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AVID > SEC Filings for AVID > Form 10-Q on 10-Nov-2011All Recent SEC Filings

Show all filings for AVID TECHNOLOGY, INC.

Form 10-Q for AVID TECHNOLOGY, INC.


10-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

EXECUTIVE OVERVIEW

Our Company

We are a leading provider of digital media content-creation products and solutions for film, video, audio and broadcast professionals, as well as artists and creative enthusiasts. Our mission is to inspire passion, unleash creativity and enable our customers to realize their dreams in a digital world. Anyone who enjoys movies, television or music has almost certainly experienced the work of content creators who use our solutions to bring their creative visions to life. Around the globe, feature films, primetime television shows, news programs, commercials, live performances and chart-topping music hits are made using one or more of our solutions.

Corporate Strategy

We operate our business based on the following five customer-centric strategic principles:

Drive customer success. We are committed to making each and every customer successful. Period. It's that simple.

From enthusiasts to the enterprise. Whether performing live or telling a story to sharing a vision or broadcasting the news - we create products to support our customers at all stages.

Fluid, dependable workflows. Reliability. Flexibility. Ease of Use. High Performance. We provide best-in-class workflows to make our customers more productive and competitive.

Collaborative support. For the individual user, the workgroup, a community or the enterprise, we enable a collaborative environment for success.

Avid optimized in an open ecosystem. Our products are innovative, reliable, integrated and best-of-breed. We work in partnership with a third-party community resulting in superior interoperability.

We routinely post important information for investors on the Investors page of our website at www.avid.com. Information contained in, or connected to, our website is not incorporated in this quarterly report and should not be considered part of this quarterly report.


                               Financial Summary

The following table sets forth certain items from our consolidated statements of
operations as a percentage of net revenues for the periods indicated:

                                  For the Three Months Ended            For the Nine Months Ended
                                         September 30,                        September 30,
                                    2011                2010             2011               2010
Net revenues:
Product revenues                    79.9 %               81.3 %          80.9 %              82.2 %
Services revenues                   20.1 %               18.7 %          19.1 %              17.8 %
Total net revenues                 100.0 %              100.0 %         100.0 %             100.0 %

Cost of revenues                    46.8 %               48.1 %          47.9 %              49.2 %
Gross margin                        53.2 %               51.9 %          52.1 %              50.8 %
Operating expenses:
Research and development            17.6 %               17.5 %          18.1 %              18.5 %
Marketing and selling               27.5 %               26.2 %          27.7 %              26.8 %
General and administrative           8.0 %               11.9 %           8.8 %              10.0 %
Amortization of intangible
assets                               1.3 %                1.4 %           1.3 %               1.5 %
Restructuring and other
costs, net                           1.7 %                0.1 %           0.1 %               1.1 %
(Gain) loss on sales of
assets                                 -                 (0.9 %)          0.1 %              (0.3 %)
Total operating expenses            56.1 %               56.2 %          56.1 %              57.6 %
Operating loss                      (2.9 %)              (4.3 %)         (4.0 %)             (6.8 %)
Interest and other income
(expense), net                      (0.3 %)              (0.0 %)         (0.3 %)             (0.0 %)
Loss before income taxes            (3.2 %)              (4.3 %)         (4.3 %)             (6.8 %)
Provision for income taxes           1.7 %                1.8 %           0.8 %               0.7 %
Net loss                            (4.9 %)              (6.1 %)         (5.1 %)             (7.5 %)

Our revenues for the three-month period ended September 30, 2011 were $165.0 million, a decrease of $0.1 million, or 0.1%, compared to the three-month period ended September 30, 2010, with revenues from products decreasing by 1.8% and services revenues increasing by 7.3%. During the third quarter of 2011, compared to the same period in 2010, audio products revenues increased by $1.9 million and services revenues increased by $2.3 million, while video products revenues decreased by $4.2 million. Our revenues for the nine-month period ended September 30, 2011 were $492.6 million, an increase of $9.5 million, or 2.0%, compared to the nine-month period ended September 30, 2010, with revenues from products increasing by 0.3% and services revenues increasing by 9.4%. During the first nine months of 2011, compared to the same period in 2010, video products revenues increased by $3.1 million and services revenues increased by $8.1 million, while audio products revenues decreased by $1.7 million. We recognized additional revenues during the first nine months of 2011 as a result of our January 1, 2011 adoption of new revenue recognition guidance, while our revenues decreased slightly during the third quarter of 2011 due to the same adoption. See our critical accounting policy disclosure and updated policy for "Revenue Recognition and Allowances for Product Returns and Exchanges" found in this Item 2 under the heading "Critical Accounting Policies and Estimates" for a further discussion of the impact of adoption of this guidance. The changes in revenues are discussed in further detail in the section titled "Results of Operations" below.

