand loyalty and AVID’s role in the industry. 
  • Completion of all restatements and filings, which management believes will take place by “mid-year 2014”. 
  • Positive press releases about AVID’s new contract signings or extensions, and its role in helping media companies cover important US and international events, including the 2014 World Cup and US midterm elections. 
  • Applying for relisting of AVID stock on NASDAQ.  If the Company completes its SEC filings by mid-year, we think the application will be filed in Q3 or Q4. 

Long-term catalysts include:  
  • Revenue growth driven by new products and product upgrades, in addition to widely covered US and/or international events (slightly seasonal) 
  • Margin expansion post divestiture of the consumer business, and further driven by cost control, and likely higher recurring revenues 
  • Return to breakeven or profitability by end of FY ‘15

Revenue growth

AVID is introducing new products and strategies which will help drive revenues higher.  Its most recent one is Avid Everywhere (basically an upgrade of Interplay), which the Company will demo and discuss in more detail at ACA and the NAB.  

Given the digitization of media assets and the many sources of content and increasing number of content creators, media companies likely are embracing more enhanced centralized (or cloud-based) media asset management systems, where media asset flow and information flow are integrated and managed efficiently, from the content creation process to its protection, distribution, and monetization.  AVID is enabling its clients to do this through the open and integrated Avid Everywhere platform.  In addition to AVID’s own widely-used tools and applications, third-party products can sit on this platform.  

Continuing trends such as increase in creation and distribution of 3D content, prioritization of not only distributing and monetizing but also creating and editing content anywhere in real-time, and, of course, the continuing transition towards HD content (now mainly in emerging markets), and lower bandwidth costs likely will drive up demand for offerings such as Avid Everywhere.  We think this may also help AVID become more of a SaaS (software as a service) company.

Large events also drive some top-line growth for AVID.  The Company has been successful in selling new products or upgrading products before widely covered US and/or international events.  Sales generated by such events usually close 2 - 3 quarters before the actual events take place.  Looking ahead, we believe the next US Presidential election plus the Summer Olympics in 2016 could drive more top-line growth in the second half of FY ’15.

We have modeled a 5.7% 5-year revenue CAGR ending in FY ’18.  We note that FY ’12 and FY ’13 numbers are our own estimates, as again, AVID has not filed its quarterly and annual financial results since Q3 ’12.  We think total revenues declined in FY ’12 and FY ’13 partially due to the Company divesting its consumer business in Q3 ’12.  That business was no longer growing, although we estimate it was still generating annual revenues between $90MM and $100MM.

As a software company moving towards a SaaS business model, or focused on selling its ‘everywhere’ media asset management solutions, we believe AVID’s software maintenance revenues, or services revenues, not only will begin to grow a bit faster than its product revenues, but will also become more recurring over time.  We expect to see more deferred revenues on AVID’s balance sheet going forward (once it begins filing its quarterly and annual results!).  We estimated a 7.6% 5-year CAGR for services revenues compared with 5% for products. 

Margin expansion  

We expect margin expansion, driven by modest revenue growth, more recurring revenues, lower amortization costs, and as mentioned previously, divestiture of the lower-margin consumer business.  While the Company may have improved gross margins in FY ’12 and FY ’13 (based on our estimates), we think it was more than offset by costs associated with restructuring and accounting review.  Based the Company’s first three quarters’ financial results in FY ’12, we estimate it incurred restructuring costs of nearly $29MM during that fiscal year.  In addition, based on AVID’s 8-K filings we plugged in accounting review costs of approx. $18MM and $34MM in FY ’13 and FY ’14, respectively.  Assuming not much additional restructuring costs going forward, we look for AVID’s operating margin to turn positive in FY ’15, 0.5%, and increase to 5%+ by end of FY ’18.  We estimate adj. EBITDA margin to grow from 4.5% this year to 9.1% in FY ’18. 

With all of this said, we expect AVID to breakeven or generate net income by end of FY ’15, which will be welcomed by the Street.


In terms of valuation, we did a 5-year DCF and came up with $9.23/sh equity value for AVID.  After adding what we expect is $1.95/sh in tax savings by carrying forward its US net operating losses (NOLs), we think AVID could be worth $11.18/sh, which represents an 82% upside.  We note that without assuming carryforward of the NOLs, upside is 50%. 

Our terminal multiple DCF model assumptions include EBITDA multiple of 7.0 and WACC of 14.1% (mainly due to AVID’s high beta of 1.8).  We are conservative in our assumptions as the multiple applied is lower than where most of AVID’s competitors are trading at.  This also goes along with our belief that the overall equity market is overvalued.  We think the lower EV/EBITDA also takes into account some of the risks with which the stock is associated, such as whether the Company can finish its accounting review and restatements, and improve its operations, on time.  The implied long-term growth rate of this model is 5%, which we believe is in-line with the ever-changing media industry and growth opportunities it may provide for software technology companies such as AVID. 

We looked at AVID’s NOLs which it can use for tax savings once it becomes profitable.  At the end of FY ’11, according to the Company, it had approx. $362MM in US NOLs.  We think that grew to $389MM by end of FY ’13 and will likely grow to $405MM this year.  Our $1.95/sh in tax savings is the sum of estimated PV of possible tax savings during FY ’14 – FY ’18, $4.7MM; and PV of tax savings post-FY ’18, $71.4MM, based on the remaining NOLs.  We assumed 41% of AVID’s revenues are generated in the US and a 35% tax rate, and used those figures to estimate the tax savings.

Again, investing in this name carries risk and requires patience, but we think given its high-quality and widely used products, combined with management’s attempts to run the Company more efficiently, the upside is attractive. 

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