Earnings season giveth and earnings season taketh away. In the case of Avid Technology (AVID -0.99%), share prices tumbled after it reported earnings and guidance that failed to meet the market's expectations. Of course, sharp short-term price reactions can also create buying opportunities for investors. But is this report an invitation to buy or a warning sign to stay away?
Avid's quarterly results
Avid Technology is a software and hardware supplier to the professional video and audio industry, with software for editing and hardware for mixing and storing media files. If you recently watched something on Netflix or listened to something on Spotify, there's a strong chance Avid's tools were used to produce and edit that content.
In recent quarters, the company has benefited from strong demand from the streaming industry, and its stock has risen. In the recently reported second quarter, that business growth continued as Avid's total revenue increased 20% year over year to $95 million. Additionally, recurring revenue grew as a percentage of total revenue to 76%. A large portion of recurring revenues in your income stream is a good thing as it indicates that the recent surge won't just be a one-time windfall.
Despite the strong revenue growth, investors were disappointed in the subscriber growth for Avid's software tools. Subscribers increased to 346,000 during Q2 2021, up 43% from 242,000 in the prior-year period. While impressive on its face, this represents a significant deceleration in subscriber growth compared to recent quarters.
Is that slowdown really a cause for concern? Maybe not.
During the Q2 earnings call, Avid CEO Jeff Rosica described the slower subscriber growth as resulting from seasonality:
As a result of this seasonal pattern, we expect year-over-year subscription revenue growth to lag total subscription growth in the second and third quarters. And for year-over-year subscription revenue growth to exceed total subscription growth in the first and fourth quarters. Overall, we expect to continue to see strong year-over-year growth in our subscription revenue each quarter throughout the year as more of our enterprise customers move to subscription models.
How does seasonality impact subscriptions to video and audio editing tools? Well, students are a large market for Avid. Every year, thousands of film students subscribe to Avid to complete their coursework. Many of those students don't need to use Avid during the summer months (starting in Q2), and so their subscriptions lapse, raising Avid's subscriber churn.
On the audio side, many musicians go on the road for tours during the summer and record new music during the winter. This seasonality often leads to Avid's ProTools having stronger subscriber additions during Q1 and Q4 and weaker subscriber growth during the summer months in Q2 and Q3.
Long term growth potential
For long-term investors, quick sell-offs after quarterly surprises can create interesting potential buying opportunities. Taking a bigger picture view, Avid is riding the coattails of a spending boom enabled by the rising demand created by streaming services such as Spotify and Netflix. This company indirectly benefits as streaming services spend more on professional content because the content creators pay for Avid's tools. As long as demand for content remains high, Avid should be able to continue capitalizing on this long-term growth opportunity.