Avid: I don’t understand what they’re doing

Today, Avid issued a press release titled: Avid Announces Appointment of Deloitte & Touche as New Audit Firm.  Some key points in the press release and the 8-K are:

  1. Avid doesn’t expect that it will be able to file its financials by March 14, 2014.  It expects that delisting is likely.
  2. Its current auditor, Ernst and Young, is being replaced by Deloitte.
  3. From the 8-K: “As of the date of this Report on Form 8-K, material weaknesses in the Company’s internal control over financial reporting continue to exist.”
  4. Avid is adopting a rights plan.  It looks like a poison pill to me.
  5. The Company expects that cash expenditures in 2014 related to the ongoing accounting evaluation through completion of the evaluation will amount to approximately $25 million to $34 million.

From the perspective of Avid’s high-end professional customers, all of this is highly unfortunate.  The well-being of these customers will be affected if Avid is no longer updating the software and issuing new versions of it.  They want to know that Avid is financially sound because their livelihood depends on Avid.  Avid should come out and put any speculation about its financial well-being to rest.  It should be louder when it says that the “Company’s cash balance on December 31, 2013 was approximately $48 million and it had no debt or draw on the available line of credit with Wells Fargo”.  It should explain to its customers why a delisting would not in any way affect its commitment to updating its software.  It should file its financial statements as soon as possible.  I don’t understand management’s lack of urgency and why it still hasn’t filed financials (it’s been almost a year).

Replacing Ernst and Young seems perverse as it would delay the audit process.  (*Disclaimer: I’m not an auditor and I could be totally wrong about the auditor change delaying the restatement process.)  The new auditors will need some time to get acquainted with Avid, delaying Avid’s ability to file audited financial statements.  Now is not the time to be replacing your auditor.

EDIT (Jan. 9, 2014): Apparently, replacing the auditor may not necessarily delay the audit process.  It may take more work but the incoming auditor could throw more people at the task to get it done quicker (???).

Secondly, I don’t see why it makes sense for shareholders for Avid management to spent time and effort on enacting a poison pill.  Right now the focus should be on getting financials filed.

And lastly, Avid should also be figuring out why it isn’t making money when it is the market leader in important markets.

Other things I don’t understand

In no particular order:

  • Why will it cost $25M to $34M to handle the ongoing accounting evaluation?  This is a lot of money.  $34M is a whopping 10.6% of the current $322M market cap.
  • Why are Avid’s audit fees so high?  According to this DEF 14A filing, Avid paid $4,069k in audit fees for YE2011.  Audit fees represent 1.6% of Avid’s current $322M market cap.  This overhead cost is extremely high.
  • Why did Avid postphone the shareholder’s meeting?

What the longs should do

In my opinion, the longs can make a lot of money if they banded together to oust Avid’s board of directors and CEO.  Avid’s high-end video editing products and Pro Tools should be cash cows.  There is value here that is obscured by terrible management.

Avid’s customers will be glad if Wall Street brings in a competent management team.

The ethics of shorting Avid

I want to see Avid succeed.  Society benefits if Avid continues to produce great tools for the film and video industry.  Shorting Avid stock is a slippery slope.  Suddenly my interests are in favour of something that’s bad for society.  I take no pride in shorting Avid stock.

I really hope that some activist investors come in and restore sanity to Avid (which will likely force me to cover).  However, it will be more difficult for activists to take control if there is a ‘poison pill’ rights plan in place.  Maybe Avid insiders aren’t as dumb as I make them out to be.

*Disclosure:  I have a very small short position in AVID.

Links

Glassdoor – Lots of very interesting comments from employees.  In general, they recognize that Avid has great products and that management is a problem.  To be fair, most employees complain about higher management on Glassdoor.  However, it seems that Avid has a higher than normal level of complaints about upper management.

The 8-A12B filing contains a concise description of the rights being distributed to shareholders.

