Avid Technology, Inc. (AVID) : Ugly Financials With Loads of Deception

COPPERFIELD RESEARCH
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Avid Technology, Inc. (AVID): Ugly Financials with Loads of Deception

Our AVID Opinion: A turnaround stock promote that is really a money-losing
melting ice cube masked by misleading revenue amortization and disingenuous
communication. Transient factors have further contributed to a stock price
completely detached from deteriorating underlying fundamentals.
Fair Value: $5.53 per share, 69% downside
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------------------------------------------------------------------Wall Street loves turnaround stories. Unfortunately, for every seemingly broken business that miraculously
recovers, there are many more failed turnarounds that result in significant investor losses. We believe after a
lengthy period of delinquent financials, Avid Technology (AVID) has re-emerged as a disingenuously promoted
turnaround. The promotional story, combined with an unusual Russell 2000 anomaly that has required net
indexers to buy approximately 3.4 million shares over the last few months, 1 has resulted in a parabolic stock
advance.
Digging into the AVID details reveals a highly misleading story, replete with promotional investor videos and
presentations, pro-forma financials that fail to reflect the actual economics of the business - while in several
cases failing to reconcile with SEC filings, and what we believe to be foreign exchange speculation that has
added materially to financial results, yet has not been shared by management in earnings releases or conference
calls. AVIDs adjusted results are inaccurate representations of its actual underlying economic profile,
distorted by management's inclusion of non-cash remnants of its accounting restatement. We believe substantial
evidence exists that AVID has violated the spirit, if not the letter, of SEC Regulation G with regard to its
seemingly abusive adjusted financial reporting. Further, our work suggests AVIDs current turnaround team may
not have had the successful exit from their previous company, Open Solutions, as many believe. We are also
troubled that AVIDs perceived turnaround specialist was previously sued by former employees who accused
him of withholding financial information and violating his duties to care for shareholders.2
For nearly a decade, AVID has struggled to generate growth, while producing minimal economic profitability.
Years ago, AVID dominated the market for converting video from tape to digital. However, AVIDs relevance
faded in the editing market, which is now populated by industry heavyweights such as Adobe, Apple, and Sony.
It is no surprise that AVIDs market share has shrunk to just 7% - 8%, 3 rendering its business subscale as
evidenced by economic EPS losses of ($1.03) and ($0.28) in 2014 and 1Q15, respectively (excluding
amortization of pre-2011 deferred revenue). Nonetheless, the AVID melting ice cube has resurfaced, thanks
ironically to a massive accounting restatement that optically changed AVIDs GAAP reporting.
The juice in the AVID story has emanated from the perception that financial results have been improving. The
reality is AVID's results have been artificially overstated by the recognition of $888 million of deferred revenue
created retrospectively to the actual 2010 ending balance. The massive accounting restatement has allowed
AVID to flow 100% margin revenue through its income statement, resulting in an egregious overstatement of
revenue, EBITDA, and EPS. We believe management's illogical inclusion of this misleading accounting artifact
in its adjusted financial results has led to a severe misrepresentation of its underlying business. We believe these
accounting details are indiscernible for quant buyers and/or unsuspecting retail investors that rely on investment
screens. Institutional investors and sell-side analysts are presumably aware of the nominal restatement benefits;
however we are convinced the actual nuances of the revenue amortization are not understood. Herein, we
meticulously detail why the actual economics of AVIDs transactions should mean that effectively zero of the
pre-2011 revenue would still exist today under current accounting rules. As we carefully illustrate, the
restatement impacted only a single-digit percentage of AVIDs pre-2011 transaction value, yet many multiples of
the affected revenue have essentially been double booked at a 100% margin based on nuanced accounting
changes. The thesis that the water coming into the bathtub (new deferred revenue) will eventually offset the
water that has been leaving the bathtub (pre-2011 deferred revenue amortization) is simply wrong.
We believe investors and analysts have not only been fooled into assigning a hefty multiple, and hence value, to
the pre-2011 deferred revenue amortization, but have also been hoodwinked by material non-recurring benefits
not appropriately disclosed by management. We believe management took credit for recurring cost initiatives
that appear to have been the result of FX hedging transactions and/or gains. AVID has inexplicably chosen to
AVOID accounting for its hedges under hedge accounting, which has resulted in substantial FX transaction gains
quietly flowing through the sales and marketing line. Further, we believe ample evidence exists that reported
metrics have been massaged to fit the bullish turnaround rhetoric. We find these tactics to be in gross violation
of investor trust and possibly of SEC regulations. Considering insiders were transacting in the stock less than 3
business days prior to the public announcement of a convertible debt offering, we would not expect the Board to
act on behalf of shareholders with a proper investigation. Nonetheless, we believe the recent convert offering
speaks volumes about how AVIDs management views its equity valuation, while rendering a sale unlikely. This
report provides detailed analysis examining the following concerns:
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------------------------------------------------------------------I. Background & Accounting Restatement:

AVID has been a melting ice cube for nearly a decade. Prior to the overnight creation of $888 million of
accounting-related deferred revenues, AVID had multiple failed growth attempts, including two entries and
divestitures into the consumer space. We calculate AVID's organic revenue contracted by 3.9% annually
from 2006 - 2010, which now looks like the glory days of growth.
In 2013, AVID was required to restate financials going back to 2005 because it had failed to identify and
account for post-transaction deliverables, such as updates and bug fixes on a large number of transactions.
Accounting rules required some portion of the transaction value to be deferred to account for such future
deliverables. This had a particularly big impact on pre-2011 years when AVID had not yet adopted the
FASB Accounting Standards Update No. 2009-13 and 2009-14 and was unable to estimate the value of such
post-transaction deliverables. In the absence of an objective estimate of that small portion of the transaction,
accounting rules required the entire transaction value to be deferred and recognized ratably over multiple
years.4 As a result, $888 million of deferred revenue was retrospectively added to AVID's 2010 balance
sheet, which was to be amortized from 2011 to 2018. The recognition of this non-economic, non-cash
accounting artifact has distorted AVIDs financials because management has inexplicable refused to exclude
it from adjusted results.
II. A Framework Explaining Why Pre-2011 Revenue Amortization MUST be Excluded from Financials
A careful deconstruction of AVID's bookings model implies 96% of its pre-2011 deferred revenue would
have been recognized by 2015. As such, the unscrupulous inclusion of this 100% margin accounting artifact
is overstating AVID's adjusted revenue and EBITDA by approximately $91.5 million (2014) and $58.7
million (2015). We provide three illustrative models that clearly explain why pre-2011 revenue amortization
is misleading and would not exist had AVID conformed to today's accounting standards.
III. Managements Misleading Financial Metrics & More Potential SEC Reg G. Violations
We believe AVID management is misrepresenting the financial performance of its business by highlighting
metrics that vastly overstate underlying fundamentals. AVIDs presentation of its adjusted financials and
key performance indicators appears to violate SEC regulations that prohibit the exclusion of recurring
charges or adjusted financials that mislead investors.
Managements liberal definition of Adjusted EBITDA includes the amortization of deferred revenue from
pre-2011 years, which is layered in at 100% margin. Because of this pro-forma shenanigan, the loss-making
fundamentals of AVID are hidden. In 2014, AVID reported Adjusted EBITDA of $72.3 million. Excluding
the $91.5 million of GAAP revenue that was booked prior to 2011, AVID would have reported negative
recurring Adjusted EBITDA of $19.2 million. AVID appears to also be severely misrepresenting its
recurring economic per share earnings. In 2014, AVID claimed to have made $1.30 per share; however, we
calculate the adjusted EPS was actually a loss of ($1.03). Prospective debt investors appear to be calculating
EBITDA in a similar manner as us, considering the effective interest rate on AVID's recent $100 million
term loan commitment was 7.5%. Contrary to the 1.3x leverage implied by AVIDs 2015 Adjusted
EBITDA, we surmise the lenders (correctly) viewed AVID as 6.1x levered when stripping out the non-cash
pre-2011 revenue amortization.
In what appears to be a violation of the spirit of SEC Regulation G, AVID reports Free Cash Flow that is
actually Adjusted Free Cash Flow. Management illogically continues to add back costs for restructurings
initiated in 2012 and 2013, as well as restatement expenses even though AVID has been current on its
filings since November 2014. In 2014, AVID reported a conventional free cash flow loss of $23.2 million
(OCF capex). However, AVID then added back $35.9 million of adjustments to report $12.7 million of
free cash flow under its own definition. Since 4Q13, AVID has added back $38.5 million of restatementrelated expenses to FCF, more than twice what they had told investors ($15 - $20 million). In 1Q'15, nearly
half of AVID's adjusted free cash flow was the result of add-backs from restatement/restructuring charges
despite no ongoing restatement. AVIDs FCF has also benefited from an unsustainable jump in deferred
revenues. In 2014, post-2010 deferred revenues increased by 14%, which contributed $39.5 million to cash
flow from operations (changes in pre-2011 deferred revenues do not impact cash flow). Changes in deferred
revenue should ultimately track changes in bookings, with the latter declining year-over-year by 0.8% and
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11.2% in 2014 and 1Q15, respectively. Based on our analysis, we believe sustainable growth in deferred
revenues should only contribute $8 - $10 million annually to cash flow from operations.
Management appears to be taking an extremely liberal approach to its definition of Bookings. AVID
includes Backlog additions in the bookings metric shared with investors as a KPI. Based on our analysis,
we believe 15% of AVID's 2014 bookings were neither shipped nor invoiced. Further, we calculate that the
actual conversion of 2014 Backlog into revenue was approximately 50% lower than the estimate
management provided as late as September 2014. It appears that $37 million of the $74 million of expected
backlog conversion management had filed in SEC documents was either de-booked or failed to convert.
As such, we believe management has misrepresented its business momentum by imprudently characterizing
pipeline as backlog, thereby artificially boosting reported bookings. Nondescript disclosures suggest AVID
can recognize bookings despite no invoice. We believe managements spurious approach to reporting
backlog resulted in a $30 million discrepancy between the backlog disclosed on the 3Q14 earnings call and
the same 3Q14 backlog subsequently published in the 4Q14 earnings release.