The following table sets forth the percentage of our net revenues attributable to geographic regions for the periods indicated:

                  For the Three Months Ended         For the Nine Months Ended
                        September 30,                      September 30,
                   2011                 2010          2011                 2010
Americas            53 %                   47 %        51 %                   49 %
EMEA                34 %                   39 %        36 %                   38 %
Asia-Pacific        13 %                   14 %        13 %                   13 %


Americas revenues increased for both the three- and nine-month periods ended September 30, 2011, compared to the same periods in 2010. In the second quarter of 2011, we saw a significant sequential decline in the revenues generated by our foreign regions, and revenues from foreign regions remained at somewhat depressed levels in the third quarter of 2011. The decline, primarily in Europe, was the result of economic uncertainties in certain countries, as well as internal challenges that led to a realignment of our sales team in Europe. Sales from foreign regions benefited from favorable foreign currency fluctuations in both the three- and nine-month periods ended September 30, 2011, compared to the same periods in 2010.

The following table sets forth the percentage of our net revenues sold through indirect and direct sales channels for the periods indicated:

              For the Three Months Ended         For the Nine Months Ended
                    September 30,                      September 30,
               2011                 2010          2011                 2010
Indirect        61 %                   62 %        61 %                   65 %
Direct          39 %                   38 %        39 %                   35 %

The decrease in the percentage of revenues derived through indirect channels for the nine-month period, compared to the same 2010 period, was largely driven by the increases in video products revenues and services revenues in the 2011 period, which have a higher percentage of sales through direct channels than audio products.

Our gross margin percentage for the three-month period ended September 30, 2011 improved to 53.2%, compared to 51.9% for the same period in 2010. This change was driven by an increase in products gross margin percentage to 54.5%, which was partially offset by a decrease in services gross margin percentage to 50.1%. This compares to products and services gross margin percentages of 52.0% and 54.0%, respectively, for the 2010 period. Our gross margin percentage for the nine-month period ended September 30, 2011 improved to 52.1%, compared to 50.8% for the same period in 2010. This change was driven by an increase in products gross margin percentage to 52.9%, which was partially offset by a decrease in services gross margin percentage to 51.0%. This compares to products and services gross margin percentages of 51.3% and 52.0%, respectively, for the 2010 period. The increases in products gross margin percentage for both 2011 periods were the result of decreases in products costs for the 2011 periods, primarily due to shifts in product mix and the favorable impact of currency exchange rates. The increase in revenues for the nine-month period also contributed to the increased products gross margin percentage for that period. The decreases in services gross margin percentage for both 2011 periods were largely the result of increased professional services costs, including loss provisions recorded in the 2011 periods related to professional services contracts assumed as part of a 2010 acquisition.

For the three- and nine-month periods ended September 30, 2011, we recorded net losses of $8.0 million and $25.0 million, respectively, compared to net losses of $10.0 million and $36.4 million for the same periods in 2010. The reduction in net loss in both periods was largely a result of our continuing focus on the management of both costs of revenues and operating expenses. The net loss for the three-month period ended September 30, 2011 included charges of $2.8 million for acquisition-related intangible asset amortization; $2.7 million for restructuring costs; and $0.2 million for legal settlements and acquisition-related costs. The net loss for the three-month period ended September 30, 2010 included charges of $5.7 million for a legal settlement and acquisition-related costs; $3.0 million for acquisition-related intangible asset amortization; and $0.2 million for restructuring costs, partially offset by gains from the sales of assets of $1.5 million. The net loss for the nine-month period ended September 30, 2011 included charges of $8.5 million for acquisition-related intangible asset amortization; a loss from the sales of assets of $0.6 million; $0.6 million for legal settlements and acquisition-related costs; and $0.3 million for restructuring costs. The net loss for the nine-month period ended September 30, 2010 included charges of $10.2 million for acquisition-related intangible asset amortization; $6.4 million for legal settlements and acquisition-related costs; $5.5 million for restructuring and other costs, including costs of $3.7 million related to our exit from our Tewksbury, Massachusetts headquarters lease. These 2010 costs were partially offset by a gain from the sales of assets of $1.5 million.


During October 2011, we committed to a restructuring plan that is intended in improve operational efficiencies. Actions under the plan include a reduction in force of approximately 10%, with the majority of the reduction expected immediately, and the closure of our facility in Irwindale, CA. These actions allow us to continue to invest in our core businesses, as well as shift some resources into areas of the business that we believe offer us better revenue growth potential. Under the plan, the Company expects to incur total expenses related to termination benefits and facility costs of $10 million to $11 million, all of which represent cash expenditures. The Company expects to record the majority of the charges related to the plan during the quarter ending December 31, 2011. As a result of the actions taken under the plan, we expect to realize annualized cost savings of approximately $25 million to $30 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results may differ from these estimates.

