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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 Their report included outdated financial data.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.

The S3L hardware - Avid's latest play for a hit in the pro audio world. Product images courtesy Avid.

The S3L hardware – Avid’s latest play for a hit in the pro audio world. Product images courtesy Avid.

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):

http://ir.avid.com/

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

  • angstrom

    I found the employee comments about upper management interesting. http://www.glassdoor.co.uk/Reviews/Avid-Technology-Reviews-E2291.htm

    12% employee satisfaction. That’s good right?

    • http://pkirn.com/ Peter Kirn

      Definitely not what you want. Many of those reviews predate the current executives – though, in fairness, the CEO was hired from the board.

    • Josh

      They did fire a ton of people in the last couple months at their office. I bet the crew that got fired would echo those sentiments.

    • Josh

      SF office that is…

    • Sara

      They did not fire a “ton”of people in the last couple of months. That statement is completely 100% false.

    • Robert Randolph

      With the average body weight of an american being ~180lbs, they would only have to lay off 12 people to have laid off a ‘ton’ of people.

      So the statement is not 100% false unless they laid off <12 people.

    • http://pkirn.com/ Peter Kirn

      @robert_randolph:disqus – ha. Math burn. Thanks for that. ;)

    • pete_press

      I personally know employees who have been “let go” this year (i.e. the last couple months). Where do you get your information Sara?

      Heck they let go a bunch of people Fall 2013 too.

    • chaircrusher

      I know you’re not that innumerate. The statistics on that site are comprised of the opinions of people who felt strongly enough about that company to post something. So 12% means fuck all.

      You can point to that as evidence that there’s some unhappiness at Avid. But there’s no point in quantifying something from incomplete data.

  • gunboat_d

    in the world of publicly traded companies, when you’re dependent on creditors for the day-to-day operation of your company, it makes little difference *why* you were delisted; the perception that the company is not being managed well is as bad as being financially on the rocks. Avid’s access to credit will be affected in any case. And if they are still paying for acquisitions or failed acquisitions or have to make their interest payments, this perception of instability can easy snowball.

    • http://pkirn.com/ Peter Kirn

      It is absolutely cause for concern. I think calling it a shot in the heart of the music business is a bit ridiculous, though. (Maybe not the Forbes author’s original headline; I don’t know.) It is a shot at Avid, and it’s in their court to demonstrate that they can continue to operate successfully while public.

    • mercury

      The industry has shifted. Their core user base is definitely going to be smaller in the future because we all have cheap access to many cheaper tools. Although it may remain a part of large studios, there is not much revenue generated out of the recording process any more. I think at best this could be salvaged as a smaller profitable company only dealing with large studios in the future, possibly at a higher price. I don’t see Pro Tools having massive mainstream appeal in the long run…unless you are recording a band or lots of instruments, Logic, Ableton, etc are more than ok at a fraction of the price. It sucks but we’ve seen this with other industries. I remember IBM actually making money selling desktops one day and now they make most of their profit at the enterprise level…

    • jay

      Not challenging your statement. but doesn’t it clearly state in this article that the company has 52million in case and has 0 debt ? I don’t think they are relying on creditors – at least according to this article.

    • Blob

      The article does state that, but I’m wondering (out of intuition only) whether the statement is just PR damage control – after all, the stock market is mostly about appearances and perception…

    • http://pkirn.com/ Peter Kirn

      I’m only reporting what Avid officially told us. Without earnings statements, there isn’t any verifiable way of evaluating the financial health of Avid. That’s why the SEC requires these disclosures.

    • Blob

      Of course, Peter – sorry if I didn’t make myself clear when I wrote that comment. I meant that *Avid’s* statement could be some sort of PR damage control after last week’s events and the ensuing speculation (our own included!)

    • Aeiou

      As long as you won’t be seeing the internal accounting stats with your own eyes, you cannot be sure at all.

      They say they have no debts, but that doesn’t exclude toxic bonds and all.

      One thing for sure is that delaying your financial report when being a publicly traded company on NASDAQ, is a very stinky thing. That simply doesn’t happen because of “bad management”.

  • http://www.pro-tools-expert.com/ Russ Hughes

    The real losses are not found on any balance sheet.

  • Jonathan

    i’ve always stayed away from Pro Tools because of the company that makes it. The software itself is fine, and I’d like to own a copy for session compatibility reasons, but there are so many layers of friction introduced every time I try a demo copy that don’t exist with other DAWs. The update/pricing structure, the incredible headaches I’ve gone through with iLok just to open a single session… it’s not worth it, especially not for the price they charge. The experience as a new potential customer is like being punched in the face repeatedly. Hoping for a change.