IV. Repeated Failure to Disclose Material Non-Recurring Gains within Reported Non-GAAP Financials
In AVIDs SEC filings, cash flow from operations shows $6.2 and $6.7 million of Unrealized foreign
currency transaction gains in 4Q14 and 1Q15, respectively (emphasis added). We believe AVID has
utilized an accounting treatment that misrepresents its financial profile by flowing FX transaction gains
through the sales and marketing lines (as opposed to hedge accounting). Prior to the abnormal currency
transaction gains in 4Q14 and 1Q15, AVID had not experienced more than a $1 million impact in the prior
eleven quarters from its FX hedging transactions. Amazingly, AVIDs Non-GAAP Operating Income, Net
Income, and Adjusted EBITDA appear to include non-recurring FX gains without a single disclosure in the
press release or earnings call. Assuming the abnormal FX transaction gains flowed through the income
statement, AVIDs reported Adjusted EBITDA would have been 44% (4Q14) and 57% (1Q15) lower,
which we believe would have collapsed the stock price.
AVID appears to be recognizing abnormally large FX transaction gains above the line, in the sales and
marketing line. AVIDs CFO publicly stated that 1Q15 cost saving were attributed to strategic initiative to
drive to a leaner, more directed cost structure. Based on opaque disclosures in its 10Q, we believe AVID
may have misrepresented the nature of its opex declines. In 1Q15, AVID recognized a $2.2 million yearover-year benefit in its sales and marketing line from Foreign exchange gains. As such, nearly half of the
$4.6 million YoY improvement in opex appears to be non-operating in nature, which would directly
contradict managements explanation.
After maintaining notional foreign exchange contracts (spot and forward) between $23.3 million and $39.5
million, AVID mysteriously discontinued its historical FX hedging practice and took the notional value to
just $100,000 one month before 1Q'15 ended. Considering its foreign exchange exposures were unchanged,
specifically the approximately 40% of revenue that comes from EMEA, we believe the sudden
disappearance of hedging after large gains that were not disclosed in earnings calls and releases, warrants an
explanation.
AVID used the terms hedge or hedging 33 times in its 10K while also explicitly stating foreign
currency contracts are used as a hedge against foreign exchange exposure. Nevertheless, AVID does not
account for its hedges with hedge accounting. Instead, AVID records changes in the fair value of forward
contracts in marketing and selling expenses, effectively booking gains in foreign currency contracts in its
operating income and EBITDA. Despite appearing to be non-operating, non-recurring in nature,
management does not appear to exclude these gains from its adjusted financials.
V. More Financial Reporting Incongruities & Confusing Guidance
AVIDs total deferred revenue balance published in its 3Q14 earnings release of $419,329 appears to
have inexplicably been changed to $417,337 in the subsequently published third quarter 10Q.
In its 4Q14 earnings release, AVID guided free cash flow to growth of $18 to $30 million. This exact
same language was used in its 1Q15 earnings release. AVID also guided free cash flow to a 42% to 136%
year-on-year improvement in 2015. Considering AVID reported $12.7 million of (heavily adjusted) free
cash flow in 2014, its 42% to 136% growth guidance does not reconcile with growth of $18 to $30
million. If this was a mistake, we would opine that frequent slip-ups are often a by-product of pervasive
shenanigans in adjusted financial.
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------------------------------------------------------------------VI. Was Managements Prior Sale of Open Solutions a Success or Absolute Disaster?
Analysts, investors, and AVIDs very own management have highlighted that the CEO and CFO sold their
last company for $1 billion in 2013. What investors are likely missing is that the $1 billion ($1.015 billion to
be exact) was the value of the enterprise, which meant the equity was only worth $55 million when
considering the associated $960 million of assumed debt. This would represent an equity value decline of
88% from the equity value just six years earlier (2007) if we hold the debt constant. The enterprise value
appears to have experienced a 28% decline over six years leading up to the $1 billion sale, while we
estimate the revenue run-rate declined by approximately 29% from 2007 - 2013.
Two former executives (COO and Head of Marketing) at Open Solutions sued then CEO Louis Hernandez,
as well as other officers, for withholding financial information and violating their duty of care and loyalty to
shareholders. While we are always skeptical of litigation brought by former shareholders or employees, in
the context of all of our other concerns, we do not believe its imprudent to wonder if these allegations
reflect a pattern.
VII. Deteriorating Fundamentals & 2H-Loaded 2015 Guidance
Shenanigans aside, AVIDs core business appears to be deteriorating and trending at a rate that is
completely inconsistent with several Non-GAAP KPIs.
In the two quarters since being relisted, AVID has missed expectations for bookings, free cash flow, and
revenues. AVID provided a highly misleading slide in its investor deck that shows a chart with revenue up
and to the right. Yet, this chart contains no numbers or percentages on the y-axis, while also seemingly
misrepresenting the factual story of bookings that declined 0.8% in 2014, compared to guidance for 3%
growth. Our analysis suggests AVID missed its 4Q14 implied bookings guidance by 10%. Further, 1Q15
bookings declined by 11% YoY, which was significantly worse than AVIDs full year guidance of (1%) to
+3%.
AVIDs management explained the horrid 1Q15 results by suggesting several meaningful deals were
pushed into 2Q15 and had in fact already closed. As such, we can calculate that 2Q15 revenue should be at
least $138.5 million by adding the 1Q15 shortfall to the pre-existing 2Q15 sell-side estimate. Buy-side
estimates for 2Q15 will likely move even higher should AVID close its Orad acquisition before June 30,
2015. We believe managements faltering credibility will be impacted by its ability to hit buy-side estimates
of $138.5 million for 2Q15, NOT by the nonsensical consensus estimates that actually declined after 1Q15
results pushed large deals into 2Q15. [NOTE - It is well understood that 2015 estimates have yet to include
the contribution from Orad. As such, AVID will need to revise its annual guidance when they report 2Q'15
by at least the $41 million revenue and $10M EBITDA post-synergy run-rates to which management
alluded on the May, 7, 2015 update call].
VIII. Fair Value is $5.53, Representing 69% Downside, Russell 2000 Buying Nearly Complete
AVIDs stock price has decoupled from its economic reality, which we believe is due in part to a turnaround
stock promotion, misleading financials, and disingenuous key performance metrics. We also believe
AVIDs stock price has benefitted from several months of unnatural buying related to the Russell 2000
rebalancing. Because AVID was removed from the Russell 2000 Index when it was delisted, the company
will be added on June 26, 2015, after regaining its listing in late 2014. Based on estimates from Credit
Suisse, net index demand resulted in 3.36 million shares of AVIDs stock that needed to be bought.
Assuming the arbitrage buying began in mid-March when preliminary rebalancing lists were released, we
estimate Indexers (or arbs) have needed to buy roughly 48,000 shares of AVID per day for the last three
months.
We believe consensus estimates have erroneously built forecasts for AVID without working through
accounting nuances. By excluding pre-2011 deferred revenue amortization, and instead forecasting
underlying driver metrics, we model financials that are starkly different than the sell-side. Using generous
assumptions for revenue growth and margins, we expect AVID to generate $18.6 million of EBITDA and
($0.03) of EPS in 2017. Using a very generous EV/EBITDA multiple of 18.0x for 2016 and 10.4x for 2017
(the same 10x multiple a sell-side analyst uses), we believe fair value for AVIDs stock is $5.53, which
represents 69% downside from its current share price.
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------------------------------------------------------------------I. Background & Accounting Restatement

A. AVID Was a Challenged Business Even Before its Accounting Issues Began
AVID was founded in 1987, and came public six years later in 1993. The business was originally built on
converting tape-based films to digital video files for non-linear editing. In its earlier years, AVID held a strong
market position, but over the last decade, its core editing technology has become commoditized and hypercompetitive. Today, AVIDs markets are saturated, with more than twenty companies, including Adobe
(ADBE), Apple (AAPL) and Sony (SNE),5 competing with software and hardware products that enable digital
content production, storage, and distribution. The company estimates it currently has 7% market share at Tier-1
large media enterprises and 8% share at Tier-2 businesses.6
Given AVIDs struggles in its core markets, the company made several failed attempts to grow into the broader
consumer segment, where management estimates a market share of just 3%. 7 Unfortunately, the consumer
market is inundated with free media editing applications, and each successive attempt to enter this market has
failed. Most recently, in July 2012, AVID divested its money-losing Consumer Product Lines that generated
$93.5 million of revenue in 2011, 8 representing 14% of AVIDs total revenue. Illustrating the challenge of
monetizing a consumer market that is accustomed to free, AVIDs divested consumer business generated
$46.1 million of revenue during the first nine months of 2012, but that revenue produced a massive $47.7 million
GAAP Net Loss.9 After multiple failed organic and inorganic attempts to crack the consumer market, AVID is
once again targeting the consumer segment with a freemium model in 2015.
To better understand AVIDs current and historical performance, it makes sense to look at two distinct time
periods: 1) before 2010, and 2) after 2010. The year-end 2010 demarcation is important to understand the
significant impact of the accounting restatement that is discussed throughout this report. Table 1 below shows
our calculation of adjusted revenue growth and free cash flow from 2006 to 2010, excluding the impact of
acquisitions/divestitures (Table 2) and FX gains, as detailed in AVIDs 10K filings. We calculate the geometric
average of individual years adjusted growth rate as the average growth rate for the period, a proxy for CAGR,
and find that AVIDs organic revenue averaged an annual decline of 3.9% between 2006 and 2010. During this
same five year period, AVID generated cumulative Free Cash Flow of only $1.8 million on reported revenue of
approximately $4 billion. It was clear that AVIDs business was facing material challenges prior to its
accounting issues.
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------------------------------------------------------------------B. A Change in Revenue Recognition, a Restatement, and the Creation of Pre-2011 Deferred Revenue
Admittedly, a background review on AVIDs restatement is boring, but its essential when trying to understand
the shenanigans behind AVIDs present financials. On 1/1/2011, AVID was required to adopt new FASB
Accounting Standards Updates No. 2009-13 and 2009-1410 which changed its revenue recognition policies. For
context, when AVID sells a product, future software updates and bug fixes are included for multiple years.
