Avid in real trouble
Posted: Thu May 12, 2016 9:23 pm
Things are looking pretty shaky for Avid:
http://seekingalpha.com/article/3973496 ... isis-nears
quote from article:
We believe Avid Technology (NASDAQ:AVID) is a compelling short at today's price of $5.60 and has 60% downside.
The CFO announces sudden departure only days after the completion of a troubling Q1, two weeks after providing guidance that now appears wholly unrealistic in the face of bookings falling off a cliff (-17% overall and -28% in Product bookings) and a month or so after securing a new costly $105M credit facility from Cerberus Capital. In Q2, despite aggressive cost cutting, the company said it is facing a significant cash burn, of approximately $30M, partly because they need to pay out bonuses. Still, management (now minus a CFO) is reiterating guidance, implying a massive uptick in bookings and cash flow in H2 of the year inclusive of the increased debt servicing costs. In fact, they are suggesting that the business will somehow generate 2016 FY free cash flow of $7M (at the midpoint) after being in the hole -$40M by the end of Q2.
Not only would that cash flow jump be a major departure from recent H2 history (-$22M would be a reasonable estimate based on 2015 - see chart below), but it also runs counter to management's description of the sluggish macro environment on the earnings call. Furthermore, given the backdrop of deep cost cutting, senior level defections and an upcoming 10% reduction in total headcount, a surge in bookings and cash flow would be a staggering achievement. If, rather than taking management's word for it, we look to either the bookings trajectory or the company's recent cash flow performance as a guide to the second half, AVID is likely a couple of quarters from a liquidity crisis.
The warning bell for us was on April 9, 2016, when John W. Frederick, Chief Financial Officer and Chief Administrative Officer of Avid, announced that he intended to resign, ostensibly for personal reasons, effective immediately following the results for the first quarter of 2016 and its earnings call. Ilan Sidi, VP of Human Resources, has taken over as interim CFO. Given that Avid's recent departures include a Head of Products, a Head of Services and 2 Chief Marketing Officers, the departure of the CFO is not totally shocking. But, the timing is very concerning for a number of reasons:
AVID recognized approximately $18M in deferred, non cash revenue in Q1 that helped the company post misleading top line numbers. However, despite what appears to be 20% yoy sales growth (not organic), free cash flow declined yoy by almost $14M and is worsening materially in Q2. Collapsing bookings means Acct Receivable is down both Q/Q and Y/Y further depressing cash flows. We estimate that the company will burn approximately $30M in cash in Q2 alone (see chart below).
Bookings are an important indicator of the health of the business and have been declining consistently for more than a year, -11% yoy in Q1 2015, -8% yoy in Q2 2015 and now -17% yoy in Q1 2016. Bookings are getting worse, not better.
Management's guidance implies top line growth that is predicated on strong bookings conversion that is a step change better than in 2015. We are not sure how that is expected to happen (see chart below).
2015 company performance is in fact lower quality than the headline would have you believe; New Revenue actually eroded by 26% in the year. Management's 2016 guidance implies that this year the trend will somehow reverse and grow by 19% (see chart below).
AVID is in the midst of a major restructuring. Declining demand for their products, a series of failed acquisitions and collapsing cash flows are forcing the company to cut costs rapidly. The company has promised $68M in cost savings, an ambitious goal for a $3B mkt cap company, let alone a $300M mkt cap company that has already had layoffs for four consecutive years.
To improve its liquidity situation, the company closed on a $105M credit facility with Cerberus Capital at the end of February that includes a $5M revolver and a $100M term-loan. The Financing Agreement includes covenants requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (A) consolidated total funded indebtedness to (B) consolidated EBITDA) of no greater than 4.35:1.00 for the four quarters ending June 30, 2016, 5.40:1.00 for the four quarters ending September 30, 2016, 4.20:1.00 for the four quarters ending December 31, 2016 and thereafter declining over time from 3.50:1.00 to 2.50:1.00. The Financing Agreement also restricts the Company from making capital expenditures in excess of $20,000,000 in any fiscal year.
