Digital media maker Avid Technology's (NASDAQ:AVID) stock has been a rollercoaster of a ride this past year. Shares took a plunge last summer after product delays zapped results. In the fall, its stock came roaring back like King Kong with the help of its Pinnacle acquisition. If recent after-hours trading was any indication, buckle your seatbelts -- it looks like another steep drop is on hand following the release of its fourth-quarter results.
One reason investors soured is because of profitability. Gross margins dropped to 49.3% from 55.7% in the year-ago period. In the conference call, management pointed to an unfavorable currency exchange as a major reason for the decline. Absent this effect, they expect cost of sales as a percentage of net revenues to firm up in 2006 within the 52% to 53% range, in line with fiscal 2005's level.
Aside from the ill effect of currency exchange, there's a lot to like about what's going on in the world of Avid. Sales continue to be explosive, with 40% top-line growth in the most recent period. The company is seeing double-digit revenue growth in multiple lines of its business, including audio, postproduction, professional video, and broadcasting.
High definition (HD) remains a key driver of sales. Management indicated that the market is still in the early phase of a multiyear transition for the HD format. TV has been the quickest to adapt the technology, but the film industry is also expected to pick up the pace. Positive HD reviews from the recent King Kong production should help convert more traditional filmmakers.
Avid is equally excited about other areas of the market. Its live audio solutions were used by four of the top 20 revenue-producing touring musicians in 2005, including U2 and The Dave Matthews Band. And small business videographers, as well as the low-cost video editing needs of consumers, are each projected to be worth $200 million a year in market opportunities.
Wall Street reacted negatively to the fourth-quarter costs associated with Avid's Pinnacle acquisition, forgetting that Pinnacle's revenue contributions were a major reason why the stock jumped last period. Further, Pinnacle's role is crucial in going after the aforementioned small-business and consumer videographers. The latter market alone grew 16% in 2005, and Pinnacle dominates with a 50% market share.
With 2006 revenues expected to grow at a high double-digit rate and margins stabilizing, this company still has plenty of juice. Keep close tabs on Avid's stock in the coming weeks, as further weakening may present a nice buying opportunity.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
