Avid, makers of Pro Tools, Media Composer, Sibelius, and other products was on Tuesday suspended from being traded on the NASDAQ stock exchange because of a failure to issue timely financial statements. And the company by the admission of its own chief executive faces a changing industry.
However, our earlier report included inaccurate information from financial analysis site The Street. Their report included outdated financial data. Our reporting was not correct; we have since spoken to Avid.
The Street reporting (and thus ours, in building a report on it) was inaccurate and misleading in that financial data for Avid actually isn’t available. That’s the sole reason for the NASDAQ delisting. The company went into further detail on Wednesday in a pre-recorded webcast for investors, which you can watch on the site.
The main point is this: we don’t have any 2013 numbers for AVID. Avid has filed no earnings reports, including the 2013 Form 10-K American public companies must submit to the SEC (Securities and Exchange Commission, the US financial regulatory body). In addition, Avid says the numbers that from 2012 are part of the restatement process. (There never was even a Q4 2012 statement.) It’s also worth noting that our bias is heavily on the audio/music side, not the video production market to which Avid caters. That is only one portion of Avid’s business, and we can’t adequately cover the rest.
The main point of the story, though, was people in music or keenly interested in the future of the company. We received an unprecedented amount of feedback from users, across the spectrum of music and audio makers. The message: those of you who do use Pro Tools care about it passionately, and many of you consider it an irreplaceable tool. Those of you who don’t use Pro Tools are passionate, too, about what is happening at Avid and what it means for the industry. We got the facts wrong, and it’s important we get them right, and that we follow this story as it develops. (The Street has since removed those statements from their story, and even went as far as removing their “SELL” rating for the stock. However, it is not our business to report inaccurate information, whatever the source, and I apologize.)
Here is our understanding, and the latest information.
Avid does have cash. This is the most important revelation. An Avid spokeperson tells CDM Avid at the end of 2013 had $48 million in cash and no debt. The company has reassured us they’re committed to music products like Pro Tools and Sibelius. The cash figure is important, as it means they can support that commitment with real investment.
Avid is recalculating their financials largely around the issue of upgrades. Avid is performing a “restatement” – a re-issuing of financial data – based on the way they account for software updates. Long-time Mac users will recall Apple talking about charging for software updates for accounting reasons. The logic is this: free software updates are considered liabilities, or “post-contract support.” This is not uncommon accounting practice, and certainly is in no way specific to Avid. In plain terms, if you give away a free update to your customers, it isn’t really free to you – it has material value, and it’s distinct from something like a warranty in that it adds new functionality. (If Whirlpool fixes your kitchen fridge, they don’t suddenly add an automatic ice crusher and Internet connection it never had.) Avid’s CFO also said in the statement Wednesday that the company may have over-accrued some restructuring costs.
When the work is done, Avid’s revenue will be the same, but the timing of that revenue will not; the recalculation involves “deferred revenue.”
The financials have been delayed again, until summer. Avid announced at the beginning of January that the restatement was taking longer than originally expected, and they publicly anticipated being delisted by NASDAQ. (NASDAQ had previously given them an extension in filing, which they missed.) As of this week, they are estimating summer. If they make that target, we’ll see updated financial numbers for past years and new quarterly reports, and Avid says they want to again be traded on NASDAQ.
Avid’s new strategy centers on media management. The investor video today isn’t necessarily recommended viewing; think long, slow, and corporate. But Avid’s CEO Louis Herndandez, Jr. did provide a peek into the new Avid strategy, “Avid Everywhere.” In the video, Hernandez says that the “value chain” has shifted beyond just creation, to monetizing and sharing content. The solution appears to be a combination of cloud solutions and new media management tools built into software like Pro Tools and Media Composer.
Based on the description and presentation slides, these would even give you the ability to finish a track in Pro Tools at home, then have a TV studio looking for music for a sports feature license it from you, all within an Avid-run marketplace. There are also new tools ranging from metadata, tagging, and search to cloud-based collaboration and exchange.
It’s far too early to judge this strategy, as it’s difficult to understand from a set of strategic slides. By April, we should be more able to do so. Avid tells CDM they won’t be able to comment on specifics until the first components of Avid Everywhere appear around the broadcasting trade show NAB. We’ll have an update then.
Avid’s official statement to CDM:
· Avid’s de-listing from NASDAQ and its subsequent listing on OTC is the result of delays in the reporting of financial information — it was not related to operating performance in any way; As we have previously reported, as a result of the restatement, previously issued financial statements are not accurate and should not be relied upon.
· We are continuing to work very hard to correct the accounting, which is related to nearly 5 million transaction lines spanning eight-and-a half years. We announced that we are targeting completion of the restatement by mid-2014.
