Avid announced fourth quarter and full year 2018 earnings results last Thursday. Avid’s stock is up 50% since its close on Thursday, ending Wednesday’s (3/20) trading session at $7.37.
Several business milestones were highlighted during Avid’s Q4 Earnings release.
Revenue for the fourth quarter 2018 was $112.6 million, a 5.1% increase versus the same quarter a year earlier, and a sequential 8.3% rise against Q3 2018. This was the first instance of year-over-year GAAP revenue growth since the second quarter of 2016. It is worthy of an illustration.
Management attributed the year-over-year growth to overall product sales, though called specific attention to the performance of integration solutions (which is approximately 40% of revenues).
Q4 2018 was also the largest quarter of free cash flow in seven years. This is even more deserving of an illustration.
Both of the above are consequences of positive developments in Avid’s business model transformation. Avid’s press release begins with a quote from Avid’s CEO Jeff Rosica making the same connection between key financial metrics and business transformation. “Our return to revenue growth and the improvement in our key financial metrics, including Free Cash Flow and Adjusted EBITDA, demonstrate an improving business profile for our Company,” states Rosica.
Business Model Metrics from 2018 Earnings Result
There were several metrics shared on the transition during the Q4 2018 results.
Recurring revenue was 56% of Avid’s 2018 revenue, up from 49% in 2017, and 38% in 2016. Management has communicated a goal of reaching 70% recurring revenue in 2-3 years time.
Annual Contract Value – which is a value approximating contractual annual revenue from long-term agreements, maintenance, and subscription – was $248 million at the end 2018. This is down slightly from the $249 million figure at the end of Q3, though an increase of 14.8% versus the end of Q4 2017.
An interesting data point on the changing sales channel of the media technology sector is the revenue Avid now generates from its e-commerce activities. E-commerce revenue grew 52% during 2019 and now represents more than $50 million in annual sales (greater than 10% of total revenue).
Another interesting data point cited by the Avid team is the uneven adoption of subscription purchase models by Avid’s diverse customer base. Big enterprises are lagging in adoption of subscription models. We had an opportunity to speak with Jeff Rosica after the earnings release and he added further context to the customer adoption profile.
The appeal of moving toward long-term subscription arrangements is clear. “These are mutually beneficial agreements where both Avid and the customer receive beneficial economics based on the long-term commitment” said Rosica.
Several factors are slowing the adoption profile of larger enterprise. Perhaps foremost, this is a fundamental change to how equipment has been historically sourced in the sector. Evidence for the change is visible in Avid’s booking numbers (discussed below). As important, media organizations have – or at least view themselves as having – unique requirements. Hence, each long-term agreement is necessarily specific to the needs of an individual enterprise.
This is going to take time, and Avid is at the center of the evolution of the customer / supplier relationship. It is made visible by Avid’s subscription and e-commerce growth, and Avid’s ongoing transition to longer-term agreements with large enterprises.
Financial Metrics from 2018 Earnings Result
Full year (GAAP) was $413.3 million, a decline of 1.4% versus 2017.
The year’s results are the last impacted from Avid’s accounting restatement, which concluded in September 2014. The restatement created a backlog of historical, non-cash revenue that was subsequently recognized in future accounting periods. Excluding non-cash revenue (from both 2018 and 2017), total revenue was up 5% year-over-year in 2018.
Gross margins (GAAP) for the year were 57.9%, a slight rise from the 57.8% level in 2017.
Each quarter during 2018 exhibited margin improvement (on a non-GAAP basis). The improvement reflected a product shift toward higher margin subscription offerings and improved margins within Avid’s hardware and integrated solutions. Avid indicated hardware margins increased 710 basis points (again on a non-GAAP basis) and was in large part due to gains in Avid’s storage and graphics business.
Operating income for 2018 was $13.6 million, a 160% increase over operating income recorded in 2017.
Net loss for the year was $10.6 million or $0.26 per share. This compares to 2017 net loss of $13.5 million or $0.33 per share.
Product and Services Revenue Breakdown
- Software revenue for the year was $213.4 million, a 9.0% decrease compared to 2017. Software represented 51.6% of overall revenue during 2018, which compares to 56.2% in 2017.
- Integrated solutions (hardware and integrated software) had revenue of $153.6 million for the year, an increase of 9.0% compared to last year. Integrated solutions contributed 40.4% of Avid’s revenue in 2018 versus 36.7% in 2017.
- Services (professional services and training) revenue was $33.1 million, an 11% increase versus the prior year. For 2018 Services contributed 8% of total revenue, compared to 6.9% in 2017.
Audio and Video Products and Solution Revenue (GAAP) Breakdown
- Video solution sales were $132.3 million during the year, a 15.2% rise above revenues during the year-earlier period. For 2018, Video solution sales were 32% of overall revenue, up from 27.4% of sales during 2017.