Under the old accounting rules, when such post-transaction deliverables were identified, but their fair value
could not be objectively established, the transaction revenues were ratably recognized over the time period when
such deliverables were due. AVID had previously recognized the majority of product revenue upfront, as
evidenced by its relatively small deferred revenue balances of $46.4 million and $49.5 million at the end of 2009
and 2010, respectively.11
With the industry-wide FASB accounting change, companies like AVID were permitted to make an estimate of
the fair value of future deliverables, and then, only defer that estimated portion of revenue to be recognized upon
delivery. The bulk of the transaction revenues were allowed to be recognized upfront, as explained in AVIDs
1Q11 10Q:
Under the new guidance, revenue may be recognized in an earlier period for a limited number of multipleelement arrangements for which VSOE [vendor-specific objective evidence] could not be established for all
undelivered elements under the previous guidance. For those arrangements, the Company will now determine the
fair value of the undelivered elements through the use of TPE [third-party evidence] or ESP [estimate of selling
price], and the recognition of certain revenues that would have been deferred under the previous guidance will
likely be recognized at the time of delivery under the new guidance, provided all other criteria for revenue
recognition are met.
Under the new accounting standards that have been used since 2011, AVID is able to attribute a small percentage
of the total transaction value to the post-transaction deliverables (which gets deferred), as listed in Table 3 below
(BESP refers to Best Estimate of the Selling Price and the Implied Maintenance Release Post-contract Customer
Support (PCS) refers to the post-transaction deliverables). Note that in most cases the value of post-transaction
deliverables is a low-single digit percentage of the total transaction value, which appears logical from the
perspective of value transfer. Said another way, under the accounting standards in place since 2011, almost all of
AVIDs transaction value gets recognized upon delivery.
Initially, the impact from the 2011 accounting change appeared insignificant. In 1Q11, AVID disclosed a $4.5
million revenue benefit.12 However, the implementation of the accounting change in 1Q11 marked an important
period because the subsequent financial restatement clearly separated the two periods based on significant
differences in accounting treatment, leading to the pre-2011 deferred revenue balance that exaggerates
reported financials today.
[As an aside, the $4.5 million benefit from the change in revenue recognition was never disclosed by
management on its 1Q11 earnings call (4/21/2011).13 Former CEO Gary Greenfield and former CFO Kenneth
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------------------------------------------------------------------Sexton were later subject to two lawsuits for violating federal securities laws. AVIDs current CEO Louis
Hernandez was an active board member when Mr. Greenfield and Mr. Sexton were accused of violating
securities laws.]
After serving as a director on AVIDs Board since February 2008, Louis Hernandez became the Lead Director in
December 2011. A little more than a year later, in February 2013, Mr. Hernandez replaced Mr. Greenfield as
AVIDs CEO. Two weeks after Mr. Hernandez was appointed as CEO, AVID announced it was postponing its
4Q12 earnings release to provide additional time for the Company to evaluate its current and historical
accounting treatment related to bug fixes, upgrades and enhancements to certain products which the Company
has provided to certain customers. AVID commenced what ultimately turned out to be a massive accounting
restatement that resulted in six quarters of missed financial filing deadlines and a subsequent de-listing from
NASDAQ in May 2014. It took twenty months for AVID to restate its prior financials, and in November 2014,
AVID finally became current.
AVIDs accounting nightmare was attributable to its failure to identify and account for the post-transaction
deliverables, such as free software updates and bug fixes discussed above. The correct treatment required the
deferral of some or all of the transaction revenue to be recognized over the time period when such deliverables
were due. It turned out that AVID had effectively been deferring none of the transaction value attributable to the
future deliverables, as noted by the failure to identify and account for language in the 2013 10K (emphasis
added):
The failure to identify and account for the existence of Implied Maintenance Release PCS resulted in errors
in the timing of revenue recognition reported in our previously issued consolidated financial statements.
Historically, we generally recognized revenue upon product shipment or over the period services and postcontract customer support were provided (assuming other revenue recognition conditions were met). As described
more fully in our policy for Revenue Recognition in Note A to our Consolidated Financial Statements in Item 8
of this Form 10-K, the existence of Implied Maintenance Release PCS in a customer arrangement requires
recognition of some or all arrangement consideration, depending on GAAP applicable to the deliverables, over
the period of time that the Implied Maintenance Release PCS is delivered, which is after product delivery or
services are rendered and is generally several years.
A key distinction in the restatement revolved around the some or all language bolded above. AVIDs
transactions that occurred after 1/1/11 treated post-transaction deliverables correctly, with AVID estimating the
fair value of the future deliverables and only deferring that estimated amount (hence some of the transaction
value). However, for transactions falling in the pre-2011 period, i.e. under the old revenue recognition rules,
AVID could not estimate the fair value of such deliverables, and as a result, they were required to defer all of
the transaction revenues for future recognition.14
This distinction is significant because AVID has effectively been able to re-recognize a far greater amount of
revenue than would have been deferred under appropriate accounting treatment (an example in a few pages will
help illustrate this point). Had AVID a) retrospectively adopted the new revenue recognition rules to pre-2011
years, which it was allowed to do,15 and b) been willing and able to estimate the fair value of the identified posttransaction deliverables during pre-2011 years, then the resulting restated revenues would have been a relatively
fair representation of the business and there would not have been a large deferred revenue balance created.
However, AVID did not (or could not) go back and estimate the fair value of the future deliverables component
of revenue, and as a result, they deferred large amounts of revenue from the pre-2011 years to satisfy the
accounting requirements. We cannot emphasize enough the pre-2011 deferred revenue that was created
does NOT reflect the level of deferred revenue that would have been recognized had AVID adhered to
todays accounting standards. Based on our conversations with analysts and other investors, we do not
believe this fact is understood. As a result of AVIDs inability to estimate the fair value of future deliverables,
$888 million of deferred revenue was retrospectively added to AVIDs restated 2010 balance sheet, as shown in
Table 4 below. Virtually all of this accounting-based revenue would have been recognized by 2014 had AVID
been able to estimate the value of the future deliverables. However, because they could not, the future
deliverables, AS WELL AS, all of the product revenue on a large number of transactions, were restated as
deferred revenue to be recognized through 2018.
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The massive $888 million of newly created deferred revenue was to be amortized on a pre-determined schedule
between 2011 and 2018. The result is that AVIDs income statement now contains a massive layer of 100%
margin revenue that has virtually nothing to do with todays business, as described in the 2013 10K (emphasis
added):
As previously discussed, the revenues recognized from the amortization of deferred revenues (that is, the
recognition of revenue backlog) attributable to transactions executed on or before December 31, 2010 will
continue to decline until the related deferred revenue balances are largely amortized in 2016. These revenues
have 100% margins, because the timing of the recognition of the deferred costs did not change as a result of our
restatement, and our gross margin percentages will be negatively impacted year over year as these revenues
decline.
The $888 million of 100% margin revenue being added to post-2010 income statements has unequivocally
distorted reported financial results. As such, we see no reasonable explanation, other than to hide the
ignominious economics of AVIDs core P&L, that management has not excluded this accounting artifact from
its financial results. As stated above, and clearly illustrated later, these deferred revenues are NOT revenue that
would have been deferred under current accounting formulas. AVID amortized approximately $127.0 million of
pre-2011 deferred revenue in 201316 and $91.5 million in 2014,17 leaving $84.6 million of pre-2011 deferred
revenue balance at the end of 2014 that will hit the income statement in the future. 18 During 1Q15, AVID
amortized $17.7 million of pre-2011 deferred revenue,19 with $41.1 million remaining for the rest of 2015.
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------------------------------------------------------------------II. A Framework Explaining Why Pre-2011 Revenue Amortization MUST be Excluded from Financials
Continuing with the boring, yet incredibly important background, it is helpful to illustrate simplistically why
failing to exclude pre-2011 revenue is so misleading. The change in AVIDs revenue recognition policies, and
subsequent restatement retrospectively, created $888 million of deferred revenue with no associated costs. It
should be clear by now why the revenue amortization is purely an accounting artifact, and as a result its
inclusion in adjusted financials paints an inaccurate profile of growth and profitability. Below, we provide two
illustrations that demonstrate why AVIDs inclusion of the pre-2011 deferred revenue completely distorts and
overstates the health of its recurring financial model.
1) AVIDs Bookings Conversion Schedule Shows Why Pre-2011 Deferred Revenues is Phony
In the March 2015 investor presentation, AVID provided a schedule for a typical bookings conversion rate
(Table 7 below). The schedule indicates that 46% of bookings in a typical year convert to revenue in that same
year. By extension, this implies 54% of bookings are added to deferred revenue and backlog. According to
AVIDs own example, 88% of the initial bookings value converts to revenues by year 3, with 96% of booking
value converting to revenue by year 5.
According to AVIDs own bookings conversion schedule, 96% of bookings made in 2010 would have already
converted to revenue by 2014. Said another way, only 4% of AVIDs 2010 bookings could legitimately still be
awaiting amortization in 2015 and future years. Therefore, using AVIDs very own revenue conversion table, at
most 4% of 2010 bookings (pre-2011) would have been present in deferred revenues entering 2015 had AVID
initially used proper accounting. The $84.6 million of total pre-2011 deferred revenues still to be amortized at of
the end of 2014 is simply non-economical and should be excluded from managements adjusted financials.