These covenants are crucially important because the company now has $225M in consolidated debt and is entering a period of dramatic EBITDA decline and cash burn, which is somewhat reflected in the cadence of the Debt/EBITDA ratios - it expands for the period ending Sept 30th before contracting again, rather significantly.
http://seekingalpha.com/article/3973496 ... isis-nears
quote from article:
We believe Avid Technology (NASDAQ:AVID) is a compelling short at today's price of $5.60 and has 60% downside.
The CFO announces sudden departure only days after the completion of a troubling Q1, two weeks after providing guidance that now appears wholly unrealistic in the face of bookings falling off a cliff (-17% overall and -28% in Product bookings) and a month or so after securing a new costly $105M credit facility from Cerberus Capital. In Q2, despite aggressive cost cutting, the company said it is facing a significant cash burn, of approximately $30M, partly because they need to pay out bonuses. Still, management (now minus a CFO) is reiterating guidance, implying a massive uptick in bookings and cash flow in H2 of the year inclusive of the increased debt servicing costs. In fact, they are suggesting that the business will somehow generate 2016 FY free cash flow of $7M (at the midpoint) after being in the hole -$40M by the end of Q2.
Not only would that cash flow jump be a major departure from recent H2 history (-$22M would be a reasonable estimate based on 2015 - see chart below), but it also runs counter to management's description of the sluggish macro environment on the earnings call. Furthermore, given the backdrop of deep cost cutting, senior level defections and an upcoming 10% reduction in total headcount, a surge in bookings and cash flow would be a staggering achievement. If, rather than taking management's word for it, we look to either the bookings trajectory or the company's recent cash flow performance as a guide to the second half, AVID is likely a couple of quarters from a liquidity crisis.
The warning bell for us was on April 9, 2016, when John W. Frederick, Chief Financial Officer and Chief Administrative Officer of Avid, announced that he intended to resign, ostensibly for personal reasons, effective immediately following the results for the first quarter of 2016 and its earnings call. Ilan Sidi, VP of Human Resources, has taken over as interim CFO. Given that Avid's recent departures include a Head of Products, a Head of Services and 2 Chief Marketing Officers, the departure of the CFO is not totally shocking. But, the timing is very concerning for a number of reasons:
AVID recognized approximately $18M in deferred, non cash revenue in Q1 that helped the company post misleading top line numbers. However, despite what appears to be 20% yoy sales growth (not organic), free cash flow declined yoy by almost $14M and is worsening materially in Q2. Collapsing bookings means Acct Receivable is down both Q/Q and Y/Y further depressing cash flows. We estimate that the company will burn approximately $30M in cash in Q2 alone (see chart below).
Bookings are an important indicator of the health of the business and have been declining consistently for more than a year, -11% yoy in Q1 2015, -8% yoy in Q2 2015 and now -17% yoy in Q1 2016. Bookings are getting worse, not better.
Management's guidance implies top line growth that is predicated on strong bookings conversion that is a step change better than in 2015. We are not sure how that is expected to happen (see chart below).
2015 company performance is in fact lower quality than the headline would have you believe; New Revenue actually eroded by 26% in the year. Management's 2016 guidance implies that this year the trend will somehow reverse and grow by 19% (see chart below).
AVID is in the midst of a major restructuring. Declining demand for their products, a series of failed acquisitions and collapsing cash flows are forcing the company to cut costs rapidly. The company has promised $68M in cost savings, an ambitious goal for a $3B mkt cap company, let alone a $300M mkt cap company that has already had layoffs for four consecutive years.
To improve its liquidity situation, the company closed on a $105M credit facility with Cerberus Capital at the end of February that includes a $5M revolver and a $100M term-loan. The Financing Agreement includes covenants requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (A) consolidated total funded indebtedness to (B) consolidated EBITDA) of no greater than 4.35:1.00 for the four quarters ending June 30, 2016, 5.40:1.00 for the four quarters ending September 30, 2016, 4.20:1.00 for the four quarters ending December 31, 2016 and thereafter declining over time from 3.50:1.00 to 2.50:1.00. The Financing Agreement also restricts the Company from making capital expenditures in excess of $20,000,000 in any fiscal year.
These covenants are crucially important because the company now has $225M in consolidated debt and is entering a period of dramatic EBITDA decline and cash burn, which is somewhat reflected in the cadence of the Debt/EBITDA ratios - it expands for the period ending Sept 30th before contracting again, rather significantly.