Why Avid Technology, Inc. Stock Plummeted Tuesday

The digital media expert missed Q2 estimates but raised full-year targets anyway. Can Avid deliver on these promises?

Anders Bylund
Anders Bylund
Aug 11, 2015 at 12:48PM
Technology and Telecom

Image source: Avid.

What: Shares of Avid Technology (NASDAQ:AVID) crashed hard on Tuesday, falling by 35% at one point on a disappointing second-quarter report. Shares were down 30% at 12:40 p.m.

So what: In the second quarter, Avid's sales fell 12% year over year to $112 million, far short of the $125 million analyst target. On the bottom line, Wall Street was looking for earnings of $0.20 per share, up from $0.15 per share in the year-ago period. Instead, Avid's earnings fell to $0.05 per diluted share.

Management also raised guidance for the full fiscal year. The $544 million midpoint of Avid's new revenue guidance range sits comfortably above the Street's current $539 million view, and EBITDA profit targets were lifted by 3%.

Now what: The gap between weak results and rising guidance leaves management with a lot to prove. According to press statements, the maker of digital media production tools saw lots of operational progress in this quarter, leading to improved visibility into the second half.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Fair enough, I suppose. The company is working through the recently closed acquisition of 3D graphics specialist Orad, a $65 million deal that's expected to provide an immediate boost to both the top and bottom lines. Moreover, like so many software vendors before it, Avid is converting its sales from perpetual licenses to a subscription-based model. Maybe there's some meat on them bones, and Avid really is set up to spring an even bigger positive surprise on investors in the next two reports.

Then again, Avid's leaders have a history of making big promises and then failing to deliver.

This was the third earnings miss in a row, and the negative surprises are only growing larger. Avid's track record on the revenue side doesn't look any better.

In short, Avid has a simple choice to make right now: Start delivering on your lofty promises or stop setting unreachable goals.