Avid Focused on Margins, Lost Crucial Sales. Investors Beware.

Back in early February, shares of Avid Technology (Nasdaq: AVID  ) jumped sky-high on a seemingly terrific earnings report. That's when I started a bearish CAPScall on the maker of software for media production. "I think investors will wake up from this euphoric jump to find that Avid's long-term prospects don't measure up," I said. "Focusing on margin growth without destroying the underlying business is very, very hard. It's a risky turnaround plan."

Today, Avid is proving me right.

The company just published preliminary results for the first quarter. $152 million in sales fell far below the $160 million expected by Wall Street analysts. Management sees a GAAP operating loss of $15 million, which would be the weakest result since the spring of 2009.

The culprit of Avid's disappointing numbers is a 30% year-over-year drop in sales to the enthusiast market. That's where Avid sells tools for making music and movies to amateurs like you and me, helping us make and manage media with somewhat simplified versions of the professional tools. That's a price-sensitive market that doesn't play well with attempts to ratchet up gross margins. I'm surprised that Avid didn't see that backlash coming.

Apple (Nasdaq: AAPL  ) is presumably stealing Avid's enthusiast customers by the bucketload with its own desktop software, but also with the iPad product line that looks more attuned to media creation with every new iteration. Avid makes iPad apps too, but some of its core customers seem to just go for Apple's built-in tools.

And while Adobe Systems (Nasdaq: ADBE  ) may have its own share of problems, the full suite of Adobe's creative tools is about to get a supposedly huge update. Prosumers might be waiting for more info on that event before committing to Avid's solutions.

So I feel pretty good about my call on Avid today as shares plunged more than 17% in after-hours action. At these prices, Avid has taken a 60% haircut over the last year and I'm pretty sure we haven't seen the worst of it yet. Avid investors should consider moving their at-risk capital to a basket of stronger technology stocks instead.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Adobe Systems and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Adobe Systems. The Motley Fool has a disclosure policy.

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  • Report this Comment On April 12, 2012, at 7:07 PM, kgiesing wrote:

    As a former Avid (Digidesign) employee, I've been following the stock for years, but most particularly over the last two years after I left the company. By my own accounting (no insider info, just public record) Avid should have run out of money sometime in the summer of 2011. I'm still somewhat baffled as to how they can still have $50M in the bank after GAAP losses quarter after quarter. So the recent news does not surprise me; what surprises me is that the news isn't worse and hasn't happened earlier.

  • Report this Comment On May 15, 2012, at 11:45 AM, TheByre wrote:

    Avid has several big problems -

    1. It sought to replace Sony in media creation in the 90s and it did. Now it is just like Sony, clinging onto old technology and hardware, when the market has gone software only (aka native).

    2. In audio, it is being replaced by Reaper, which is a free download with a $60 honesty box and a massive user base. Also, Avid's 32-bit software in a 64-bit World is just slow.

    3. Pro audio is a very, very small market, pro video is dominated by Final Cut from Apple.

    4. Avid's product range and distribution reminds me of Apple - BEFORE Steve Jobs came along and did a business 101 and sorted things out. Cluttered, 47 brands (!!!) and no clear product philosophy that I can see.

    5. Avid is still overloaded with pointless fixed costs, such as prestige buildings all over the World and a large sales force in an on-line World.

    I could go on, but that will do.

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