Avid has Strong Q2, Raises Full-Year Guidance

Posted by Josh Stinehour
Aug 08 2016

Avid Technology announced Q2 2016 GAAP revenue of $134.1 million, a year-over-year increase of 22.1% against Q2 2015, and a decline of 6.5% versus Q1 2016.  Avid Logo_ white background

Approximately 60% of the year-over-year growth is attributable to a change in the accounting treatment of revenue recognized for the release of the latest Pro Tools version 12.5.  The ability to more quickly recognize revenue reflects Avid’s progress over the past two years of eliminating the practice of implied support for products and transitioning to explicit support and recurring revenue models.

Avid did not disclose the amount of the growth attributable to revenue contribution from Orad, which was purchased in late June 2015.  As a reference, Orad had $10.4 million of revenue during Q1 2015.

Net income for the quarter was $13.0 million or $0.33 per share.  This compares to Q2 2016 net income of ($4.0) million or ($0.10) per share.  During the first quarter of 2016 Avid had net income of $20.9 million or $0.53 per share.

Gross margins (GAAP) for the quarter were 65.5%, an increase of 510 basis points when compared to the year earlier period, and a decrease of 420 basis points against the preceding quarter.

Operating income for Q2 2016 was $18.8 million, a substantial increase over the operating loss of $8.1 million in Q2 2015, though a decline of 26.8% versus Q1 2016.

R&D expense for the quarter were $21.4 million, an 8.1% decline against Q2 2015 R&D levels, and flat when compared to the first quarter of 2016.  As a percentage of revenue R&D expenses were 15.9% for the quarter, compared to 21.2% of total revenue in Q2 2015.

Sales and marketing costs for Q2 2016 were $30.2 million, representing an 8.0% decline versus Q2 2015 sales and marketing levels, and a decline of 4.4% versus Q1 2016.  Sales and marketing expenses were 22.5% of Q2 2016 revenue, a decline versus 29.9% of total revenue from the second quarter of 2015.

G&A expense was $16.8 million for Q2 2016, a decline of 3.5% versus the year-earlier quarter, and a decline of 5% against the preceding quarter.  Expressed in terms of total revenue, G&A expense was 12.5% of sales in Q2 2016 versus 15.9% in Q2 2015.

When considering the comparable period Q2 2015 figures do not include a full contribution of Orad’s operations (purchased in late June 2015), the decline across all operating expense categories – especially in sales – illustrates the impact of Avid’s recent restructuring initiatives.

There are many one-time expenses and non-cash items in Avid’s income statement results.  To provide a more normalized view of profitability Avid cites adjusted EBITDA, which is defined as operating income plus expense add backs for costs attributed to amortization, restructuring, restatements, stock-based compensation, acquisitions, integration activities, and efficiency program costs.  Adjusted EBITDA for the quarter was $29.4M, a substantial increase over the adjusted EBITDA of $1.4 million from Q2 2015.

Product and Services Revenue Breakdown

  • Product revenue for the quarter was $75.6 million, a slight decline of 0.7% versus the prior year, and a decline of 10.5% against the preceding quarter. Products represented 56.4% of overall revenue in the quarter, a decrease versus the 69.3% contribution during the second quarter of 2015.
    • Video solutions represented $44.5 million of Product sales, an increase of 3.9% versus the prior year. The primary cause of the increase in sales for the quarter was the contribution of revenues from the Orad acquisition.
    • Audio solution revenue for the quarter was $31.1 million, a decrease of 6.6% against the year-earlier period. Lower audio sales for the quarter were attributed to weaker Pro Tools sales.
  • Services revenue was $58.5 million, an increase of 73.9% versus the year-over-year period, and a slight decline of 0.8% against the preceding quarter. The rise in Services revenue was due to the accelerated revenue recognition associated with Pro Tools 12.5 sales.  For the quarter Services contributed 43.6% of total revenue, an increase versus the 30.6% contribution from Q2 2015.

