Avid (NASDAQ: AVID) has announced its financial results for the third quarter ended September 30, 2020.
Total revenue increased 14.1 percent sequentially in the third quarter, while declining slightly year-over-year, as many of Avid’s end markets showed initial signs of recovery from the COVID-19 pandemic. During the third quarter, the Recurring Revenue components of the Company’s business remained strong. The Company reported record subscription revenue of $17.9 million, up 73.9 percent year-over-year, resulting in 6.5 percent year-over-year growth in Annual Contract Value. Also, in the third quarter, Avid significantly improved its profitability as a result of a 250 basis point year-over-year improvement in gross margin coupled with a ($4.3) million reduction in operating expenses that yielded a 56.1 percent year-over-year improvement in operating income and an Adjusted EBITDA Margin of 21.4 percent. The strong operating results for the third quarter resulted in Free Cash Flow of $15.5 million.
The non-Recurring Revenue portions of the Company’s business related to product and professional services showed strong signs of sequential recovery during the third quarter, although they continued to be negatively impacted year-over-year by weaker demand as a result of the COVID-19 pandemic. Product revenue from perpetual software licenses and integrated solutions increased 29.5 percent sequentially to $35.8 million in the third quarter.
During the third quarter, the Company repaid the $22.0 million balance on its revolving credit facility using available cash. As of September 30, 2020, the Company had $49.1 million in cash and cash equivalents. The Company’s leverage ratio under its financing agreement decreased to 3.4x as of September 30, 2020 as a result of the repayment of borrowings under the revolving credit facility using the Company’s strong Free Cash Flow generation in the quarter, and the year-over-year increase in Adjusted EBITDA in the quarter.
Third Quarter 2020 Financial and Business Highlights
- Subscription revenue was $17.9 million, up 73.9 percent year-over-year.
- Paid Cloud-enabled software subscriptions increased by approximately 27,000 during the quarter, to approximately 269,000 at September 30, 2020, an increase of 58.1 percent year-over-year in total paid subscriptions.
- Subscription and Maintenance revenue was $48.7 million, up 11.6 percent year-over-year.
- Total revenue was $90.4 million, up 14.1 percent sequentially, and down (3.2 percent) year-over-year.
- Gross margin was 64.4 percent, up 250 basis points year-over-year. Non-GAAP Gross Margin was 64.9 percent, up 280 basis points year-over-year.
- Operating expenses were $45.1 million, a decrease of (8.7 percent) year-over-year. Non-GAAP Operating Expenses were $41.4 million, a decrease of (12.6 percent) year-over-year.
- Operating income was $13.1 million, an increase of 56.1 percent year-over-year. Non-GAAP Operating Income was $17.3 million, an increase of 61.3 percent year-over-year.
- Adjusted EBITDA was $19.3 million, an increase of 51.2 percent year-over-year. Adjusted EBITDA Margin was 21.4 percent, up 770 basis points year-over-year.
- Net income per common share was $0.18, up from $0.07 in the third quarter of 2019. Non-GAAP Net Income per Share was $0.27, up from $0.10 in the third quarter of 2019.
- Net cash provided by operating activities was $18.0 million in the quarter, an increase of $20.5 million compared to Net cash (used in) operating activities of ($2.6) million in the third quarter of 2019.
- Free Cash Flow was $15.5 million in the quarter, an increase of $20.2 million compared to Free Cash Flow of negative ($4.6) million in the third quarter of 2019.
- LTM Recurring Revenue percent was 71.2 percent of the Company’s revenue for the 12 months ended September 30, 2020, up from 59.4 percent for the 12 months ended September 30, 2019.
- Annual Contract Value was $271.9 million as of September 30, 2020, up 6.5 percent from $255.3 million as of September 30, 2019.
Jeff Rosica, Avid’s CEO and President, stated, “We are pleased with the beginning of the demand turnaround we saw in our non-recurring business during the third quarter, and with the strength of the recurring revenue elements of our business driven by the continued growth of our creative software subscription business and the introduction of enterprise subscription. COVID-19 continued to have some temporary impact on customer demand for parts of our non-recurring product business, but we expect demand to continue the gradual recovery that started in Q3.” Mr Rosica added, “We have adjusted our strategy and investments to quickly respond to the changes in the market we’re seeing, focusing even more sharply on the parts of the business that we believe will drive more profitable growth. We also remain focused on ensuring we have the right cost structure moving forward so that Avid enters 2021 as a stronger and more profitable company.”