- Audio solution revenue for the year was $72.8 million, a decrease of 23.1% when measured against 2017 sales. Contribution for the full year was 17.6% by Audio solution sales, down from 22.6% in 2017. The decreasing component from Audio sales is attributable to the strong comparable in 2017 stemming from the release of Pro Tools 12 (and associated accounting change that accelerating the revenue recognition in the first half of 2017).
- Services revenue was $208.2 million in 2018, a slight decline of 0.7% compared to 2017. Revenue from Services accounted for 50.4% of total sales in 2017 and 50.0% in 2017.
Revenue by Geography
- Revenues from the United States were $150.8 million for the year, a 6.4% decrease against 2017. As a percentage of sales, the United States was 36.5% of total revenue for the year, which compares to 38.5% in 2017.
- Revenue contribution from Other Americas was $27.5 million, a 1.7% increase against the year-earlier period. Other Americas represented 6.7% of revenue in 2018, versus 6.5% in 2017.
- EMEA revenues were $172.2 million, a 5.6% increase against 2017. EMEA was 41.7% of sales during the year. EMEA represented 38.9% of sales in 2017.
- The Asia-Pacific region contributed $62.6 million in revenue for the year, a decline of 7.5% compared to 2017. Asia-Pacific was 15.2% of sales during the year. This compares to 16.2% in 2017.
- R&D expenses for the quarter were $62.3 million, a 8.6% decline against 2017 R&D levels. As a percentage of revenue R&D expenses were 15.1% for the year, compared to 16.3% of total revenue in 2017.
- Sales and marketing costs for 2018 were $101.2 million, a 4.7% decline versus 2017 sales and marketing levels. Sales and marketing expenses were 24.5% of 2018 revenue, a decline against 25.4% of total revenue from 2017.
- G&A expense was $55.2 million for 2018, an increase of 2.5% versus the prior year. Expressed in terms of total revenue, G&A expense was 13.4% of sales in 2018 versus 12.9% in 2017.
Upcoming Financing Considerations
As observed during Avid’s Q3 2018 release, the long-term debt stemming from Avid’s June 2015 convertible bond offering will become a current liability in June 2019 (expiring in June 2020). There is a balance of approximately $100 million left with these notes.
During Management’s prepared remarks Avid’s CFO Ken Gayron made only a quick reference to Avid’s near-term financial circumstances. “…to strengthen our ability to achieve our business objectives, we are continually working to establish a more prudent long-term capital structure for the company, being aware that our convertible bonds mature in June 2020” stated Gayron. The lack of focus on the notes is consistent with management’s expressed confidence in being able to manage the situation.
While the situation is manageable, it is important to track. Avid’s interest expense as a percentage of revenue was 5.6% during 2018, up from 3.7% in 2016. Effective interest rate on Avid’s long-term debt for 2018 was 5.5%. That figure includes $8.9 million in non-cash interest (attribute to the accounting for the convertible note). To put a fine point on the statement: if the non-cash interest were instead payable in cash it would have represented more than 150% of Avid’s free cash flow for 2018.
Bookings for the fourth quarter were $109.0 million, a 31.8% decrease compared to Q4 2017 and a sequential decline of 8.7%. The year-over-year booking decline was driven by a 43.9% drop in product bookings.
The steep decline was partially explained by Management as the timing of two large deals ($18 million in value) moving into Q1 as opposed to Q4. The second part of the explanation was more interesting: that bookings are no longer the most appropriate measurement for near-term revenue performance.
“You have to be careful in looking at quarter-to-quarter bookings now. I know bookings in prior years was treated as a proxy for revenues. Today there is no longer a correlation between the two on a direct basis within a quarter” said Jeff Rosica during the call Q4 2018 call with analysts.
Management indicated the average of long-term agreements is 2-3 years in duration. These are then large deals with multi-year impacts. Any single large deal can then distort the comparison of quarterly booking figures, which – as noted above – would make the booking numbers less valuable in predicting near term revenue.
Total revenue backlog (deferred revenue + backlog) was $456.8 million as of December 31, 2018, a year-over-year increase of 5.5% compared to Q4 2017 and effectively flat versus the preceding measurement date of September 30, 2018.
As outlined by Ken Gayron on the call, the total revenue backlog of $456.8 million and the annual contract value of $248 million would suggest the backlog takes around 20 months to turn into revenue.
Avid issued guidance for Q1 2019 of $96 million – $104 million in terms of revenue. Full year 2019 revenue guidance is $420 million – $430 million. The mid-point of the full year range would represent growth of 2.8% compared to 2018.
© Devoncroft Partners 2009 – 2019. All Rights Reserved.