  • Filtersweep

    As far as Pro Tools and Sibelius… they’re software, just the zero’s and one’s versions of what we used to do with hardware, just tools. Albeit ones that we’ve learned to use very well and have no desire to retrain. And then of course there is the initial investment, the updates, as well as the the ancillary hardware and software/plugins. I’m pretty sure my colleagues agree when I say I really hope they either straighten this out or sell off their products to an eager private company. However, if we had to, we would move on. Painful at first, but then big changes and breakups always are.

    • Yup

      Oh, for crying out loud, PT is not going anywhere. Despite what you electronic music/MIDI guys may think, PT is the absolutely number 1 DAW for professionals. That has been true then and now. This has been a classic internet non-story…

    • poopoo

      “electronic music/MIDI guys” not to be confused with “professionals” . You can tell by their software and also by their pony tails and their self importance.

    • Aeiou

      Ho yeah, “the professionals”.

      How many of them are gonna be left 10 years from now?

  • experimentaldog

    Where it really is a pain, is in education. Since ProTools still holds on as the standard, it is still required to be taught in many post-secondary schools. Try teaching ProTool labs of 40+ students with 24 iLok keys that need to be signed out each time in a school of a few thousand students. When assignment deadlines come around, it’s a mess. With class sizes on the rise, not many post-secondary schools are able to teach ProTools in an intimate studio setting anymore. Avid brought in the option to use PT without hardware just the iLok a few years ago, but a lot of other DAW software is now able to do what PT was always known for and don’t require excessive pricing or USB key license protection. If PT is to continue as a standard it will still need to be taught en masse like Photoshop. Not all students are destined to be audio engineers, but if many up and coming multimedia artists really want to learn how to format and prepare sound using the industry standard, Avid better focus hard on their potential future users. A negative experience can really change the appeal. Sibelius has been lab friendly for years, designed with mass education in mind. PT needs to appeal more easily to institutions, instructors, and to students if they don’t want to potentially be replaced by other DAWs in multimedia labs.

    • heinrichz

      Fortunately at Dubspot we decided to stay away from it and doing just fine without helping people to make music instead of supporting an ever dwindling industry and music business model.

    • Blob

      Tell me about it. I was also forced to learn ProTools when I was studying music and had a music recording module. In all other music production and sound design modules the teachers taught us Logic or Cubase and allowed us to do our homework in any other DAWs we felt comfortable with. I could not for the life of me understand why was ProTools was being shoved down our throats by our music recording lectiurer, especially because at the time it was actually running behind other DAWs (crappy MIDI editing? no offline bouncing? seriously? was this the “industry standard”?). I’ve since come to realise it is indeed a good piece of software, but 1) functionally and GUI-wise I couldn’t relate to it and 2) too pricey for someone who mainly composes and works in sound design.

    • experimentaldog

      I teach my composition classes in Logic and Ableton Live/M4L, and Max 6.1. PT obviously works well in a good recording studio setup, but that’s been the model for years. It’s hard to get students to understand that if they want to make cues for future TV shows/films, they’ll need to know how the standard of Pro Tools works. At least if they want to send their project to a pro studio to be mixed. This is especially the case in pro post-production studios. It’s difficult because the pro studios can handle it fine because PT was originally designed by Digidesign for big studios with all the fancy gear. When Avid gobbled up Digidesign and M-audio, it seemed like they wanted to make PT more accessible to the pro-sumer market, especially version 10. But yes I think they really need to seriously look at what their competitors offer if they want to keep afloat in this market and relative to production education. It is far less of a headache to let your students have a less expensive, yet pro quality route to achieving the same things. I’m wondering if Avid is going to adopt an education subscription model for students like Adobe and Cycling 74.

  • poopoo

    Good. Seems to me that they have treated customers like shit from the get go. They are the microsoft office of DAW. People use it because everyone else uses but no one really wants to use it. That and it keeps getting worse and worse with each release.

    Also I once worked with a certified protools trainer and he was such a douche.

    • Eric B.

      MS Office of DAW… LMAO. Heh.

  • John P Shea

    So “Avid Everywhere” means competing with iTunes/Bandcamp/Soundcloud AND the PROs? Good luck with that… How does that investment benefit existing users?

  • chaircrusher

    Thanks for this post, Peter. This is the most concise and lucid description of this issue anywhere. I don’t know if you set out to be a journalist when you started CDM, but this story hits all the bullet points J-School-wise.

    I sat through that whole Investor Relations video as well. I give it two thumbs down. The explanation of why they’re getting de-listed is straightforward enough, but hell’s bells, Avid is a publicly traded company, and they managed to screw up stuff that publicly traded companies never screw up. I guess I understand why they fired Ernst & Young. This is the sort of fuck up you pay your accounting firm to avoid.

    As for their grand integrated software strategy, I’ll believe it when I see it. I’ve been writing software for nearly 30 years, and when I hear a suit talk like that I know that there’s a giant pile of bullshit under the covers there. It’s all well and good to leverage a common code platform, but they’re integrating several programs written by 3 distinct development groups and 3 distinct code bases.

