Avid announced second quarter 2018 earnings results, placing heavy emphasis on its now complete executive team and a series of new metrics to highlight its transformation to a software business.
“Now among my priorities in the first hundred days as CEO was to ensure that Avid has the right management across all functions of our organization to effectively lead us forward and to have the right level of operational execution and focus on business performance. I’m quite happy to inform you that the complete executive management team is now fully in place with the transition being quite swift and successful” stated Avid’s CEO Jeff Rosica during management’s prepared remarks.
The below slide from Avid’s earnings presentation highlights several key management team members.
In providing a rationale for the emphasis on new operational metrics, Avid’s CFO Ken Gayron offered the following, “Avid’s business has evolved to be more software oriented. However, our financial reporting has not kept pace. As the new CFO, I am introducing a transparent and more detailed depiction of Avid’s revenue streams today that better maps to our business.”
I am by nature skeptical of new financial metrics except in the circumstances, such as Avid’s, where a business transition has occurred and more appropriate financial metrics are needed to describe the resulting operational profile.
The change is warranted and transparency is welcomed. Recent Avid earnings disclosures had become exhausting to review given the lengthy discussions of theoretical market opportunities across customer tiers, citations of non-financial metrics such as number of downloads, and inscrutable adjusted non-GAAP measures. Much of the complexity and non-financial disclosures was responsive to the accounting impacting of the 2014 restatement, which introduced revenue streams that existed in accounting terms only and had the effect of making GAAP measures less representative of true developments within Avid’s business.
Returning to the new metrics, first among metrics is recurring revenue for Avid (defined as subscription, maintenance, and long-term contracts), which was 57% of Avid’s total revenue in the second quarter. This compares to 51% in both the year-earlier period and in the preceding quarter, Q1 2018. The aggregate year-over-year growth of recurring revenue was 7.6% versus Q2 2017. Taking a longer perspective, recurring revenue has increased from 24% of total revenue during the 2014 calendar year.
As part of the release, management also introduced the metric of Annual Contract Value (ACV). The metric attempts to describe the aggregate amount of annual contract, maintenance, and subscription revenue Avid is set to earn from customers in a given year. In other words (this is my explanation, not management), ACV represents the approximate revenue Avid would generate over the next 12 months if it did not sell a single incremental product or service. At the end of the second quarter ACV was $245 million and has grown at a compound annual growth rate of 23% since 2014 (when it was $119 million).
Total GAAP revenue for Q2 2018 was $98.6 million, a decline of 4% versus Q2 2017 and a slight increase of 1% compared to the first quarter of 2018. However, if the non-cash revenue (from the 2014 statement) is eliminated, then year-over-year revenue growth in the quarter was 4%.
Revenue was negatively impacted by the delay in MediaCentral shipments from June until late July. The delay was related to final quality checks of the software. Management offered guidance on the impact of ‘millions’ in the quarter. As part of the commentary on developments, management pointed to the strength of Avid’s storage business and creative software solutions, with the latter enjoying “significant double-digit growth.”
Gross margins (GAAP) for the quarter were 57.1%, a decrease of 130 basis points when compared to the year earlier period, and an increase of 20 basis points against the preceding quarter.
Operating loss for Q2 2018 was $2.0 million, an improvement over the operating loss of $6.3 million in Q2 2017 and loss of $3.3 million in Q1 2018.
Net loss for the quarter was $8.5 million or ($0.20) per share. This compares to Q2 2017 net income of ($10.8) million or ($0.26) per share. During the first quarter of 2018 Avid recorded a net loss of $8.9 million or ($0.22) per share.
Operating Expenses by Category:
- R&D expenses for the quarter were $15.9 million, a 5.9% decline against Q2 2017 R&D levels, and a slight increase when compared to the Q1 2017 R&D figure of $15.6 million. As a percentage of revenue R&D expenses were 16.2% for the quarter, compared to 16.6% of total revenue in Q2 2017.
- Sales and marketing costs for Q2 2018 were $27.7 million, representing a 4.3% decline versus Q2 2017 sales and marketing levels, and a 6.1% increase versus Q1 2018 (remember NAB expenses are in Q2). Sales and marketing expenses were 28.1% of Q2 2018 revenue, in line with the 28.4% of total revenue from the second quarter of 2017.
- G&A expense was $14.0 million for Q2 2018, an increase of 2.9% versus the year-earlier quarter, and a 14% rise against the preceding quarter. Expressed in terms of total revenue, G&A expense was 14.2% of sales in Q2 2018 versus 13.3% in Q2 2017.
Product and Services Revenue Breakdown
The new reporting lists non-GAAP revenues of Software (licenses and maintenance), Integrated Solutions (hardware and integrated software), and services (professional services and training).
- Software non-GAAP revenue for the quarter was $51.7 million, a slight increase over the $51.0 million from the first quarter. The year-earlier period is not available. For the first half of 2018, Software represented 52% of overall revenue.
- Integrated solutions had revenue of $39.1 million in the quarter, an increase of 3.9% compared to the first quarter. Integrated solutions contributed 39% of total revenue during the quarter.
- Services revenue was $7.8 million, a decrease of 16.1% versus the preceding quarter. For the first half of the year Services contributed 9% of total revenue.
Avid does still provide a breakdown of its product and solutions sales by Audio and Video in its regulatory filings. That breakdown is the following,
- Video solution sales were $29.5 million during the quarter, approximately flat versus the second quarter of 2018
- Audio solution revenue for the quarter was $31.1 million, a decrease of 7.1% against the year-earlier period
Revenue by Geography
- Revenues from the United States were $38.1 million for the quarter, a 17% decrease against the year-earlier period of Q2 2017. It is important to note, Avid did not restate the prior period of Q2 2017 to conform with ASC 606 (accounting standard impacting revenue recognition) so the comparison is imperfect. As a percent of sales, the United States was 39% of total revenue in the quarter.
- Revenue contribution from Other Americas was $6.3 million, roughly flat with Q2 2017
- EMEA revenues were $40.2 million, a 6% increase against Q2 2017. EMEA was 41% of sales during the quarter.
- The Asia-Pacific region contributed $13.9 million in revenue for the quarter, a rise of 15.8%. Asia-Pacific was 14% of sales during the quarter.
Announcement of New Efficiency Program
Avid ended the quarter with $60.2 million in cash, which compares to $57.2 million at the start of 2018.
During the earnings release management revealed a new $20 million non-personnel-related savings plan. The cost savings are anticipated from bringing efficiencies to Avid’s supply chain, consolidating facilities, reducing travel and entertainment, and decreasing the use of consultants and outside service providers. The plan is then attempting to remove costs equating to around 5% of Avid’s total revenue without impacting employment levels.
Initial benefit of the cost savings are anticipated in the fourth quarter of this year with the full measure of the benefit received during 2019.
Bookings for the quarter were $110.3 million, a 12% increase over the year-earlier period and a 9% rise over the sequential quarter.
Avid reaffirmed and narrowed its guidance for the full year 2018. Revenue is anticipated in the range of $410 million to $420 million, Adjusted EBITDA of $40 million to $46 million, and Free Cash Flow of $4 million to $12 million.
The mid-point of the revenue guidance would represent a year-over-year decline in sales of slightly less than 1% versus 2017 revenues.
Press Release on Avid’s Q2 2018 Earnings Results:
Earnings Presentation Avid Q2 2018 Results
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