AVID TECHNOLOGY, INC. EXECUTIVE OVERVIEW
Business Overview
We develop, market, sell, and support software and integrated solutions for video and audio content creation, management and distribution. We are a leading technology provider that powers the media and entertainment industry. We do this by providing an open and efficient platform for digital media, along with a comprehensive set of tools and workflow solutions. Our solutions are used in production and post-production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; live-sound performance venues; advertising agencies; government and educational institutions; corporate communications departments; and by independent video and audio creative professionals, as well as aspiring professionals. Projects produced using our tools, platform, and ecosystem include feature films, television programming, live events, news broadcasts, sports productions, commercials, music, video, and other digital media content. With over one million creative users and thousands of enterprise clients relying on our technology platforms and solutions around the world, Avid enables the industry to thrive in today's connected media and entertainment world. Our mission is to empower media creators with innovative technology and collaborative tools to entertain, inform, educate, and enlighten the world. Our clients rely on Avid's products and solutions to create prestigious and award-winning feature films, music recordings, television shows, live concerts, sporting events, and news broadcasts. Avid has been honored for technological innovation with 18 Emmy Awards, oneGrammy Award , two Oscars, and the first ever America Cinema Editors Technical Excellence Award.
Operations Overview
Our strategy for connecting creative professionals and media enterprises with audiences in a powerful, efficient, collaborative, and profitable way leverages our creative software tools, including Pro Tools for audio and Media Composer for video, and our MediaCentral Platform - the open, extensible, and customizable foundation that streamlines and simplifies content workflows by integrating all Avid or third-party products and services that run on top of it. The platform provides secure and protected access, and enables fast and easy creation, delivery, and monetization of content. We work to ensure that we are meeting customer needs, staying ahead of industry trends, and investing in the right areas through a close and interactive relationship with our customer base.The Avid Customer Association was established to be an innovative and influential media technology community. It represents thousands of organizations and over 30,000 professionals from all levels of the industry including inspirational and award-winning thought leaders, innovators, and storytellers.The Avid Customer Association fosters collaboration between Avid, its customers, and other industry colleagues to help shape our product offerings and provide a means to shape our industry together. A key element of our strategy is our transition to a recurring revenue-based model through a combination of subscription offerings and long-term agreements. As ofMarch 31, 2022 , we had approximately 432,000 paid subscriptions. The subscription count includes all paid and active seats under multi-seat licenses. These licensing options offer choices in pricing and deployment to suit our customers' needs. Our subscription offerings to date have been sold to creative professionals and media enterprises. We expect to increase subscription sales to media enterprises going forward as we expand offerings and move through customer upgrade cycles, which we expect will further increase recurring revenue on a longer-term basis. Our long-term agreements are comprised of multi-year agreements with large media enterprise customers to provide specified products and services, including SaaS offerings, and channel partners and resellers to purchase minimum amounts of products and service over a specified period of time. Avid continued to invest in our Digital Transformation Initiative through the first quarter of 2022, which focuses on optimizing systems, processes, and back-office functions with the objective of improving our operations related to our digital and subscription business. The project started in the third quarter of 2021 and over the next four years, we plan to significantly invest in transforming our enterprise-wide infrastructure and technologies to benefit customers and drive enhanced performance across the company.
A summary of our revenue sources for the three months ended
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Three Months Ended March 31,
2022 2021
Subscriptions $ 32,954 $ 24,868
Maintenance 28,327 29,852
Subscriptions and Maintenance 61,281 54,720
Perpetual Licenses 5,197 7,058
Software Licenses and Maintenance 66,478 61,778
Integrated solutions 28,212
26,209
Professional services & training 5,959 6,377 Total revenue$ 100,649 $ 94,364
Recent Developments Affecting on Our Business
The COVID-19 pandemic has created significant global economic uncertainty which adversely impacted our business and the business of our customers and partners during 2020. However, our results through 2021 and the first quarter of 2022, reflected a gradual recovery in spending levels with the continuing positive signs of recovery from the impacts of the COVID-19 pandemic driven by vaccination and government stimulus programs, particularly inthe United States . At the same time, certain countries continue to face challenges and there remains uncertainty relating to the ongoing spread and severity of the virus and its variants. Although we are encouraged by the trends we have seen, to the extent that the pandemic continues to have negative impacts on economies, our results could be affected and uneven. Ongoing effects of the COVID-19 pandemic and its subsequent variants continue to complicate supply chain logistics and cause delays, and the Russian invasion ofUkraine may exacerbate supply chain issues further. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19.
