Tom, your analysis of Avid's current operations does show some positive fundamental improvement. Since I haven't been a shareholder for 3 months, I haven't looked closer at the numbers, so I'm glad your post prompted me to do so. However, the string of losses and the relatively unimpressive sales gains, along with my view of where this market is headed is enough to keep me away from Avid for now, perhaps forever. When I was riding Avid up through its heyday, the company regularly announced hefty revenue gains: 1992 +158%; 1993 +117%; 1994 +80%; 1995 +74%; then 1996 +5%. There's a pattern here, isn't there? Of course, it could be argued that the stock price reflects this slower revenue growth, but then again, there also haven't been any recent earnings, so you can't really value the company based on PE, only hope for future profitability.
I think that if investors focus strictly on the balance sheet, they are missing the Big Picture, hence my example of New England Digital. I'll give you another one. I once ran a lumber company and we were the first in Southern California to go with a Point-of-Sale computer system. It was a couple hundred thousand dollar investment, with a stiff annual technical service support fee. Back then, the company specialized in setting up these massive POS systems for the lumber/hardware industry and they were the leader in that market. Well, within a few years, the dishwasher-sized computer needed for this kind of application had shrunk to a generic desktop PC costing a fraction of what we spent on ours, and POS/inventory software became commonly available.
My point is that closed-box niche-marketed computer systems have their day in the marketplace until they gradually lose their monopoly as the only game in town for professionals. It happened with digital audio workstations, and it's happening now with digital video nonlinear editing workstations. Avid used to be the only game in town for serious professionals. Now there are dozens of other systems out there and the choice is not a slam dunk anymore. Also, there is a trend for creative artists to own their own tools and work from home. Again, the digital audio/music market serves as an example. I simply argue that there are many, many more independent editors, directors, producers, etc., who could afford to purchase or lease their own nonlinear video editing system in the $10k range than there are at the $75k and up level.
Specialized software designed for high-end professional applications (turnkey systems) can charge a premium as long as there are no other alternatives in the marketplace. For now, Avid still has the edge with a complete, turnkey professional nonlinear video editing package. But the differences between its Media Composer line and those from competitors at significantly lower price points are becoming less and less significant. Adobe Premiere retails for around $500 and along with a decent quality video digitizing card, can do 90% of what Avid's systems do. Maybe not as fast or as elegantly yet, but these lower end systems are rapidly catching up with features and performance.
Avid's most important advantage has been in what we call "real-time" performance. By that, I mean you can make cuts and effects (dissolves, wipes, title supers, etc.) to your material and preview these edits in real time, instantly. This is crucial in a professional post-production environment, especially when you have clients looking over your shoulder or deadlines to beat. But this key advantage is disappearing, with many others now offering real-time editing features at a significantly lower cost of entry. The other important advantage Avid has had has been its elegant interface and a myriad of very specialized tools for professional editors. Again, even the generic nonlinear software used by competing digital video cards is catching up by adding more and more of these important professional features with each new upgrade.
A few more remarks on your comments:
<<Gross profit margin held steady at 44.2% as compared to 44.38%, even after considering the one time charge of $5,600 against the cost of revenue in the fourth quarter. Without consideration of that charge, the gross profit margin increased to 46.75%.>> This is exactly what worries me. The cost of hardware has probably dropped in half in the past year or so. Everyone knows this. But Avid is still banking on its Media Composer line, which is typically $75-$100k for a fully-configured system. Meanwhile, many competitors have positioned their systems from $10k to $30k. Avid should have stepped up to the plate a long time ago and put out a less expensive, simplified system to keep these competitors from getting a toehold. Their entry level MCXpress systems came out last spring (a little late, in my opinion) and are around $30k fully configured. And they're faced with the dilemma that if they add too many features to their entry-level systems in an effort to keep up with competitors, they end up shooting themselves in the foot by steering customers away from their bread-and-butter Media Composer line.
<<Nevertheless, there is still plenty of growth at the high end not only here in the US but mainly in Europe and Asia where is far less market penetration.>> Yes, and Avid's competitors will be there too. MDEA, the #2 leader in this market (I am a shareholder of MDEA, see my posts there if you're interested) has sold 10,000 of its systems worldwide, and unlike Avid, its sales are still growing at a fast clip: 1996 revenue +68%, income +105% (without nonrecurring charges). Sony and Panasonic have come into the marketplace with their own turnkey systems, with Panasonic at a lower price point than Avid (and focusing on an all-digital DVC system), and Sony's priced at around $60k. More importantly, their nonlinear editing systems are designed to interface with their new broadcast cameras and VTRs with the newer all-digital formats. These products will be given a serious look by international customers who are familiar and comfortable with these giants in our industry.
<<Moreover, there are always upgrades of existing systems.>> Yes, and this is what has caused so much anger and frustration from the owners of Avids I know. Both Avid's upgrades and technical support contract fees are perceived to be price-gouging, and unaffordable for some. The cost of maintenance and upgrades has been the major reason why I haven't purchased or leased an Avid. I rent one only when I need to and leave the maintenance costs and headaches to someone else. The Media Composer is still my editing tool of choice, and I hope Avid continues to put out great products. But a company that makes the best products doesn't necessarily make the best investment. That is why I advise everyone to wait for profitability and see if the revenues are going anywhere.
Good luck,
D. Kuspa |