· We continue to invest in product innovation. Since the beginning of the restatement process, we released Pro Tools 11, Media Composer 7, Sibelius 7.5, two new online shared storage offerings, a brand new mixing console – the S6, as well as a new live sound system – Avid S3L. During this process we remain squarely focused on the execution of our product innovation and growth strategies. Having ended 2013 with $48 million in cash and no debt, we believe we are well positioned to support these efforts.
· With a compelling Avid Everywhere vision established, the launch of the ACA, a significant number of new product innovation announcements planned for 2014, we believe we remain well positioned to support our customers’ ongoing success
Sam Butler, product manager for Sibelius, is quoted in the New York-based (unofficial) Sibelius Blog with an effort to calm Sibelius users:
Although I can’t comment about specifics, I’d like to reassure you that behind the scenes, we’re carrying on as usual developing Sibelius, Pro Tools, Media Composer and our other software and hardware solutions. We’re investing heavily in new technologies and expanding our development teams to transform our solutions. Over the next few months to a year, you’ll see big advances in our products and solutions.
For Sibelius, we’ll soon be releasing Sibelius 7.5, which marks a huge milestone for the team. After that, we’ll be looking into improvements to both Sibelius and the Scorch platform that are in line with the Avid Everywhere platform.
The Sibelius news is doubly relevant, as many engineers formerly working on that product were fired; some are now working for Steinberg on something new.
Version 7.5 will include new Timeline navigation, updated playback expression and notation interpretation, added collaboration and sharing, and integration with the iPad Scorch.
While it’s encouraging to hear product developments, it’s disappointing for the confidence in Avid that accounting delays still haven’t been resolved. These delays, irrespective of the validity of their cause, have some real repercussions. And Avid faces some serious challenges that are not directly due to the state of the industry, but to the state of the company’s own financial health.
They outline some of these problems in their own words, in the disclaimer statement that accompanies this week’s press release.
Those “risks and uncertainties” include:
…the effect on the Company’s sales, operations and financial performance resulting from: delays in Avid’s completion of its financial statements and the filing of its periodic reports; the delisting of its stock from the NASDAQ stock market and the Company’s ability to have its shares relisted on the NASDAQ stock market; the previously disclosed ongoing SEC and Department of Justice inquiries; pending litigation and possibility of further legal proceedings adverse to the Company resulting from the restatement or related matter; the costs associated with the restatement and the SEC and DOJ inquiries; the identified material weakness in Avid’s internal controls; recent changes in Avid’s management; recent changes in Avid’s external accountants; Avid’s ability to execute its strategic plan and meet customer needs…
This is usual legalese associated with any financial releases, but some of the details – such as the SEC and DOJ inquiries and litigation – are specific areas of concern. Avid needs to demonstrate both the organization of the business and their strategy for customers.
April and summer appear to be the timeframe when we’ll see if they can deliver.
Good reading, in the meantime:
Timed with the new CEO’s hiring roughly this time last year:
Meet the New CEO of Avid: Q&A with Louis Herndandez, Jr. on the Future of Pro Tools – See more at: http://www.sonicscoop.com/2013/02/18/meet-the-new-ceo-of-avid-qa-with-louis-herndandez-jr-on-the-future-of-pro-tools/ [SonicScoop]
Six Things You Might Not Know About Avid’s New CEO, Louis Hernandez Jr. [studiodaily]
Forbes’ Bobby Owsinski has a fairly black-and-white take. (Side note: he also notices something I noticed just reading things on Avid’s investor site – the stock, now over the counter, is seeing heavy trading and actually lifting in value.)
The Avid saga is just another example of a technology company in a small market that’s based around creative professionals. A company like this has no business being public in the first place as it’s growth will be capped by the market size sooner or later. A public company is more beholden to its stockholders than its customers, especially when things go bad, which is a bad recipe when it comes to the entertainment industry.
That may be, though it seems the time to make that judgment will be after we see how the next few months play out in Avid specifically. The headline is a bit over the top:
Avid Delisting A Potential Shot To The Heart Of The Music Business
In fact, the NASDAQ delisting has absolutely zero immediate impact on the music and movie business. Long-term Avid health will certainly impact Avid customers, but so, too, will the direction the company takes and how the products – and competitive products – evolve.
Avid Investor Relations (including the video, which from reading the forums, eager readers have been watching in its entirety):
And their latest press release.
Avid Receives Anticipated NASDAQ Delist Letter
Shares Will Continue to Trade on OTC Markets – OTC Pink Tier; Company Targets Mid-2014 for Completion of the Restatement Process