CRITICAL ACCOUNTING ESTIMATES
Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates. We believe that our critical accounting policies and estimates are those related to revenue recognition and allowances for sales returns and exchanges, stock-based compensation, and income tax assets and liabilities. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the year endedDecember 31, 2021 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Policies and Estimates". There have been no significant changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 19 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of net revenues for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, 2022 2021 Net revenues: Subscriptions 32.7 % 26.4 % Maintenance 28.1 % 31.6 % Integrated solutions & other 39.2 %
42.0 %
Total net revenues 100.0 % 100.0 %
Cost of revenues 33.7 % 34.9 %
Gross margin 66.3 % 65.1 %Operating expenses:
Research and development 16.6 % 16.3 %
Marketing and selling 21.8 % 22.0 %
General and administrative 14.7 % 14.5 %
Restructuring costs, net - % 1.1 %
Total operating expenses 53.1 % 53.9 %
Operating income 13.2 % 11.2 %
Interest expense, net (1.5) % (2.2) %
Other income, net (0.1) % (3.8) %
Income before income taxes 11.6 % 5.2 %
Provision for income taxes 1.1 % 0.5 %
Net income 10.5 % 4.7 %
Net Revenues
Our net revenues are derived mainly from sales of subscription software
solutions, maintenance contracts, and integrated solutions for digital media
content production, management and distribution, and related professional
services. We commonly sell large, complex solutions to our customers that, due
to their strategic nature, have long lead times where the timing of order
execution and fulfillment can be difficult to predict. In addition, the rapid
evolution of the media industry is changing our customers' needs, businesses,
and revenue models, which is influencing their short-term and long-term
purchasing decisions. As a result of these factors, the timing and amount of
product revenue recognized related to orders for large, complex solutions, as
well as the services associated with them, can fluctuate from quarter to quarter
and cause significant volatility in our quarterly operating results. For a
discussion of these factors, see the risk factors discussed in Part I, Item 1A
under the heading "Risk Factors" in our Annual Report on Form 10-K for the year
ended December 31, 2021 .
Net Revenues for the Three Months Ended March 31, 2022 and 2021
(dollars in thousands)
2022 Change 2021
Net Revenues $ % Net Revenues
Subscriptions $ 32,954 $ 8,086 32.5% $ 24,868
Maintenance 28,327 (1,525) (5.1)% 29,852
Integrated solutions & other 39,368 (276) (0.7)% 39,644
Total net revenues $ 100,649 $ 6,285 6.7% $ 94,364
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Net Revenues for the Nine Months Ended September 30, 2021 and 2020
The following table sets forth the percentage of our net revenues attributable
to geographic regions for the three months ended
Three Months Ended March 31,
2022 2021
United States 44% 42%
Other Americas 5% 5%
Europe, Middle East and Africa 39% 39%
Asia-Pacific 12% 14%
Subscription Revenues
Our subscription revenues are derived primarily from sales of our Media
Composer, Pro Tools, and Sibelius offerings. Subscription revenues increased
$8.1 million , or 32.5%, for the three months ended March 31, 2022 , compared to
the same period in 2021. The increase for the three months ended March 31, 2022
was primarily a result of new customers adopting our subscription solutions and
customers transitioning from our perpetual product licenses to our
subscription-based model.