Revenue by Geography

  • Revenues from the United States were $44.4 million for the quarter, an increase of 5.8% versus Q2 2015
  • Revenue contribution from Other Americas was $10.2 million, an increase of 54.2% on a year-over year basis
  • EMEA revenues were $58.9 million, a 25.3% increase against Q2 2015
  • The Asia-Pacific region contributed $20.5 million in revenue for the quarter, a rise of 44%

Update on Efficiency Initiative and Cash Generation

During the first quarter of 2016, Avid announced a $68 million (annualized) efficiency initiative.  As part of the Q2 2016 earnings release Avid’s management increased the efficiency target to $76 million.  A total of $57 million of the annualized savings have been achieved through the end of the second quarter.  The full savings are expected beginning in 2017.

Given the complexity of Avid’s financial statements, it is helpful to review the impact on the Company’s cash balance.  Cash used in operations for the quarter was $33.8 million.  This compares to cash used in operations of $30.8 in Q2 2015 and $11.2 million during the first quarter of 2016.

During Avid’s earlier first quarter release, Management cautioned the second quarter would experience negative cash flow between $27.5 million and $32.5 million.  It was attributable to a lower end of quarter accounts receivable balance for the first quarter, which was brought on by a decline in bookings.

Avid ended the quarter with $50.4 million in cash.  Avid had started the quarter with $87.8 million of cash.

Several factors have combined to make Avid’s financial disclosures difficult to comprehend, most notably the restatement in late 2014, which introduced a considerable amount of amortized revenue from prior financial periods.  Though this revenue is now recognized in Avid’s income statement, it does not represent any actual cash received from clients.  In other words, it is non-cash revenue with 100% gross margins.  Adding to this complexity are the effects of recent restructuring initiatives, the impact of the Orad acquisition, and the ongoing transition to a subscription model.  (Much of the complexity will abate during the second half of 2016.)

In an effort to better communicate the results of Avid’s ongoing transformation, management references several new metrics.

Update on Transformation:

Below is a chart from Avid’s investor presentation for Q2 2016 illustrating several areas of progress on the market adoption of Avid’s Everywhere Platform.

avid-transformation

Commenting on the transformation progress, Avid CEO Louis Hernandez, Jr. stated, “Our financial results and operational performance this quarter underscore the progress we are making to transform our company into a service-platform business with strong positions in higher-growth categories and a greater proportion of recurring revenue. We have a clear path to complete this transformation by our target of mid-2017, which will enable us to accelerate growth, realize a more efficient cost structure, increase revenue visibility, and generate enhanced value for our shareholders over the long-term.”

Business Outlook:

Bookings for the quarter were $102.2 million, a decline of 13.3% versus Q2 2015, and a 4.3% increase compared to the first quarter of 2016.  The original guidance for Q2 2016 bookings was for $99 million to $115 million, so the results were in line with Q1 guidance.

For Q3 2016, management provided guidance of bookings between $100 million and $120 million.  The full backlog (post impact of restatement) was $464.7 million at the end of second quarter, a 14% decrease over the backlog at the end of the second quarter of 2015.  Avid has worked through much of the backlog introduced from the 2014 financial restatement.  The balance for the “pre-2011” backlog has been reduced to $8 million as of the end of the quarter.

Avid is expecting to begin generating adjusted free cash flow in the second half of 2016, starting with a breakeven cash flow result for the third quarter of 2016.  As part of the earnings release, Avid increased its full year guidance for 2016 (link to previous guidance) to the following,

avid-guidance

“We are raising our full-year guidance range for non-GAAP revenue and adjusted EBITDA. We are also improving our guidance range for non-GAAP operating expenses because we are increasing our annualized run-rate cost savings target to $76 million. We are on track to be cash flow positive for the full year as we continue to execute our efficiency program and growth initiatives. We are reaffirming guidance for bookings, although we expect to be at the lower end of the range, due to higher than expected volatility in the media enterprise marketsaid Mr. Hernandez.

 

Related Content:

Press Release on Avid’s Q2 2016 Earnings Results:

Earnings Presentation Avid Q2 2016 Results

 

 

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