We believe that our critical accounting policies are those related to revenue recognition and allowances for product returns and exchanges; stock-based compensation; the valuation of business combinations, goodwill and intangible assets; and income tax assets and liabilities. We believe these policies are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most difficult and subjective estimates and judgments. Our critical accounting policies may be found in our 2010 Annual Report on Form 10-K in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Policies and Estimates." On January 1, 2011, we adopted Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2009-13, Multiple-Deliverable Revenue Arrangements, an amendment to Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition, and ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements, an amendment to ASC Subtopic 985-605, Software - Revenue Recognition, or the Updates. As a result, our critical accounting policy for "Revenue Recognition and Allowances for Product Returns and Exchanges" has been updated to reflect adoption of this guidance.

Recently Adopted Accounting Pronouncements

ASU No. 2009-13 requires the allocation of revenue to each unit of accounting using the relative selling price of each deliverable for multiple-element arrangements. ASU No. 2009-13 also amends the accounting for multiple-element arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method by establishing a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence, or VSOE, third-party evidence, or TPE, and the best estimate of selling price, or ESP. If VSOE is available, it is used to determine the selling price of a deliverable. If VSOE is not available, the entity must determine whether TPE is available. If so, TPE would be used to determine the selling price. If TPE is not available, then the entity is required to determine an ESP. ASU No. 2009-14 amends ASC Subtopic 985-605 to exclude from the scope of software revenue recognition requirements sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. The Updates also include new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Updates must be adopted in the same period using the same transition method and are effective prospectively, with retrospective adoption permitted. We adopted the Updates prospectively for new and materially modified arrangements originating after December 31, 2010.


Prior to adoption of the Updates, we generally recognized revenues using the revenue recognition criteria of FASB ASC Subtopic 985-605, Software - Revenue Recognition. As a result of adoption of ASU No. 2009-14 on January 1, 2011, we will now typically recognize revenue using the criteria of FASB ASC Topic 605, Revenue Recognition. Historically, we were generally able to establish VSOE for undelivered elements in multiple-element arrangements as allowed by FASB ASC Subtopic 985-605 and, therefore, could typically recognize revenues for each element of multiple-element arrangements as the element was delivered. Under the new guidance our recognition of revenues may be recognized in an earlier period for a limited number of multiple-element arrangements for which VSOE could not be established for all undelivered elements under the previous guidance. For those arrangements, we will now determine a relative selling price for the undelivered elements through the use of TPE or ESP, and the recognition of certain revenues that would have been deferred under the previous guidance will typically be recognized at the time of delivery under the new guidance, provided all other criteria for revenue recognition are met. For the nine months ended September 30, 2011, adoption of the Updates resulted in an increase in total revenues of approximately $5.5 million. For the three months ended September 30, 2011, adoption of the Updates resulted in a decrease in total revenues of approximately $0.8 million. We cannot reasonably estimate the effect of the adoption of these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified arrangements in any given period.

Revenue Recognition Policy (as adopted January 1, 2011)

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenues we report. For example, we often receive multiple purchase orders or contracts from a single customer or a group of related parties that are evaluated to determine if they are, in effect, parts of a single arrangement. If they are determined to be parts of a single arrangement, revenues are recorded as if a single multiple-element arrangement exists.

Generally, the products we sell do not require significant production, modification or customization of software. Installation of the products is generally routine, consists of implementation and configuration and does not have to be performed by Avid. However, certain transactions for our video products, typically complex solution sales that include a significant number of products and may involve multiple customer sites, require us to perform an installation effort that we may deem to be complex, non-routine and essential to the functionality of the products delivered. In these situations, we do not recognize revenues for either the products shipped or services performed until the essential services have been completed. In addition, if these orders include a customer acceptance provision, no revenues are recognized until the customer's formal acceptance of the products and services has been received.

In the first quarter of fiscal 2011, we adopted ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, an amendment to ASC Topic 605, Revenue Recognition, and ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements, an amendment to ASC Subtopic 985-605, Software - Revenue Recognition. ASU No. 2009-13 requires the allocation of revenue, based on the relative selling price of each deliverable, to each unit of accounting for multiple-element arrangements. It also changes the level of evidence of standalone selling price required to separate deliverables by allowing a best estimate of the standalone selling price of deliverables when more objective evidence of fair value, such as vendor-specific objective evidence or third-party evidence, is not available. ASU No. 2009-14 amends ASC Subtopic 985-605 to exclude sales of tangible products containing both software and non-software components that function together to deliver the tangible products essential functionality from the scope of revenue recognition requirements for software arrangements. We adopted this accounting guidance prospectively and applied its provisions to arrangements entered into or materially modified after December 31, 2010.