Maintenance Revenues
Our maintenance revenues are derived from a variety of maintenance contracts for our software and integrated solutions. Maintenance contracts allow each customer to select the level of technical and operational support that they need to maintain their operational effectiveness. Maintenance contracts typically include the right to the latest software updates, call support, and, in some cases, hardware maintenance. Maintenance revenues decreased$1.5 million , or 5.1%, for the three months endedMarch 31, 2022 , compared to the same period in 2021. The decrease for the three months endedMarch 31, 2022 was primarily due to customers transitioning from our perpetual based licenses to our subscription licenses.
Integrated Solutions and other Revenues
Our integrated solutions and other revenues are derived primarily from sales of our storage and workflow solutions, media management solutions, video creative tools, digital audio software and workstation solutions, and our control surfaces, consoles, and live-sound systems as well as professional and learning services. Integrated solutions and other revenues decreased slightly, for the three months endedMarch 31, 2022 , compared to the same period in 2021 as the result of delayed shipments due to supply chain issues.
Cost of Revenues, Gross Profit and Gross Margin Percentage
Cost of revenues consists primarily of costs associated with:
•procurement of components and finished goods;
•assembly, testing and distribution of finished products;
•warehousing;
•customer support related to maintenance;
•royalties for third-party software and hardware included in our products; and
•providing professional services and training.
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Costs of Revenues and Gross Profit
Costs of Revenues and Gross Profit for the Three Months Ended March 31, 2022 and 2021
(dollars in thousands)
2022 Change 2021
Costs $ % Costs
Subscriptions $ 5,602 $ 2,987 114.2% $ 2,615
Maintenance 5,277 (297) (5.3)% 5,574
Integrated solutions & other 23,006 (1,753) (7.1)% 24,759
Total cost of revenues $ 33,885 $ 937 2.8% $ 32,948
Gross profit $ 66,764 $ 5,348 8.7% $ 61,416
Costs of Revenues and Gross Profit for
the Nine Months Ended
Gross Margin Percentage
Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales-promotion programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products, and currency exchange-rate fluctuations. For a discussion of these factors, see the risk factors discussed in Part I, Item 1A under the heading "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Our gross margin percentage for the three months endedMarch 31, 2022 increased to 66.3% from 65.1% compared to the same period in 2021. This increase was primarily due to increased volume on our higher margin subscription revenue as well as an improvement in our integrated solutions gross margin. This was offset by the decrease in our subscription margins due to increased customer care costs being allocated to subscription. Gross Margin % for the Three Months Ended March 31, 2022 and 2021 2022 Gross 2021 Gross Margin % Change Margin % Subscription 83.0% (6.5)% 89.5% Maintenance 81.4% 0.1% 81.3% Integrated solutions & other 41.6% 4.1% 37.5% Total 66.3% 1.2% 65.1% Gross Margin % for the Nine Months Ended September 30, 2021 and 2020 22
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Operating Expenses and Operating Income
Operating Expenses and Operating Income for the Three
Months Ended
(dollars in thousands)
2022 Change 2021
Expenses $ % Expenses
Research and development $ 16,736 $ 1,319 8.6% $ 15,417
Marketing and selling 21,927 1,183 5.7% 20,744
General and administrative 14,811 1,176 8.6% 13,635
Restructuring costs, net 15 (1,059) (98.6)% 1,074
Total operating expenses $ 53,489 $ 2,619 5.1% $ 50,870
Operating income $ 13,275 $ 2,729 25.9% $ 10,546
Operating Expenses and Operating Loss for
the Nine Months Ended
Research and Development Expenses
Research and development ("R&D") expenses include costs associated with the
development of new products and the enhancement of existing products, and
consist primarily of employee compensation and benefits, facilities costs,
depreciation, costs for consulting and temporary employees, and prototype and
other development expenses. R&D expenses increased $1.3 million , or 8.6%, for
the three months ended March 31, 2022 , compared to the same period in 2021. The
increase in R&D expenses was primarily due to increased consulting and outside
research and development services for the three months ended March 31,
2022 , compared to the same period in 2021.