2) A Simplified Framework Using $100 of Revenue as an Example
Consider a company that sells one product for $100 every year and commits to five years of updates and bug
fixes the post-transaction deliverables. Assume that under the new accounting rules, the fair value of such posttransaction deliverables that are deferred and amortized is $5. Both the value (5%) and time period of future
deliverables (5 years) is consistent with AVIDs deferred percentage disclosures in its 10K (shown earlier in
________________________________________________________________________11
------------------------------------------------------------------Table 3). We assume total costs for the company are $105, resulting in a net loss of $5, or a (5%) net income
margin.
i)
Under new accounting rules, this company would recognize $95 of its $100 annual transaction in year one
and defer the remaining $5 of 100% margin revenue over the proceeding 5 years. This means $1 would be
ratably recognized annually for 5 years. As illustrated in Table 8 below, the company would report $95 of
revenue in year 1, $96 in year 2 ($95 recognized upfront from year 2, plus $1 amortized from year 1), $97 in
year 3 ($95 recognized upfront from year 3, plus $1 from year 2, plus $1 from year 1). This would continue
until year 6, when a steady state $100 of revenue gets recognized ($95 of revenue recognized from year 6
booking + $1 from each of the previous 5 years). The resulting financial statements would portray a fairly
accurate picture of the underlying business in later years when the distortion between GAAP revenue and
bookings was only $1 or $2. In year 6, bookings and revenue would be equal.
ii) Now consider the same company under the old accounting rules in place prior to 2011. Assume for
simplicity that, like AVID prior to the 2011 accounting change, the company did not identify any posttransaction deliverables. Therefore the company does not defer any product revenue, and instead recognizes
the full $100 transaction revenue upfront. This also results in an income statement that reasonably portrays
the underlying financials. The problem in this example is that an accountant could argue that to the extent
post-transaction deliverables existed, they needed to be identified and some revenue should have been
deferred to future periods.
So assume this company that had been recognizing $100 of revenue with no deferral, is now required to
restate that $100. However, since the old revenue recognition rules did not allow our company to establish a
$5 fair value for such post-transaction deliverables, the accountant requires the entire $100 transaction be
deferred and recognized ratably over five years. This would result in a restatement that would ratably
recognize $20 per year of deferred revenue amortization for five years, compared to just $1 of amortization
per year in scenario (i) above. The distorted revenue and profit/loss numbers from this example are
illustrated in Table 9 below. Despite the obvious distortion, notice that after five years, this model would
also produce accurate steady state economics with $100 of revenue and $105 of costs.
________________________________________________________________________12
------------------------------------------------------------------iii) Finally, assume that the company operates under old accounting rules (scenario (ii) above) in year 1 but then
changes to the new accounting rules (scenario (i) above) in year 2. Think AVID. The $100 of revenue
deferred out of year 1 will result in $20 of amortized revenue in years 2 through 6. The resulting income
statement would show $118 and $119 of revenue in years 5 and 6, respectively, and $13 and $14 of positive
respective profits. The annual economic revenue remains $100 every year, while the net loss is $5 annually.
Therefore, these financials overstate year 5 and 6 revenue by $18 and $19, respectively, while overstating
net income by the same amount (100% gross margin). This wild misrepresentation portrays a company with
an 11%-12% profit margin, when the true net margin is negative 5% by definition. We believe this is a very
good representation of how AVIDs financials in 2014 and 2015 are dramatically overstated by pre-2011
deferred revenue amortization.
The appropriate and accurate action would be to subtract the $20 of year 1 revenue amortization from
subsequent years. We have done this below under the lines Revenue Excl. Amortization From Year 1. If
appropriate adjustments are made to subtract the misleading $20 of deferred revenue amortization from the
restatement, then revenue would be $98 and $99 in years 5 and 6, with a corresponding annual net loss of $7
and $6, respectively (Table 10 below). While there would still be a $2 and $1 discrepancy between the
adjusted numbers and the underlying steady state metrics of $100 revenue/$5 net loss, we would consider
the adjusted numbers far more reflective of the business economics. In AVIDs case, management has
irresponsibly chosen to significantly overstate its income statement and profitability, instead of making
responsible adjustments to help investors accurately analyze and value the company.
Like our (iii) example above, AVIDs financial statements are completely detached from reality because the
accounting restatement required that virtually all of the questionable pre-2011 transaction revenue be deferred.
By not excluding the subsequent amortization of deferred revenues, AVIDs management is consciously
presenting adjusted financials that do not represent the economics of its business. This is not only reckless, but it
also sits squarely in the gray area of violating SEC Regulation G.20
________________________________________________________________________13
------------------------------------------------------------------III. Managements Misleading Financial Metrics & More Potential SEC Reg. G Violations
Management teams choose key performance indicators (KPIs) to help investors gauge the progress towards
achieving certain business objectives. Investors assume that managements KPIs are in fact accurate and
illustrative of the businesss operational performance. AVIDs management focuses on three key financial
metrics Adjusted EBITDA, Bookings, and Free Cash Flow. These metrics would typically be reasonable
performance indicators. However, our analysis into the composition of AVIDs metrics raises serious red flags.
We believe management is grossly misrepresenting the current state of business by reporting and advocating
misleading metrics. Based on our diligence, we believe management has potentially been manipulating certain
metrics, which could be a violation of SEC Regulation G. AVID management shares the rationale for selecting
its KPIs on the 1Q14 earnings call (emphasis added):
We'll endeavor to provide what we believe are meaningful metrics to our investors to assess our performance and
our execution against the strategy as we recognize that, given the restatement, the amortization of deferred
revenue, it may be challenging to make such assessments based on traditional GAAP metrics. We believe that
looking at bookings as an operational metric, we use as a leading indicator of growth, adjusted EBITDA and
free cash flow may be informative indicators as to our operational performance.21
In the sections below, we address each of AVIDs key financial metrics and provide evidence that question the
validity of each metric.
1) Adjusted EBITDA Is Wildly Overstated by the Pre-2011 Deferred Revenue Amortization
As discussed earlier, AVIDs restatement created $888 million of pre-2011 deferred revenue. GAAP accounting
layers this revenue onto the income statement at a 100% margin ($127.0 million in 2013 and $91.5 million in
2014). As seen earlier in Table 5, AVID still has two more years of significant pre-2011 revenue amortization
($58.7 million in 2015 and $24.8 million in 2016).
Managements decision to include pre-2011 revenue in its key performance metrics unequivocally distorts
revenue and earnings-derived lines of the income statement. Table 12 below depicts how egregious the inclusion
of pre-2011 deferred revenue amortization is on AVIDs profitability. By removing the pre-2011 deferred
revenue amortization on the reported Non-GAAP financials, we can see a more accurate picture of Adjusted
EBITDA. The upper section in Table 12 shows the Non-GAAP metrics as reported by AVID, while the bottom
section shows the same reported metrics after subtracting the pre-2011 deferred revenue amortization from each
period. By doing so, the staggering distortions that management is implicitly supporting become obvious. In
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------------------------------------------------------------------2013, 2014, and 1Q15, AVID reported positive Adjusted EBITDA of $80.3 million, $72.3 million, and $11.8
million, respectively. Based on managements adjusted presentation, the average investor would probably
conclude AVID operates with reasonable profitability. However, a different picture emerges when the pre-2011
revenue amortization is removed. Had AVID management excluded the pre-2011 revenue amortization,
Adjusted EBITDA would have been negative $46.7 million, $19.2 million, and $5.9 million during the same
three periods. Other profitability metrics are similarly warped by managements inclusion of the pre-2011
revenue amortization in adjusted results. For example, Non-GAAP EPS excluding the 100% margin pre-2011
revenue amortization would have been ($1.79), ($1.03), and ($0.28) in 2013, 2014, and 1Q'15, compared to
AVIDs reported earnings of $1.46, $1.30, and $0.17.
AVIDs management discusses Adjusted EBITDA extensively in earnings calls, and proudly provided 2015
Adjusted EBITDA guidance of $72.0 million to $78.0 million. 22 However, nowhere in its press releases,
earnings calls, or promotional IR PowerPoints can we find this Adjusted EBITDA guidance without the huge
distortion from pre-2011 deferred revenue amortization. The 9/24/14 earnings call was the only public call where
management addressed its irresponsible decision to continue including pre-2011 deferred revenue in adjusted
financial results. Below is CFO John Fredericks vaporous justification for refusing to normalize revenue by
simply removing the pre-2011 transactions (emphasis added):
As the amount of revenue recognized from pre-2011 period declines, this creates a challenge for revenue and
gross margin as a percentage of revenue for the comparable periods. The impact of the declining pre-2011
deferred revenue and the increasing post-2010 deferred revenue means that it's impractical to normalize our
revenue by simply adding back the effects of the pre-2011 transactions as there continues to be deferrals that
are not yet reflected in our results on a fully normalized basis.
The choice of the word impractical makes no sense to us it is in fact very practical and easy to subtract the
pre-2011 deferred revenue amortization because the precise amount is known. There are no costs that would also
require adjustments. AVIDs justification is premised around the infinitesimal lingering amortization of
legitimate pre-2011 bookings that should not be excluded. This is true from an accounting point of view.
________________________________________________________________________15
------------------------------------------------------------------However, as clearly illustrated in Table 10 of our $100 Company Framework, the economic point of view
supports removing the entirety of pre-2011 deferred revenue considering AVID is currently overstating revenue
and profits by the analogous $18 or $19, as opposed to simply removing all of the misleading pre-2011 revenue
and possibly understating results by $1 or $2 (Table 10). This approach would be far more representative of the
economic reality, which is the intent of presenting adjusted financial reports.
We believe AVIDs creditors agreed with our assessment that the pre-2011 revenue inclusion is bogus. In
connection with the Orad Hi-Tech Systems Ltd acquisition announcement (April 2015), AVID received a $100
million financing commitment letter. The transaction valued Orad at approximately $60 million of enterprise
value. The $100 million financing commitment letter was necessary because AVID had just $25 million of cash
exiting 2014.