We recognize revenue from the sale of non-software products, including software bundled with hardware that is essential to the functionality of the hardware, under the general revenue recognition accounting guidance of ASC Topic 605, Revenue Recognition and ASC Subtopic 605-25 Revenue Recognition - Multiple-Element Arrangements. We recognize revenue in accordance with ASC Subtopic 985-605, Software - Revenue Recognition for the following types of sales transactions: (i) standalone sales of software products and related upgrades and (ii) sales of software elements bundled with non-software elements, when the software elements are not essential to the functionality of the non-software elements.


For 2011 and future periods, pursuant to the guidance of ASU No. 2009-13, when a sales arrangement contains multiple elements, such as non-software products, software products, customer support services, and/or professional services, we allocate revenue to each element based on the aforementioned selling price hierarchy. Revenue is allocated to the non-software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized using the guidance for recognizing software revenue, as amended.

The process for determining our ESP for deliverables without VSOE or TPE involves management's judgment. We generally determine ESP based on the following.

We utilize a pricing model for our products to capture the right value given the product and market context. The model considers such factors as: (i) competitive reference prices for products that are similar but not functionally equivalent, (ii) differential value based on specific feature sets, (iii) geographic regions where the products are sold, (iv) customer price sensitivity, (v) price-cost-volume tradeoffs, and (vi) volume based pricing. Management approval ensures that all of our selling prices are consistent and within an acceptable range for use with the relative selling price method.

While the pricing model currently in use captures all critical variables, unforeseen changes due to external market forces may result in the revision of some of our inputs. These modifications may result in consideration allocation in future periods that differs from the one presently in use. Absent a significant change in the pricing inputs, future changes in the pricing model are not expected to materially impact our allocation of arrangement consideration.

From time to time, we offer certain customers free upgrades or specified future products or enhancements. For software products, if elements are undelivered at the time of product shipment and provided that we have VSOE of fair value for the undelivered elements, we defer the fair value of the specified upgrade, product or enhancement and recognize those revenues only upon later delivery or at the time at which the remaining contractual terms relating to the elements have been satisfied. If we cannot establish VSOE for each undelivered element, all revenue is deferred until all elements are delivered, we establish VSOE or the remaining contractual terms relating to the undelivered elements have been satisfied. For non-software products, if elements are undelivered at the time of product shipment, we defer the relative selling price of the specified upgrade, product or enhancement and recognize those revenues only upon later delivery or at the time at which the remaining contractual terms relating to the elements have been satisfied.

Approximately 61% of our revenues for the first nine months of 2011 were derived from indirect sales channels, including authorized resellers and distributors. Certain channel partners are offered limited rights of return, stock rotation and price protection. For these partners, we record a provision for estimated returns and other allowances as a reduction of revenues in the same period that related revenues are recorded in accordance with ASC Subtopic 605-15, Revenue Recognition - Products. Management estimates must be made and used in connection with establishing and maintaining a sales allowance for expected returns and other credits. In making these estimates, we analyze historical returns and credits and the amounts of products held by major resellers and consider the impact of new product introductions, changes in customer demand, current economic conditions and other known factors. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. The amount and timing of our revenues for any period may be affected if actual product returns or other reseller credits prove to be materially different from our estimates.

A portion of our revenues from sales of consumer video-editing and audio products is derived from transactions with channel partners who have unlimited return rights and from whom payment is contingent upon the product being sold through to their customers. Accordingly, revenues for these channel partners are recognized when the products are sold through to the customer instead of being recognized at the time products are shipped to the channel partners.


At the time of a sales transaction, we make an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is probable that collection will occur in a timely manner. In making this assessment, we consider customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not probable based on our credit review process, revenues are recognized on a cash-collected basis to the extent that the other criteria of ASC Topic 605, ASC Subtopic 985-605 and Securities and Exchange Commission Staff Accounting Bulletin No. 104 are satisfied. At the outset of the arrangement, we assess whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, our collection experience in similar transactions without making concessions, and our involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after our normal payment terms, which are generally 30 days, but can be up to 90 days, after the invoice date, we evaluate whether we have sufficient history of successfully collecting past transactions with similar terms. If that collection history is sufficient, revenues are recognized upon delivery of the products, . . .

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