Change in R&D Expenses for the Three Months Ended
Change in R&D Expenses for the Nine Months Ended
Marketing and Selling Expenses
Marketing and selling expenses consist primarily of employee compensation and
benefits for selling, marketing and pre-sales customer support personnel,
commissions, travel expenses, advertising and promotional expenses, web design
costs, and facilities costs. The tables below provide further details regarding
the changes in components of marketing and selling expenses.
Change in Marketing and Selling Expenses for the Three Months
Ended
(dollars in thousands)
2022 Increase (Decrease) From 2021
$ %
Personnel-related 225 1.4 %
Advertising and promotions 370 76.3 %
Consulting and outside services 369 51.5 %
Foreign exchange (gains) and losses 727 1,115.4 %
Other (508) (14.3) %
Total marketing and selling expenses decrease $ 1,183 5.7 %
Change in Marketing and Selling Expenses for the Nine Months Ended
The increase in advertising and promotions expenses for the three months endedMarch 31, 2022 , compared to the same period in 2021, was primarily the result of resuming our attendance at trade shows that were paused in 2021 and increased advertising 23 -------------------------------------------------------------------------------- efforts to promote increased sales. The increase in consulting and outside services for the three months endedMarch 31, 2022 was primarily due to an increased used of external contractors to provide marketing and promotional support as well as assist in our digital transformation initiative. The change in foreign exchange translations for the three months endedMarch 31, 2022 , compared to the same period in 2021, was due to foreign exchange gains and losses from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities. These foreign exchange changes were primarily due to the euro-dollar exchange rate volatility. The decrease in other expenses for the three months endedMarch 31, 2022 was related to a reduction in our bad debt allowance.
General and Administrative Expenses
General and administrative ("G&A") expenses consist primarily of employee
compensation and benefits for administrative, executive, finance and legal
personnel, audit, legal and strategic consulting fees, and insurance,
information systems and facilities costs. Information systems and facilities
costs reported within general and administrative expenses are net of allocations
to other expenses categories. The tables below provide further details regarding
the changes in components of G&A expenses.
Change in G&A Expenses for the Three Months Ended March 31, 2022 and 2021
(dollars in thousands)
2022 Increase
From 2021
$ %
Personnel-related 595 8.8 %
Facilities and information 151 10.0 %
Other 430 8.0 %
Total G&A expenses increase $ 1,176 8.6 %
The increase in personnel-related expenses for the three months ended March 31,
2022 , compared to the same period in 2021, was primarily due to an increase in
variable related compensation as a result of the Company's continued strong
performance. The increase in other expenses for the three months ended March 31,
2022 , compared to the same period in 2021, was primarily a result of business
development activities as well as our digital transformation initiative.