The proposed interest rate on the term loan was LIBOR + 6.50% with a 1% LIBOR floor, or an undisclosed
reference rate plus 5.25%.23 The effective interest rate of a 1% LIBOR floor plus 6.50% resulted in a 7.5%
interest rate for AVID, which is astronomically high in todays environment for a previously debt-free, $750
million market cap company. We believe that unlike gullible equity investors, the lenders understood the paltry
EBITDA/interest coverage because they correctly excluded the non-cash pre-2011 revenue amortization that
dramatically overstates AVID's EBITDA. Excluding the fictitious, non-recurring revenue results in a 6.1x
leverage ratio, as opposed to the 1.3x leverage that is derived simply from AVID's reported Adjusted
EBITDA. Including Orad's $10 million of annual EBITDA contribution ($5M of standalone and $5M of
synergies), 24 pro forma leverage remains relatively high at 3.8x. A 7.5% effective interest rate is far more
commensurate with a junk borrower that is 4x levered than 1.3x. It appears obvious to us that the lenders priced
the credit agreement in light of AVID's EBITDA excluding the pre-2011 revenue amortization.
2) Free Cash Flow Wildly Overstated by Adjustments and Unsustainable Inflows

Cash flow is typically unaffected by retrospective changes to deferred revenue accounting; therefore it would
seem reasonable to expect this metric to be a good financial proxy that is free from distortion. While AVIDs
free cash flow is unaffected by pre-2011 deferred revenue amortization, we believe AVIDs reported metrics
disingenuously overstate the economic realities.
Numerous examples are presented below to support our belief that AVIDs management is manipulating the
presentation of key adjusted financial metrics in direct violation of SEC Regulation G. In 2003, the SEC adopted
Regulation G to prohibit material misstatements or omissions that would make the presentation of a material
Non-GAAP financial measure misleading to investors. 25 The regulation prohibits companies from adjusting a
Non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual
________________________________________________________________________16
------------------------------------------------------------------if such items occurred in the past two years or are likely to occur in the ensuing two years. 26 Below, we present
multiple free cash flow examples that we believe violate Reg. G.
i) AVID reports Free Cash Flow, without clarifying that its reporting methodology makes several adjustments
that are inconsistent with the conventional definition of Free Cash Flow (cash flow from operations less capital
expenditures). In its free cash flow calculation, AVID adds back restructuring and restatement related cash
expenses. While understandable (more on these non-recurring recurring charges later), AVIDs decision to
present its free cash flow without adjustment is misleading and requires a more appropriate designation like
Adjusted Free Cash Flow considering the large discrepancy when compared to conventional FCF. As shown in
Table 13-1 below, AVID reported positive FCF of $5.6 million and $12.7 million in 2013 and 2014,
respectively. However, these figures included $26.4 million and $35.9 million of adjustments, which meant
conventional FCF was negative $20.8 million and $23.2 million.
ii) While the Free Cash Flow presentation is misleading, the fact that AVID continues to exclude cash payments
attributable to restatements is far more troubling considering AVID has been current for nearly eight months.
Specifically, as of 11/13/14 AVID was current with all of its filings and restatements. As such, any remaining
cash payments for its restatement initiatives should be completed, with any additional legal/audit costs
representing ongoing public company costs. However, as seen in Table 13-1 above, AVID added back a massive
$5.8 million of restatement payments in 4Q14, and $2.1 million in 1Q15, despite being current on all filings
and months past any restatement activities. Similarly, AVID continues to add back cash payments related to its
2012 and 2013 restructuring. In 2014, AVID added back $7.2 million to its Free Cash Flow and another $0.4
million in 1Q15 (we do not believe this represents timing differences between the 2012/2013 accruals and cash
payments). It appears that management may be arbitrarily allocating regular public company costs to
restructuring and restatement payments, thereby overstating reported (Adjusted, even if not called Adjusted)
FCF. Expenses tied to improving financial controls or the cost structure are recurring expenses that all
corporations experience. Free cash flow is viewed by many investors as sacred because it is usually presented in
a relatively straightforward manner. However, if management introduces arbitrary add-backs and other
manipulations, the integrity of FCF is harmed and can be highly misleading. Either way, presenting AVIDs Free
Cash Flow as unadjusted is problematic.
iii) Adding to our suspicion that an unnecessarily wide net is being casted over restatement expenses is the fact
actual restatement related cash payments have been approximately 100% higher than managements public
estimates. In October 2013, AVIDs management filed an 8K that included guidance for an additional $15-$20
million of cash expenditures for completing the accounting evaluation.27 While management is allowed to be
wrong, the magnitude of the cash add-backs attributable to the restatement has been nearly 100% higher than the
initial guidance. As seen in Table 13-1 above, restatement related add-backs to (adjusted) FCF from 4Q13
through 1Q15 were a whopping $38.5 million, significantly greater than the $15-$20 million estimate.
iv) As detailed later, AVIDs financial performance has been atrocious in the two quarters since regaining
compliance with its financial filings. In light of significant shortfalls versus consensus estimates, we are skeptical
about managements motivation to delay bonus payments out of 1Q15 into 2Q15. AVID reported 1Q15 FCF
of $4.2 million,28 which of course excluded $2.5 million of restatement and restructuring payments. On its 1Q15
earnings call, management noted that FCF benefited from the push-out of bonus payments into 2Q15 29
(emphasis added):
________________________________________________________________________17
------------------------------------------------------------------Free cash flow for the quarter was $4 million or about an $18 million improvement over the same period last
year. Much of this improvement was based on the timing differences of incentive compensation payments,
which were paid in the first quarter of last year as compared to the second quarter of this year.
Question - Steven Frankel: So one quick last question, what drove the decision to pay incentive comp in Q2
rather than Q1?
Answer - John Wilbert Frederick: There was the timing of when all the approvals came together and when we
could get it through all the global payrolls.
Answer - Louis Hernandez, Jr.: The Company, Steve, hadn't had we instituted a requirement that evaluations
and rating of all employees had to be completed and that hadn't been a policy before, and that just meant globally
a little more coordination than before. But we wanted to make sure that we understood exactly who was getting
what and why and that employees in good standing and performing better were getting a disproportionate amount
of the reward. And so that just took a little couple of more cycles because it was new to a lot of us.
Management chose not to quantify the cash flow benefit from delayed bonus payments. However, if we assume a
$10 million cash compensation deferral, this would imply 1Q15 FCF would have been negative $8.3 million
excluding the dubious $2.5 million of restructuring and restatement add-backs. On the heels of a very
disappointing 4Q14 FCF number ($16.2 million reported30 vs. $18.5 million Dougherty estimate 31), we believe
management may have manipulated the timing of bonus payments to cover-up another poor quarter of FCF.
v) What may be most ominous for bullish investors is our analysis that concludes cash flow from operations has
been boosted by unsustainable changes in post-2010 deferred revenue. While the changes in pre-2011 deferred
revenue do not have an impact on cash flow, new bookings into the post-2010 deferred revenue balance can
create cash flow if payments were collected upfront. As such, net changes in the post-2010 deferred revenue line
indicate the cash flow contribution from deferred revenue growth. As shown in Table 14 below, AVIDs post2010 deferred revenue grew year-over-year by 14% ($39.5 million) and 15% ($15.5 million) in 2014 and 1Q15,
respectively. Note that the reported negative $52.0 million impact from Changes in deferred revenues 32 in
2014 nets out the positive $39.5 million from post-2010 deferred revenues and negative $91.5 million of pre2011 revenues.
Deferred revenue growth was the only reason AVID had marginally positive cash flow from operations in 1Q15
(2014 was negative either way). Without the abnormal inflows to deferred revenue, cash flow from operations
would have been negative $49.4 million and negative $10.9 million in 2014 and 1Q15, respectively, which is
substantially worse than the reported ($9.9) million and $4.6 million (Table 14).
We do not question whether AVID should get credit for growth in deferred revenue. However, we believe the
magnitude of deferred revenue growth does not reconcile with flat-to-declining bookings. As seen in Table 14
below, 2014 bookings declined by 0.8% year-over-year, which is in stark contrast to reported deferred revenue
growth of 14%. The same trend can be seen in 1Q15, where post-2010 deferred revenue grew 15% year-overyear, while bookings declined 11.2%. At some point bookings and deferred revenue changes will need to
converge. We believe AVID may be significantly discounting its annual total purchase value (weak bookings) if
customers are willing to pay more up-front. This would lead to a temporary boost of cash flows followed by a
severe future drop in bookings as the pipeline has been drained at discounted prices. With the post-2010
deferred revenue balance at $345.7 million, if we assume a reasonably bullish 2.5% steady-state bookings
growth rate, AVIDs deferred revenue growth should level off to just $8-$10 million annually. This would create
an approximately $30 million headwind to future cash flow from operations.
________________________________________________________________________18
-------------------------------------------------------------------
3) Aggressive Backlog Calculation Appears to Overstate Bookings; 50% Shortfall in Backlog Conversion
Our analysis of AVIDs bookings suggest management has used aggressive tactics and inaccurate
communication in its public presentations. Before diving into the red flags in AVIDs backlog, it is helpful to
clarify how AVID invents its backlog and bookings figures. Table 15 below is a representation of how AVID
treats bookings. Solid lines represent the flow of bookings and cash flow at the time of the transaction, whereas
the dotted lines represent movements in subsequent periods. For example, a booking that has not been delivered
and for which the cash has not been collected, is allocated into backlog, which can subsequently flow into
deferred revenue if cash is collected prior to delivery, or can flow into revenue if it is delivered. Importantly,
backlog is defined as a booking that have not been delivered, nor has any cash been received for that purported
transaction. This dynamic makes the backlog component of bookings subject to managements discretion
because no concrete event (product delivery or a paid invoice) is required.
AVID defines revenue backlog as deferred revenues (product paid for but not delivered) plus backlog (product
________________________________________________________________________19
------------------------------------------------------------------not delivered and not paid for). While deferred revenue has an associated cash payment, backlog is an
amorphous figure as described above. How much discretion does management have over this all-important
backlog figure that is integral to calculating revenue backlog? In AVIDs 2014 10K, the following safe harbor
disclosures seem to indicate that the definition of revenue backlog is indeed highly subjective:
Certain orders included in revenue backlog may be reduced, canceled or deferred by our customers.
The expected timing of the recognition of revenue backlog into revenue is based on current estimates and could
change based on a number of factors, including (i) the timing of delivery of products and services, (ii) customer
cancellations or change orders, (iii) changes in the estimated period of time Implied Maintenance Release PCS is
provided to customers or (iv) changes in accounting standards or policies.
