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Avid Headed Where?

  •  02-08-2012, 13:10

    Avid Headed Where?

    On February 7, Avid gave a summary of its year-end 2011 results.  Not a great deal has changed since Avid posted 2-QTR-11 results.  Reduction in restructuring costs have trimmed the pre-tax loss.  A tax-loss carryforward credit afforded the semblence of a break-even result for the last three months, but the 12-month net loss of $24 million which was approximately a -5.6% return on equity.  By comparison, Adobe's ROE for the 4 latest quarters was +4.1%.  Cyberlink's reports to the Taipei exchange indicate an annualized ROE of +13.5% as of SeptemberMagix, which is smaller and more volatile than the giant Adobe or the aggressive Cyberlink, had some bumpy quarters in 2011, and may have more in 2012, but at least closed its 12-month September year with a roughly +8.5% return on average equity.  Magix nonetheless cut combined compensation of its three Board chiefs by half, to EUR 534 thousand.  None reaped more than EUR 200 thousand, and no stock options were rewarded for the period.  Magix plowed nearly 28% of its revenues into R&D.  In the case of Avid, the quotient was only 16%.

    By comparison, people can earn over 3% on low risk bonds, and the stock market at large offered about a break-even return during 2011, or about +9% p.a. over the multi-decade long haul. 

    Avid has not posted an annual profit since 2006, sales are flat, and post-2008 cost reductions are more or less finished, so odds are that, during 2012, it will continue to post GAAP losses of about $10 million or so.  This is net of about $30 million / year in amortization of good will (the difference between the price paid for past acquisitions and their book value).  If earnings continue to fall shy of the amortization costs, auditors may prescribe further write-down of the $246 million balance of good will.  Although that charge would be non-cash, it would lob off 60% of shareholder equity.  Freed of the amortization charge, subsequent after-tax earnings might be around $14 million or 8% of the reduced equity.  However, that would reward only investors who bought the stock at a very low price, and only if it were clear that falling margins, obsolete inventory, returned items, or creeping costs did not wipe out that momentary stassis in earnings.  The returns to long-term shareholders remain well below what they could have reaped on something as sour as sub-prime mortgages. 

    Avid makes a great fuss about dedicating a section of its reports to "non-GAAP" results, even though the numbers do not qualify for anything that can be paid out as dividends or yield a return to shareholders.  The main reason for the exercise is that it is the basis for the senior executives perfomance compensation.  The main reason for this is that the current team of managers does not want to be penalized for the amortization costs tied to operations acquired in 2004-6, before their appointments.  Those folks have now had nearly 4 years to turn things around, and the outlook is anything but slam dunk.  The employment contracts that accompany Avid's public 10-k filings, however, render the current bosses rather iron-clad protection.  In other words, Avid could go on reporting no GAAP profits indefinitely, and management would do handsomely.  Page 36 of Avid's 26-Apr-11 Form Def 14A Proxy Statement indicates that the five top execs took home a combined $11 million in compensation in 2010.  Base pay accounted for the biggest quotient. About $1.7 million consisted of performance award pay in cash.

    Avid's latest venture is to offer iPad owners an Avid Studio app for about $10.  The development costs were certainly not covered by surplusses thrown off by existing products at large, and they came at the expense of patches or upgrades for existing products.  Will it make any money?  That seems doubtful, unless AS for iPad becomes as popular as Angry Birds, or if it pries far more Apple users to Avid than Apple draws Avid users to iMovie or FCPX.  All this, instead of investment in existing (legacy, EOL?) products or apps for W8 or Android.  Nonetheless, some will continue to have a grand time through it all.

    I don't own or trade shares or any other securities of any of the companies in question.  Nor do I offer any counsel on how people invest. My vantage is merely that of a software user who has tried to figure out why a company that, despite historical success and occasional good ideas, bumbles when it comes to product improvements or support.  Meanwhile, despite a difficult market environment, competitors with a more acute and lean approach continue to advance. 

    People should be free to lose money however they see fit.  And there's always a chance, however peculiar, that someone will come along and buy Avid shares above their current trading value, in order to sell its parts to investors with a different vision, though the cost of breaking certain contracts might make that outcome as likely as snow in the Congo.

    Condensed Consolidated Statements of Operations
    (unaudited - in thousands, except per share data)
    Three Months Ended Twelve Months Ended
    December 31, December 31,
    2011 2010 2011 2010
    Net revenues:
    Products $


    $ 162,863 $


    $ 559,907
    Services   37,333     32,484     131,565     118,615  
    Total net revenues  




    Cost of revenues:




    Services 18,137 15,117 62,482 56,490
    Amortization of intangible assets   657     642     2,693     3,299  
    Total cost of revenues




    Gross profit  




    Operating expenses:
    Research and development 28,722 30,881 118,108 120,229
    Marketing and selling 47,592 47,759 183,865 177,178
    General and administrative




    Amortization of intangible assets 2,063 2,186 8,528 9,743
    Restructuring and other costs, net 8,530 14,918 8,858 20,450
    (Gain) loss on sales of assets   -     (3,502 )   597     (5,029 )
    Total operating expenses  




    Operating loss


    ) (3,278 )


    ) (36,168 )
    Interest and other income (expense), net   (497 )   (258 )   (2,068 )   (390 )
    Loss before income taxes


    ) (3,536 )


    ) (36,558 )
    (Benefit from) provision for income taxes, net   (2,715 )   (2,965 )   942     396  
    Net income (loss) $


        ($571 )  


    )   ($36,954 )

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