Provision for Income Taxes
Provision for Income Taxes for the Three Months Ended March 31, 2022 and 2021
(dollars in thousands)
2022 Change 2021
$ %
Provision for income taxes $ 1,126 $ 644 133.6% $ 482
Provision for Income Taxes for the
Nine Months Ended
We had a tax provision of 9.6% and 9.9% as a percentage of income and loss before tax for the three months endedMarch 31, 2022 and 2021, respectively. The increase in the tax provision for the three months endedMarch 31, 2022 , compared to the same period in 2021, is primarily due to the increase in worldwide pre-tax income. No benefit was provided for the tax loss generated inthe United States due to a full valuation on the deferred tax asset. 24 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Sources of Cash
Our principal sources of liquidity include cash and cash equivalents totaling$41.2 million as ofMarch 31, 2022 , as well as the availability of borrowings of up to$70.0 million under our revolving Credit Facility. We have generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under our credit facilities. We have continued our commitment to a digital transformation initiative focused around modernizing our enterprise-wide infrastructure and technologies to benefit our customers and drive enhanced performance across the company, which we started in the quarter endedSeptember 30, 2021 . Over the next four years we plan to invest significant funds and resources towards implementing these new technologies. OnJanuary 5, 2021 , we entered into the Credit Agreement withJPMorgan Chase Bank, N.A . and a syndicate of banks, as collateral and administrative agent, and the Lenders. Pursuant to the Credit Agreement, the Lenders agreed to provide us with the Term Loan and the Credit Facility. We borrowed the full amount of the Term Loan, or$180.0 million , on the closing date, but did not borrow any of the$70.0 million available under the Credit Facility on the closing date. The proceeds from the Term Loan, plus available cash on hand, were used to repay outstanding borrowings of$201.0 million under the Company's prior credit facility withCerberus Business Finance, LLC , which was then terminated. Prior to the maturity of the Credit Facility, any amounts borrowed under the Credit Facility may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed in whole or in part without penalty. OnFebruary 25, 2022 , the Company executed the A&R Credit Agreement withJPMorgan Chase Bank, N.A . and the Lenders. The A&R Credit Agreement extended the term of the Term Loan by approximately one year toFebruary 25, 2027 , reduced the applicable interest rate margins by 0.25%, removed the LIBOR floor, moved the reference rate from LIBOR to SOFR, reset the principal amortization schedule, and eliminated the fixed charge coverage ratio. The A&R Credit Agreement contains a financial covenant to maintain a total net leverage ratio of no more than 4.00 to 1.00 initially, with step downs thereafter. Other terms of the A&R Credit Agreement remain substantially the same as the Credit Agreement. The Term Loan, as amended, has an initial interest rate of SOFR plus an applicable margin of 2.25%, with a 0% floor. The applicable margin for SOFR loans under the A&R Credit Agreement ranges from 1.75% to 3.0%, depending on the Company's total net leverage ratio. Both the Term Loan and the revolving Credit Facility mature onFebruary 25, 2027 . Our ability to satisfy the maximum total net leverage ratio covenant in the future depends on our ability to increase bookings and billings above levels experienced over the last 12 months. In recent quarters, we have experienced volatility in bookings and billings resulting from, among other things, (i) our transition towards subscription and recurring revenue streams and the resulting decline in traditional upfront product sales, (ii) dramatic changes in the media industry and the impact it has on our customers, (iii) the impact of new and anticipated product launches and features, and (iv) volatility in currency rates. In the event revenues in future quarters are lower than we currently anticipate, we may be forced to take remedial actions which could include, among other things (and where allowed by the lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, or (iv) disposing of certain assets or businesses. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on our business. If we are not in compliance with the net leverage ratio covenant and are unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the A&R Credit Agreement, which could permit acceleration of the outstanding indebtedness under the A&R Credit Agreement and require us to repay such indebtedness before the scheduled due date. If an event of default were to occur, we might not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the A&R Credit Agreement. Our cash requirements vary depending on factors such as the growth of the business, changes in working capital, and capital expenditures. We anticipate that we will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next 12 months as well as for the foreseeable future. We also believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business operations and cash flows for the foreseeable future, which could include reductions in revenue and delays in payments from customers and partners. The challenges posed by COVID-19 on our business are constantly evolving. Consequently, we will continue to evaluate our financial position in light of future developments, particularly those relating to COVID-19. 25 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Three Months Ended March 31,
2022 2021
Net cash provided by operating activities $ 7,916 $ 12,313
Net cash used in investing activities (3,244) (1,254)
Net cash used in financing activities (19,991) (35,003)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash
(254) (332)
Net decrease in cash, cash equivalents and restricted cash
Cash Flows from Operating Activities
Cash provided by operating activities aggregated
Cash Flows from Investing Activities
For the three months ended
Cash Flows from Financing Activities
For the three months ended
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements and Recent Accounting Pronouncements To Be Adopted
Our recently adopted and to be adopted accounting pronouncements are set forth in Note 1 "Financial Information" of our Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
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