As there is no industry standard definition of revenue backlog, our reported revenue backlog may not be
comparable with other companies.33
Looking at the composition of revenue backlog (deferred revenue + backlog), we know the deferred revenue
component is relatively predictable, which AVID has confirmed in investor presentations. 34 Therefore the risk of
revenue backlog being inaccurate can be isolated to the subjective backlog component exposed to cancelations
and delays. Looking at 2014, we can calculate that 13% of AVIDs total annual bookings went into backlog
(Table 16). Similarly, we can tell that backlog represented 25% ($116 million / $461.7 million) of the combined
post-2010 deferred revenue and backlog balance at the end of 1Q15 (Table 17). It is clear that this highly
subjective backlog ($116 million at 1Q15), which is clearly dependent on managements interpretation, is a
meaningful driver of AVIDs bookings and revenues.
We believe two different approaches below independently show that AVIDs reported bookings are nothing but
nebulous misrepresentations of its business. Our alarming analysis unsurprisingly concludes that AVIDs highly
subjective backlog component within revenue backlog is misleading.
A) Based on fairly straightforward math, it appears AVIDs backlog-to-revenue conversion for 2014 was
approximately 50% lower than management had estimated in September 2014 (8 months into the year). As
shown in Table 18 below, when AVID filed its 2013 10K on September 12, 2014, the company expected to
recognize $200.9 million from post-2010 revenue backlog (deferred revenue and backlog).
________________________________________________________________________20
-------------------------------------------------------------------
Exiting 2013, AVIDs combined post-2010 deferred revenue and backlog balance was $383.0 million (Table 17
above), which implies AVID expected to recognize 52.5% of this balance, or $200.9 million, as revenue during
2014. While management has not touched on the topic, we believe the actual conversion was far lower, which
would irrefutably support our belief that managements backlog disclosures are bogus and misleading.
In its 3/17/15 investor deck, AVID reported that in 2014 it had recognized $256 million of revenues from
amortization of deferred revenues and conversion of backlog. Within that $256 million, amortization of pre-2011
deferred revenue accounted for $92 million as expected, while amortization of post-2010 deferred revenue was
$127 million, and backlog conversion was $37 million. The combined revenue from post-2010 deferred revenue
and backlog was therefore $164 million (127 + 37 = 164), representing only 43% of the 2013 ending balance of
$383 million post-2010 deferred revenue backlog. Recall that based on managements publicly disclosed
revenue backlog recognition schedule, $201 million was expected to be recognized in 2014 (vs. just $164 million
that was ultimately recognized). Because we know that amortization of deferred revenue flows through the
income statement on a relatively fixed schedule, we can assume that the companys estimated pre-2010 deferred
revenue amortization of $127 million was relatively accurate. This would imply that AVIDs original $201
million revenue backlog conversion estimate (Table 18 above) assumed approximately $74 million of backlog
conversion (201 127 = 74). The actual backlog conversion was just $37 million, or exactly 50% of the $74
million that was expected. While we believe the 50% miss of backlog conversion is inarguable proof of
managements misleading backlog reporting, the fact their annual estimate was made in the 10K filed in
September 2014, roughly eight months into the year, is even more troubling.
There are only two plausible explanations for a 50% miss in revenue backlog conversion ($37 million actual vs.
$74 million expected in 10K). Either the environment deteriorated significantly and deals were pushed out, or
management had included orders in backlog that were subsequently de-booked. Neither explanation gives us
comfort. At best, this decoupling of backlog conversion with expectations raises serious concerns about
managements ability to reliably forecast future backlog conversion and therefore revenues. At worst, one could
argue that management had been booking fictitious orders into backlog, or significantly underestimating the
normalized de-booking rate.
We are also perplexed by managements forecast for $82.5 million of backlog conversion in 2015 (Table 20 &
21), despite just $37 million converting in 2014. This level of backlog conversion represents 15% of the 2015
revenue guidance midpoint of $538.2 million, 35 and 17% of the $479.7 million revenue guide when excluding
the $58.5 million of scheduled pre-2011 deferred revenue amortization (Table 21). After a horrendous 1Q15
relative to expectations (more on this later), we believe management may have again imprudently set
expectations that depend on a mysteriously high backlog conversion rate. Should management deliver another
50% shortfall in conversion, a $41.3 million hole would exist in AVIDs revenue forecast.
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-------------------------------------------------------------------
B) Management appears to have (purposely?) reported a total revenue backlog number on its 3Q14 earnings call
that was incorrect by $30 million. We do not believe this $30 million mistake was a one-off because the post2010 revenue backlog figure provided on the call was also erroneous by an identical $30 million (quoted as $405
million vs. subsequent disclosures in 4Q14 that the actual figure was $434.6 million). Below are comments
made by CFO John Frederick from the 3Q14 earnings call on November 11, 2014 (emphasis added):
Revenue backlog was $509 million as compared to $559 million at the end of 2013. However, if you remove the
impact of the pre-2011 deferred revenue, revenue backlog was $405 million, which is $24 million or a 6%
increase from the end of 2013, and this reflects a continued trend towards increased revenue visibility.36
Earnings for 4Q14 were released on March 16, 2015 (Table 22) and reported total revenue backlog for each of
the trailing four quarters was disclosed. As such, we could clearly see that the revenue backlog figure for 3Q14
had been changed with no explanation from $509 million as disclosed in the quote above to $539.2 million
(Table 22).
Post-2010 revenue backlog is calculated as the sum of the $314.7 million post-2010 deferred revenues and the
$119.9 million backlog, which equals $434.55 million. This is an approximately $30 million difference from the
$405 million Mr. Frederick disclosed on the 3Q14 earnings call. Since deferred revenues are the relatively fixed
component of revenue backlog, we once again suspect the swing factor was a substantial decline ($30 million) in
the backlog component. Whether 3Q14 was overstated by $30 million, or 4Q14 was understated by $30 million
(making for more favorable compares in 2015), a $30 million discrepancy on a $120 million total backlog
number is simply too large to chalk up to an innocent margin of error. Based on the public evidence, we believe
AVID suffers from terrible financial controls and/or may be nefariously manipulating the backlog component.
________________________________________________________________________22
-------------------------------------------------------------------
314,700 + 119,850 = 434,550, NOT 405,000
________________________________________________________________________23
------------------------------------------------------------------IV. Repeated Failure to Disclose Material Non-Recurring Gains within Reported Non-GAAP Financials
Based on extensive analysis of AVIDs financials, we believe management may have failed to disclose material
non-recurring FX gains that resulted in misleading Non-GAAP financial reports. Further, it would appear
management structured hedging transactions in a manner that would keep gains above the EBIT line. As a result
of the unconventional accounting treatment of its hedges, it would appear management took credit for operating
expense reductions that were heavily influenced by FX gains. Because the FX attributions within AVIDs
financial filings are unclear and management has provided no explanation, we could be misinterpreting the
financial dynamic. However, based on our analysis, we believe AVID has blatantly violated investor trust.
Further, AVID mysteriously disposed of virtually all FX hedges one month prior to reporting 1Q15, with zero
explanation.
1) Mysterious FX Gains Suggest AVID Drastically Misrepresented Adjusted EBITDA in 4Q14 and 1Q15
AVIDs 10Q for 1Q15 and 10K for 2004 show $6.2 million and $6.7 million, respectively, of Unrealized
foreign currency transaction gains in the statement of cash flows (Table 23 below). Note that the $6.2 million
gain for 4Q14 is calculated by subtracting the $0.5 million cumulative gains reported for the first nine months in
the 3Q14 10Q37 from the $6.7 million gain reported in the 10K for the full year 2014, as shown on the right
panel in Table 23 below.
We are puzzled not only by AVIDs apparent inclusion of these massive gains in its Non-GAAP results, but also
by the anomalous magnitude of the currency transaction gains (or losses) in the last two quarters (Table 24
below). Interestingly, the 2014 10K and 1Q15 10Q filings added the word Unrealized to the Foreign
currency transaction (gains) losses that had previously been used in all prior filings since the restatement.
________________________________________________________________________24
-------------------------------------------------------------------
But surely, given the massive impact on reported results, AVIDs management would have discussed these
transaction gains on its calls, correct? Between the 4Q14 and 1Q15 calls, AVID management used the term
currency twelve times. However, not one of these currency references was directed at explaining the outsized
and unusual FX gains. Further, the word hedge (or hedging) was used exactly one time, when management
was referencing its natural profit hedges to a strengthening dollar from worldwide sales offices with costs
denominated in non-Dollar currencies. Considering the materiality of the FX transaction gains, we are shocked
AVID chose not to discuss them in its earnings releases or conference calls. This naturally leads to the question:
Were these gains included in Non-GAAP financials, such as Adjusted EBITDA? Based on AVIDs opaque
disclosures, we believe it stands to reason that:
First, these gains implicitly increased GAAP Net Income, as they are listed among non-working capital line
items that bridge GAAP Net Income and Cash Flow from Operations (Table 23 above).
Second, if they increased GAAP Net Income, then they must have increased Non-GAAP Net Income as
well, because AVIDs GAAP to non-GAAP net income reconciliation does not exclude any FX transaction
gains or losses (Table 25 below).
Third, if non-GAAP Net Income included such gains, then Adjusted EBITDA must have included these
gains too because they were above the EBIT line (more on this below).
To make our position crystal clear, we have included AVIDs full 1Q15 and 4Q14 GAAP and non-GAAP
reconciliation published in the earnings releases (Table 25 on the following page). There does not appear to be
any adjustment for FX gain of any type (spot, forward, realized, or unrealized), despite ample evidence in SEC
filings that FX gains materially contributed to financial results.
________________________________________________________________________25
-------------------------------------------------------------------
If AVID did indeed include large FX gains in Adjusted EBITDA, this would be another example of AVIDs
management misrepresenting the actual recurring business trajectory. Table 26 below puts the magnitude of
distortions from the FX gains into perspective. Instead of reporting $14.3 million of Adjusted EBITDA in 4Q14,
AVID would have reported $8.0 million without the FX gain, or 44% less than investors were led to believe.