    If it was me and I was trying to develop all of Avid’s products to a common base, I’d basically start over from scratch with each product. Pro Tools has been around long enough that there is ‘dusty deck’ code at its core that no one presently at Avid understands, and changing any of it is something that is perilous and ultimately more work than it is worth.

    And if they do bite the bullet and re-architect everything from scratch they run the risk of alienating customers because the new program doesn’t work the same way as the old program. There are 6-figure-salaried veteran engineers in studios all over the world whose fingers twitch out Pro Tools key shortcuts in their sleep, and anything that moves the furniture in their world is going to cause a ruckus.

    • AlainCl

      “I understand why they fired Ernst & Young. This is the sort of fuck up you pay your accounting firm to avoid.”

      E+Y were not Avid’s accountants, they were their auditors, and they were retained for more than a year after the error was recognized. Auditors review selected financial data clients provide and approve or disapprove of the accounting measures, so considering that they were retained for so long it is more likely that it was Avid’s accounting department fault and that E+Y did not approve or even review the software accounting (because they were not asked or expected to).

      If E+Y were responsible they would likely have been fired immediately and be sued or made to pay for the multimillion dollar review not being undertaken

    • http://pkirn.com/ Peter Kirn

      That’s a little puzzling, though. Why wouldn’t you ask the auditor to review software upgrades, which are a fundamental part of the company’s business and strategy?

      It seems like their auditor would have come across this issue, as it’s explicitly mentioned as a revenue recognition issue in their annual report in 2011 (the last annual report the company released):

      “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.”

      That same annual report identifies upgrades and support as the main portion of their services business, which in 2011 was 19% of their total revenue.

      I am still unclear on what happened with deferred revenue, then. It was recognized as a key part of their business and they claimed they were calculating it correctly. What happened? Why did it take until 2013 to figure it out? Some variable in the above, or is there something else we don’t know?

    • Blob

      From what I know about auditors, they sometimes ask for information that is never provided if the company is hiding something. If they really want to, they can often get to that information to provide a correct audit result, whether the audited company likes it or not.

      However when big clients (would AVID be considered “big”?) are concerned, large auditing corporations will most likely tiptoe around the subject because they do not want lose the business opportunity, so they will close their eyes to accounting disappearing acts.
      In E+Y’s case, it’s happened before – with Lehman Brothers, mind you.
      http://www.ag.ny.gov/press-release/attorney-general-cuomo-sues-ernst-young-assisting-lehman-brothers-financial-fraud

    • AlainCl

      Blob is essentially correct. Auditing is a Federal requirement for public corporations filing SEC documents, not a value-added service companies choose to take advantage of. Auditors are given the bare minimum financial data required to be evaluated for meeting GAAP and no more. Auditors don’t ask for more info that required because they are not doing forensic accounting and they are being paid by their clients to approve their numbers. As long as the basic info is provided and it appears to fall within GAAP, auditors have done their needed work and client companies and the SEC are satisfied.

  • mush

    what is this the Create Wallstreet Journal now ? … please stick to music technology and leave the financial reports to the wallstreet twats … unless you know what you’re talkin about which clearly most of you don’t

  • Charles

    $48 million isn’t actually a lot of money. The crucial question is, what is their burn rate?

    Avid redefined the postproduction industry in the 90′s, but since then they’ve been floundering (aka constantly trying to reorganize or rebrand) and failing to keep up with the times. I doubt this “new strategy” is really going to be any different. They could still be saved, but it would take considerable vision and courage, two things that haven’t been much in evidence at Avid.

  • Todd

    I hate to break it to the old timers and to education facilities, but…. AVID IS A SINKING SHIP!!!!! RUN, FAST. Delisted from Nasdaq, can’t get their numbers straight, won’t even comment on earnings (hint, there aren’t any), and lags 5 years behind LOGIC/cubase/reaper in features. Finally, finally, they have offline bounce. Sigh. Remember SGI? There ya go :) For those in educational facilities your path is clear. APPLE/LOGIC. Done. After all, the old MAC PROS won’t run the new MAC operating system, and the new Mac Pros won’t take the Pro Tools Hardware!!! You could try to buy an expansion chasis (remember those?) and hope to God it’s been tested/approved and doesn’t conflict with some Mac OS update :) So yeah, cut your losses Education folks and go LOGIC. For pro shops, your days ahead are full of trouble as you already know. Competition from folks using Macs/Logic&Cubase/Apollo cards at home is killing what’s left of the biz. So it’s gonna be case by case serving each community as it’s needs permit.

  • Nihilist

    as someone who owns an icon, and 5 pt rigs, i will NOT spend anymore large outlays with avid. aside that avid has other issues besides fiscal, and the software is now 20 years old in many ways, its time for pros to find an open source daw that will work in pro settings. reaper is great, but is not ready for the big leagues…. avid needs to sell the pt division to midas, who is building fantastic hardware now.