1 Big Reason I've Had It With Avid

Everything is not as it seems for Avid Technology (Nasdaq: AVID  ) . I'm willing to bet my professional reputation that today's shocking price jump can't last.

The stock is soaring more than 20% today after a stellar fourth-quarter report. Analysts expected modest non-GAAP earnings of $0.06 per share on $177 million in sales. That would have been a 9.4% year-over-year revenue decline and a very steep profit drop from $0.37 per share.

But Avid absolutely crushed those targets with adjusted EPS of $0.38 on $185 million in sales -- a 5.1% revenue swoon.

Notice how the towering majesty of the day's share price action fades away when you apply a more historical perspective? Avid shares have in fact lost 45% of their value in the past year. The company has been in full turnaround mode since last summer, when management started issuing downright depressing guidance numbers.

Down the drain we go
At the start of this fiscal year, Avid thought it could reach about $710 million in revenue in 2011. That quickly shrunk to $700 million, then $670 million. The final full-year tally landed at $678 million, still far short of the original, happy outlook.

That's in spite of some pretty significant tailwinds from head-to-head competitor Apple (Nasdaq: AAPL  ) . Cupertino started scaring away video editing professionals when its Final Cut Pro X package turned out to be a major break from earlier versions, to the point that existing Final Cut projects and processes no longer worked with the new software.

And some essential tools in the editing professional's arsenal went missing altogether, like the Edit Decision List that keeps your project consistent as it moves between versions and workstations. Digital workflow pro Jude Mull told Ars Technica that Apple's changes made no sense: "When I read Final Cut Pro X didn't have the ability to generate an EDL I figured Apple is targeting a different audience, the Tweeners, people with a little $, time and creativity, the Indie crowd. This looks stupid to even read, so again, kind of baffled."

Avid's Media Composer and the Adobe Systems (Nasdaq: ADBE  ) Premiere Pro still see Final Cut defectors making the switch, including some high-profile users like reality TV producers Bunim/Murray. Avid CEO Gary Greenfield made a point of landing the Bunim/Murray account and talked about stealing customers from Final Cut. But he wanted to make it look like an Avid achievement, not Apple's mistake. I think that's dishonest, but media spin is unfortunately a common task for public company executives.

But wait -- there's more!
What's worse, Greenfield doesn't see any growth opportunity in 2012. "We're taking a focus on how we can improve our profitability with no growth," he told analysts on the earnings call. Sure, he'll take any revenue growth that falls in his lap, particularly in the professional market at the expense of low-margin enthusiast sales. But he's essentially admitting that sales growth is dead in Avid's core markets.

So this quarter wasn't the hyper-success Mr. Market makes it look like. There's little or no sales growth ahead, and Avid has become a margin story from head to toe. And there's that Apple-made opportunity that seems to be slipping through management's fingers. Adobe, on the other hand, is accelerating.

I think investors will wake up from this euphoric jump to find that Avid's long-term prospects don't measure up. Cost-cutting is a delicate balancing act, and you can't really force customers to flock to your richer-margin products. Focusing on margin growth without destroying the underlying business is very, very hard. It's a risky turnaround plan. That's why I'm putting my all-star CAPS rating on the line here with an angry, red "underperform" CAPScall. That way, you can hold me accountable when I say that Avid is going nowhere -- fast.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Adobe Systems. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple and a diagonal call position in Adobe Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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  • Report this Comment On February 08, 2012, at 3:28 PM, realtvguru wrote:

    Avid is going up because they have improved their product to be something professionals actually want to use.

    Their latest offering of Media Composer 6 is one of the most sophisticated editing systems on the planet and it's amazing innovation.

    Both of Avid's competitors are no longer on the radar of most pros. Even with Apple's FCP X latest update, no one cares because the FCP X interface is counter intuitive for a professional editor. It's like they wrote it in a bubble without consulting anyone.

    Avid on the other hand is making products people want to buy because it's the standard in the professional world. I love my new Avid and will gladly turn down any job offered on anything but Avid.

  • Report this Comment On February 10, 2012, at 12:22 PM, boacinema wrote:

    I don't think the stock market folks, including Motley Fool, fully understand what Avid's sources of incomes are.

    The "Apple-made opportuniity" is that now Avid is again the de-facto leader in high-end multi-user video market (FCP 7 competed there but FCP X is not currently designed for multiple users editing a project at the same time - neither is Adobe Premiere). If you're upgrading a TV station or big post company, chances are you'll buy Avid now.

    However... due to the economic situation, I just don't see every TV station in Europe deciding to spend huge sums of money on upgrades this year.

    It's not like Avid can really do much about this. The money just isn't there right now. So I think it's a smart move to just keep costs low and try to make a profit for the year.

    Not sure why this is being criticized as a terrible management decision.

    Also, on the audio side, they are going through a major transition (necessary in the long term but will cut into sales in the short run while folks wait for 3rd-party support for the new platform). Also: the music industry is in turmoil too. So I don't see how sales can grow much there either.

    The main thing I would criticize is that they seem to have let some very smart people go. And they should have made the audio transition cheaper for loyal users - there is some backlash on this.

    But long-term: yes, there is sales growth to be had for sure. The economy will improve, people aren't going to stop listening to music or watching video - and distribution on the Internet will improve. All Avid is doing is trying to hang in there as a company while people sort things out. Which seems pretty smart to me.

    Certainly this seems better than their entire strategy from 2003-2007 which was "be arrogant and fail to defend against Final Cut Pro". When the stock market folks were valuing them at between $20 and $60 per share.

    I think that they are a much better company now than they were then, with better prospects. So why do you think they're worth a lot less than $11.50 per share now?

    Anyway, I'm happy I bought AVID in Jan when it was $9. Worked out well.

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