Similarly, in 1Q15, AVIDs $11.8 million of reported Adjusted EBITDA would have been $5.1 million, or 57%
________________________________________________________________________26
------------------------------------------------------------------lower, excluding the FX gains of $6.7 million. [Note the next topic below suggests costs also benefitted from FX
gains].
It seems obvious something unusual happened in 4Q14 and 1Q15 with regard to AVIDs FX hedging
instruments to drive such abnormal gains. However, despite clear legal requirements, AVIDs filings and
earnings calls offer minimal explanation behind these gains. We assume the gains were driven by AVIDs FX
hedging contracts (presumably short Euros), which are discussed in more detail later. However, AVID discloses
to investors in its SEC filings that FX hedging forward contracts typically mature in 30 days,38 which does not
reconcile with the unrealized nature of such gains.
Either way, AVIDs management offered no insight into these gains on either the 4Q14 or 1Q15 earnings calls.
For clarity, we have included comments made by management discussing Adjusted EBITDA on the 4Q14
earnings call:
Also contributing to the adjusted EBITDA success was the $10 million of operating expense savings in
2014.
Currency movements in 2014 had a nearly 1% unfavorable impact on our bookings growth rate for the
year.
Adjusted EBITDA of $14 million was at the high end of our guidance coming out of Q3. And although it
was down from last year by about $5 million if you consider the $10 million of pre-2011 deferred revenue
amortization headwind, the operating performance actually improved.39
And on the 1Q15 earnings call (that of course read quite poorly on their own considering the disappointing
quarter):
Adjusted EBITDA was lower, reflecting about $10 million less pre-2011 deferred revenue amortization; a
challenging year-over-year comp, as Q1 2014 included the Olympics and World Cup, creating about a $2
million headwind; and lower sales of deemphasized products; and higher costs related to a completed
customer project implementation.
So although deals closed generally later, which impacts near-term revenue and EBITDA results, given the
total quantum of closed deals to date, we have growing confidence and comfort around our full year
guidance. Another item impacting adjusted EBITDA in the first quarter that we mentioned is the cost impact
of certain large scale MAM customer implementations that were completed in the quarter.
While bookings, revenue and adjusted EBITDA were lower than the prior year due primarily to the timing
of both deal activity and new product announcements, as well as the currency pressure and the general
market softness that has impacting many global organizations.40
Despite our belief that approximately half of the reported Adjusted EBITDA came from undisclosed FX gains,
which are no doubt material, management did not discuss the impact to results on either call.
2) Opex Savings Overstated by 2X When Adjusted for another FX Gain in Sales & Marketing Line
AVID has historically entered short-term foreign currency forward contracts for the purpose of hedging against
foreign exchange risk. However, because of AVIDs unusual accounting decision to not treat hedges as hedges
(more later), gains and losses from such contracts are captured in the Sales & Marketing line of operating
expenses. Below are disclosures taken directly from AVIDs SEC filings (emphasis added):
________________________________________________________________________27
------------------------------------------------------------------
As a hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash
balances of foreign subsidiaries, the Company enters into short-term foreign currency forward contracts,
which typically mature within 30 days of execution. The changes in fair value of the foreign currency forward
contracts intended to offset foreign currency exchange risk on cash flows associated with net monetary assets
are recorded as gains or losses in the Companys statement of operations in the period of change, because
these contracts have not been accounted for as hedges.
During the three months ended March 31, 2015, net foreign exchange gains (specifically, resulted from
foreign currency forward contracts, foreign currency denominated transactions, and the revaluation of
foreign currency denominated assets and liabilities), which are included in marketing and selling expenses,
were $1.3 million, compared to losses of $0.9 million in the 2014 period. We classify these gains and losses
within marketing and selling expenses.41
Because these contracts have not been accounted for as hedges, the changes in fair value of these foreign
currency contracts are recorded as gains or losses in the Companys statement of operations.
In 1Q15, AVID had $1.3 million of foreign currency transaction gains that flowed through sales and marketing.
This compares to a $0.9 million loss in 1Q14, which means foreign currency gains resulted in a year-over-year
benefit to sales and marketing of $2.2 million (Table 27). As seen in Table 28, the FX-driven year-over-year
benefit represented 48% of the $4.6 million nominal decline in Sales & Marketing expense.
If there was indeed a $2.2 million YoY benefit from FX gains in selling and marketing, then AVID would appear
to have provided a misleading explanation for the decline in sales and marketing. When discussing its 1Q15
results, AVIDs CFO John Frederick said that operating expenses declined by $4.6 million YoY. He proceeded
to attribute the expense reductions to cost-savings programs announced earlier in the year, such as personnel
reductions and reallocation of workforce towards lower cost regions (emphasis added).
Offsetting these factors were lower operating expenses as we continue to execute on our cost-savings
programs.
Non-GAAP operating expenses of $64.2 million were down $4.6 million or 7% from the first quarter of 2014, as
we continue to benefit from our strategic initiative to drive to a leaner, more directed cost structure.42
As seen in Table 25 earlier, AVIDs non-GAAP adjustments do not exclude foreign currency related gains or
losses. In Table 28 below, we show operating expense line items for 1Q14 and 1Q15 as reported by AVID. We
also clearly address the $2.2m foreign currency gain (in FX Gain column). As can be seen below, AVID
________________________________________________________________________28
------------------------------------------------------------------reported a $4.6 million year-over-year reduction in Non-GAAP opex. However, this decline was significantly
impacted by the year-over-year change in FX (unclear the nature) that was disclosed in the 10Q. The $2.2
million benefit from FX gains in sales and marketing represented 48% of the $4.6 million nominal cost reduction
YoY. While the absolute amounts involved are not very large, providing explanations that include undisclosed
non-recurring gains strikes us as unscrupulous. Another inconsistency belying managements opex reduction
story is the fact both R&D and G&A actually increased year-over-year.
3) FX Forward Contracts Suddenly Discontinued in March 2015

As shown in Table 24 earlier, AVID had historically entered short-term foreign currency spot and forward
contracts for hedging purposes. Oddly, AVID did not characterize these hedging transactions as hedges.
Specifically, we have found two types of foreign currency contracts AVID has used:
Forward contracts to hedge exposures in receivables, payables and cash balances of foreign subsidiaries
Spot and forward contracts to hedge exposures in its net monetary assets denominated in foreign currencies.
Below are extracts from AVIDs 10K filed for 2014, which discloses the business rationale for maintaining
hedging contracts (emphasis added).
The Company has significant international operations and, therefore, the Companys revenues, earnings, cash
flows and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables,
payables, sales and expense transactions, and net investments in foreign operations. The Company derives more
than half of its revenues from customers outside the United States. This business is, for the most part, transacted
through international subsidiaries and generally in the currency of the end-user customers. Therefore, the
Company is exposed to the risks that changes in foreign currency could adversely affect its revenues, net income,
cash flow and financial position. The Company uses derivatives in the form of foreign currency contracts to
manage its short-term exposures to fluctuations in the foreign currency exchange rates that exist as part of its
ongoing international business operations. The Company does not enter into any derivative instruments for
trading or speculative purposes.
The functional currency of each of the Companys foreign subsidiaries is the local currency, except for the Irish
manufacturing branch whose functional currency is the U.S. dollar due to the extensive interrelationship of the
operations of the Irish branch and the U.S. parent and the high volume of intercompany transactions between that
branch and the parent.
Our international sales are, for the most part, transacted through foreign subsidiaries and generally in the
currency of the end-user customers. Consequently, we are exposed to short-term currency exchange risks that
may adversely affect our revenues, operating results and cash flows. The majority of our international sales are
transacted in euros. To hedge against the dollar/euro exchange exposure of the resulting forecasted payables,
receivables and cash balances, we may enter into foreign currency contracts.43
With EMEA accounting for 38% and 41% of reported revenues in 2013 and 2014, respectively, the rationale for
maintaining currency hedges seems rather straightforward. However, beginning in March 2015, AVID abruptly
eliminated short-term foreign currency forwards, reducing the notional value of its forward contract hedges from
$25.4 million on 12/31/14 to ZERO on 3/31/15. Below is the language taken directly from the 1Q15 10Q
(emphasis added):
The Company stopped entering short-term foreign currency forward contracts in March 2015 and had no
outstanding foreign currency forward contracts at March 31, 2015. The Company had foreign currency forward
________________________________________________________________________29
------------------------------------------------------------------contracts outstanding with aggregate notional values of $25.4 million at December 31, 2014 as hedges against
such forecasted foreign-currency-denominated receivables, payables and cash balances.
AVID also reduced it usage of spot contracts, reducing its notional exposure to just $100,000 on 3/31/15. Again,
below is the disclosure directly from its 10Q (emphasis added):
The Company reduced its usage of short-term foreign currency spot contracts in March 2015. At March 31,
2015 and December 31, 2014, the Company had such foreign currency contracts with aggregate notional values
of $0.1 million and $2.8 million, respectively.44
Historically, the combined notional value of its foreign currency contracts had fluctuated between $23.3 million
and $39.5 million as seen in Table 29 below. However, with no explanation, no history of seasonality, and
absolutely no material change in the foreign composition of its business, AVIDs FX hedging contracts
effectively vanished in the month prior to filing its first quarter 2015 10Q.
4) When is a Hedge Really Speculation? Why does AVID Choose Not to Use Hedge Accounting?
In AVIDs 10K, the terms hedge or hedging were used 33 times. Relating to its international exposure,
AVID clearly has appropriate motivation and justification to enter into foreign currency hedging contracts. In
fact, in its 10Q for 1Q15, AVID explicitly states that its foreign currency contracts are hedges.
As a hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash balances
of foreign subsidiaries, the Company enters into short-term foreign currency forward contracts, which typically
mature within 30 days of execution.
The Company may also enter into short-term foreign currency spot and forward contracts as a hedge against the
foreign currency exchange risk associated with certain of its net monetary assets denominated in foreign
currencies.