My previous posts on Avid:

EDIT (Jan. 10, 2014):  So I might be wrong about how this auditing stuff works.  Avid may be justified in replacing its auditor if Ernst and Young did a bad job at detecting the problems in Avid’s financials.  It depends on the source of the issues.  If Avid’s accounting staff made an “honest” mistake and goofed, then perhaps E&Y should have caught it.  If Avid employees committed accounting fraud, then they were probably trying to hide the fraud from E&Y.  In my opinion, auditors should not be held responsible for intentional fraud as auditors only serve a limited role and have limited usefulness.  Not everybody has this opinion.  Navistar is suing its former auditor for failing to catch fraud that was committed by Navistar employees.  Navistar could be similar to Avid as Navistar failed to file its financials on time and was delisted.  It turns out that there was accounting fraud at Navistar; however, Navistar’s stock has largely moved sideways despite the drama.  I have no idea if there is accounting fraud at Avid.

In Avid’s case, I’m not really sure what the real issue is.  Avid is saying that it should have counted its free updates as implied post-contract customer support (PCS).  The GAAP rules regarding PCS seem to be very subjective, very complicated, and very stupid.  If these rules are forcing Avid to restate its financials (even though Adobe and Autodesk don’t have to do it…), then it seems like Avid shareholders are getting shafted.  The restatement so far seems to be shockingly expensive.  A reasonable reaction to this would be for management to rant to shareholders about how stupid these accounting rules are.  This is why I have my suspicions about what the real issue is.  I find it hard to believe that the reason Avid is restating its financials is for the reasons that Avid management has stated.

Regarding Avid’s decision to replace its auditors, there are legitimate explanations for it and cynical explanations for it.  I would encourage you to do your own homework and figure it out for yourself.

Here are some additional links:

Navistar Sues Deloitte Proving No Statute of Limitations On Idiocy by Francie McKenna

Navistar v Deloitte: Blame the Auditors for Fraud Committed and Concealed By Employees by Tracy Coenen

PWC paper that explains PCS (post customer support) – I have not bothered to read the whole thing.  However, sometimes these things are worth reading as auditing firms will put out excellent papers on complicated subjects because they want to attract clients.  While I don’t understand the PCS accounting rules, I think that they are a bad idea.  They strike me as overly complicated and seem like they will generate a lot of fees for accountants and auditors (at the expense for shareholders…).

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4 thoughts on “Avid: I don’t understand what they’re doing

  1. Pingback: Avid update | Glenn Chan's Random Notes on Investing

  2. Glenn, this is a great blog. I have followed another re-statement situation – Volt (OTC:VISI) where the process was lengthy (taking years longer than anyone thought) and more expensive. I profited from buying well, but not as quickly as it should have all played out. I am here because I thought this could be a similar opportunity once they are current again. My experience says to try to buy very well as only backstop. Best

    • I have newer posts on Avid. I don’t see the wisdom in buying companies that are restating their financials.

      1- There is some merit to the “ick” factor. In the case of Avid, I don’t think that the restatement will be major. So perhaps the restatement itself isn’t that bad.
      2- Restatements reflect poorly on insiders’ integrity. In Navistar’s case, people were committing accounting fraud. In general, it’s not worth doing business with shady people because bad things happen too often. It makes it difficult to make money (on average). You will get a few Steve Maddens but in aggregate I don’t think shareholders will do well.

      In Avid’s case, they are facing some serious headwinds from their competitors. Their competitors (at least the ones that matter) are better managed and have been adding features at a faster rate than Avid. This is absolutely a case where Avid has been getting killed by commoditization. Avid no longer sells expensive video editing systems, which was its former bread and butter. It has no 4K finishing solution since it discontinued DS. Media Composer sells for four figures, not six. (Yes, Avid systems used to cost an arm and a leg.) It hasn’t made money in years and things are about to get worse for them.

  3. It could be the case that the management / auditors aren’t dishonest, but just don’t get it right and institutions must sell because they can’t own a OTC stock along with the uncertainty (this creates the buying opportunity). Headwinds are a different issue and VOLT had these in hindsight although should have performed better (temp staffing was a strong industry coming out of the recession), but the restatement definitely took a big toll on management time. Management were big owners of stock, so that helped somewhat with alignment.

    Avid sounds too hard, but have a look at Accretive Health for perhaps a more interesting idea.

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