Ken Gayron, Executive Vice President and Chief Financial Officer of Avid, said, “We continued to make substantial progress in driving our higher margin revenue streams and improving our cost structure in the third quarter, yielding strong growth in profitability.” Mr. Gayron continued, “The improvement in profitability resulted in third quarter Free Cash Flow of $15.5 million, enabling us to fully repay the balance on our revolving credit facility and reduce our accounts payable, further strengthening our balance sheet. As we head into our seasonally highest Free Cash Flow generating quarter and with the improvements we achieved in our profitability during the third quarter, we believe Avid will generate strong Free Cash Flow as we conclude fiscal year 2020, which should enable us to improve our cost of capital and reduce our interest costs.”
Non-GAAP Financial Measures and Operational Metrics
Avid includes non-GAAP financial measures in this press release, including Adjusted EBITDA, Adjusted EBITDA Margin, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP Operating Expenses, Non-GAAP Operating Income, and Non-GAAP Net Income (Loss) per Share. The Company also includes the operational metrics of Cloud-enabled software subscriptions, Recurring Revenue, LTM Recurring Revenue percent and Annual Contract Value in this release. Avid believes the non-GAAP financial measures and operational metrics provided in this release provide helpful information to investors with respect to evaluating the Company’s performance. Unless noted, all financial and operating information is reported based on actual exchange rates. Definitions of the non-GAAP financial measures and the operational metrics are included in our Form 8-K filed today. Reconciliations of the non-GAAP financial measures presented in this press release to the Company’s comparable GAAP financial measures for the periods presented are set forth below and are also included in the supplemental financial and operational data sheet available on our Investor Relations website at ir.avid.com, which also includes definitions of all operational metrics.
Certain information provided in this press release includes forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include statements regarding our future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations, and other statements that are not historical fact. You can identify forward-looking statements by their use of forward-looking words such as “may”, “will”, “anticipate”, “expect”, “believe”, “estimate”, “intend”, “plan”, “should”, “seek”, or other comparable terms.
Readers of this press release should understand that these forward-looking statements are not guarantees of performance or results. Forward-looking statements provide our current expectations and beliefs concerning future events and are subject to risks, uncertainties, and factors relating to our business and operations, all of which are difficult to predict and could cause our actual results to differ materially from the expectations expressed in or implied by such forward-looking statements.
These risks, uncertainties, and factors include, but are not limited to: risks related to the impact of the coronavirus (COVID-19) outbreak on our business, suppliers, consumers, customers and employees; our liquidity; our ability to execute our strategic plan including our cost saving strategies, and to meet customer needs; our ability to retain and hire key personnel; our ability to produce innovative products in response to changing market demand, particularly in the media industry; our ability to successfully accomplish our product development plans; competitive factors; history of losses; fluctuations in our revenue based on, among other things, our performance and risks in particular geographies or markets; our higher indebtedness and ability to service it and meet the obligations thereunder; restrictions in our credit facilities; our move to a subscription model and related effect on our revenues and ability to predict future revenues; fluctuations in subscription and maintenance renewal rates; elongated sales cycles; fluctuations in foreign currency exchange rates; seasonal factors; adverse changes in economic conditions; variances in our revenue backlog and the realisation thereof; risks related to the availability and prices of raw materials, including any negative effects caused by inflation, weather conditions, or health pandemics; disruptions or inefficiencies in our supply chain and/or operations, including from the COVID-19 outbreak; the costs, disruption, and diversion of management’s attention due to the COVID-19 outbreak; the possibility of legal proceedings adverse to our Company; and other risks described in our reports filed from time to time with the U.S. Securities and Exchange Commission. Moreover, the business may be adversely affected by future legislative, regulatory or other changes, including tax law changes, as well as other economic, business and/or competitive factors. The risks included above are not exhaustive. We caution readers not to place undue reliance on any forward-looking statements includes in this press release which speak only as to the date of this press release. We undertake no responsibility to update or revise any forward-looking statements, except as required by law.