WE BELIEVE AVID MAY HAVE RECENTLY BEGUN SPECULATING IN THE FOREIGN CURRENCY
MARKET BASED ON THE ILLOGICAL ELIMINATION OF NOTIONAL HEDGING EXPOSURE AND
BECAUSE AVID CHOOSES NOT TO USE HEDGE ACCOUNTING.
________________________________________________________________________30
------------------------------------------------------------------If our opinion is correct, AVID seemingly misrepresented its derivative usage when stating in its most recent
10K, We do not enter into any derivative instruments for trading or speculative
purposes. The facts appear to suggest otherwise.

As documented in Table 29 above, AVID inexplicably removed all but $100,000 of notional FX hedges in
March 2015. We see no reason why AVIDs hedging approach would have changed considering its international
operations are still in place, with associated assets, liabilities, and cash flows that justify similar levels of
hedging. Unless of course AVID is using its hedges as a form of speculation to artificially inflate the
performance of its income statement and adjusted financials.
We find it incredibly disturbing that AVID has elected not to use hedge accounting, despite their clear
acknowledgement of hedging intent. In its 10K filed for 2014, AVID provided disconcerting disclosures related
to its treatment of hedging contracts (emphasis added):
We have not designated these forward contracts as hedging instruments
We may enter into derivative contracts that are intended to economically hedge certain of our risks, even
though we elect not to apply hedge accounting.
Based on publicly available information, as well as our suspicion that AVID included the
benefit from FX in its two most recent earnings calls and releases, we believe AVID is
violating SEC reporting guidelines. It is our opinion that AVIDs motivation to exclude its
hedging contracts from hedge accounting treatment is so that gains from a stronger dollar can
flow through the sales and marketing line (as shown earlier). Consider the following
disclosures, taken directly from AVIDs 10Q for 1Q15 filed with the SEC (emphasis added):
changes in the fair value [are] recorded in our marketing and selling expenses.
The changes in fair value of the foreign currency forward contracts intended to offset foreign currency
exchange risk on cash flows associated with net monetary assets are recorded as gains or losses in the
Companys statement of operations in the period of change, because these contracts have not been accounted
for as hedges.
Because these contracts have not been accounted for as hedges, the changes in fair value of these foreign
currency contracts are recorded as gains or losses in the Companys statement of operations.
Suddenly taking previously consistent notional FX hedging exposures to zero in the last month of a quarter may
just be an innocuous red flag. But combined with two consecutive quarters of highly unusual, unexplained, and
unrealized FX-related gains, AND highly questionable accounting treatment, we believe serious consideration is
warranted from AVIDs investors, analysts, and possibly regulators.
________________________________________________________________________31
------------------------------------------------------------------V. More Financial Reporting Incongruities & Confusing Guidance

If not clear by now, we believe AVID plays fast and loose with its adjusted financial reporting and investor
communication. In our opinion, investors and analysts may have made investment decisions with inaccurate
and/or misleading information.
For example, in AVIDs 4Q14 earnings release, tables were provided showing sequential comparison with
3Q14. However, AVIDs total 3Q14 deferred revenue provided in the 4Q14 earnings release did not match
what was reported for 3Q14 in the third quarter 10Q.
In the 4Q14 earnings release, AVID reported 3Q14 deferred revenue of $419,329 in its backlog schedule as
shown in Table 30 below. The $419,329 reported is the sum of deferred revenue balances for pre-2011
($104,629) and post-2010 ($314,700).
Now consider the same reported metric for 3Q14 found in AVIDs 10Q filed with the SEC (Table 31 below).
Please note that the consolidate balance sheet in the 10Q does not delineate between pre-2011 and post-2010
deferred revenue, but instead provides traditional short- and long-term deferred revenue.
________________________________________________________________________32
-------------------------------------------------------------------
As seen in the balance sheet above, adding short-term deferred revenues of $221,830 to long-term deferred
revenues of $195,507 equates to $417,337 of total deferred revenue. However, this results in a $1.992 million
difference from the $419,329 figure reported for 3Q14 in the 4Q14 earnings release. Statistically significant?
No. But another example of inaccurate and/or misleading financial reporting? We believe yes.
We also believe AVIDs investor communication relating to free cash flow is at best confusing, and at worst
misleading. Compare the two extracts from the 3Q14 and 4Q14 earnings releases in Table 32 below.
________________________________________________________________________33
------------------------------------------------------------------The 3Q14 release includes annual guidance for free cash flow of $15 million to $20 million. There is no
ambiguity here (ignoring that AVID actually means adjusted free cash flow). AVID ultimately missed the 2014
guidance that was provided in the 3Q14 earnings release, instead reporting $12.7 million of free cash flow in
2014 (per their definition that adjusts for restatements and restructuring). Looking at the 4Q14 earnings release,
2015 guidance is provided for free cash flow growth of $18 to $30 million. The $12.7 million of free cash flow
was an actual number in the 4Q14 earnings release, so growth of $18 to $30 million on top of the $12.7
million from 2014 would result in free cash flow guidance for 2015 of $30.7 -$42.7 million.
However, in the same line that AVID guided for growth of $18 to $30 million, AVID also guided for 42% to
136% year-over-year improvement. Considering the $12.7 million of free cash flow AVID reported for 2014, a
42% to 136% year-over-year improvement would result in total free cash flow of $18 - $30 million, which is
meaningfully different than $30.7 $42.7 million.
While it would appear that AVID intended to guide total free cash flow to $18 - $30 million for 2015, many
investors unlikely understood this inconsistency. AVIDs management did correctly articulate its guidance in the
prepared remarks on the earnings call, stating, We expect free cash flow generation to be in a range of $18
million to $30 million as compared to the $12.7 million we reported in 2014.
Unlike so many of the other more problematic issues raised to this point, we believe AVID made an innocent
mistake in its press release. However, management still has an obligation to report concise and unambiguous
metrics. It is not unreasonable to assume some investors may have based investment decisions on this potentially
misleading information before AVIDs earnings call even began the following morning. Perhaps we can chalk
this mistake up to inadequate quality control over financial reporting. However, high frequency slip-ups can
often be a by-product of pervasive adjusted financial manipulations, like those detailed at length herein.
Supporting our opinion that AVIDs attention to financial accuracy is quite poor, the subsequent 1Q15 earnings
release still had the same misleading language of Free cash flow growth of $18 to $30m or 42% to 136% yearon-year improvement.
________________________________________________________________________34
------------------------------------------------------------------VI. Was Managements Prior Sale of Open Solutions a Success or Absolute Disaster?
We believe part of AVIDs turnaround stock promotion hinges on the illusory story that management
successfully sold its last company. While they did sell their prior company, a deeper dive suggests there may be
much more to the success story.
Prior to becoming the CEO of AVID, Louis Hernandez was CEO of Open Solutions from 1999 until its sale to
Fiserv (FISV) in January 2013. AVIDs current CFO John Frederick was also the acting CFO at Open Solutions
from 2009 until its sale to Fiserv. The sell-side has regurgitated the $1 billion sale figure without much context
around the sale itself, when bullishly asserting managements competence and past accomplishments.
While the out-of-context $1 billion sale to Fiserv would seem to enhance the credibility of the CEO and CFO,
we believe a careful examination of Open Solutions back-story reveals the sale may have resulted in a massive
loss for the equity holders.
As background, Carlyle and Providence Equity acquired Open Solutions in January 2007 for a total transaction
value of $1.4 billion (Table 34). At the time of the deal, consensus estimates expected Open Solutions to
generate $452.2 million of revenue in 2007 (Table 35). The company had acquired BISYS in March of 2006 for
$472 million, so we believe the 2007 consensus revenue estimate of $452.2 million was more representative of
the combined run-rate than the 2006 guidance of $387.5 million that included a BISYS partial contribution.
________________________________________________________________________35
-------------------------------------------------------------------
As is well recited among sell-side reports, Fiserv announced on January 14, 2013, that it was buying Open
Solutions for approximately $1 billion in total consideration ($1.015B to be precise). However, parsing through
the acqusition details, the ~ $1 billion total consideration was comprised of: $960 million of assumed debt and
only $55 million for the equity. Further, Fiserv noted a $165 million present valued tax asset was also acquired.
If we account for the $165 million PV of the tax asset, we could argue the net present value outlay by Fiserv for
Open Solutions was just $850 million. Considering Fiserv assumed $960 million of debt, it actually seems like
the equity sponsors were willing to value Open Solutions equity at negative $110 million. As such, we find it
highly misleading to state that Fiservs $1 billion acquisition of Open Solutions was a success.
To the contrary, it appears Open Solutions lost 28% of its enterprise value during the six years between the $1.4
billion buyout and Mr. Hernandezs supposed $1 billion sale to Fiserv. Further, if we assume that Carlyle and
Providence Equitys initial purchase of Open Solutions for $1.4 billion was financed with 68% debt (32%
equity), then the initial debt burden would have been approximately $960 million, which is the same nominal
debt assumed by Fiserv. This implies the equity value eroded by 88% from $440 million ($1.4B - $960M) to $55
million ($1.015B $960M).
This equity implosion seems reasonable based on the publicly available financial collapse that appears to have
occurred under Mr. Hernandezs watch from 2007 through 2013. On Fiservs investor conference call discussing
the Open Solutions transaction, Fiservs management disclosed that Open Solutions has adjusted revenue of
about $320 million.
________________________________________________________________________36
-------------------------------------------------------------------
While there may have been some revenue elimination in the transaction, the 28% overall enterprise value decline
in the Fiserv transaction ($1.4B to $1B), seems relatively consistent with the 29% collapse in Open Solutions
annual revenue run-rate when compared to 2007 expectations (note the 28% decline in enterprise value results in
an 88% equity value decline if we hold debt constant at $960 million).
It is of course possible that we have missed some nuanced element of the two transactions, and we of course
have no way to know how much capital, if any, the equity sponsors extracted while Open Solutions was private.
But what appears clear is that the $1 billion buyout was an absolute disaster for the equity holders. As such, we
believe any positive references to this $1 billion sale are potentially gross misrepresentations that appear
highly inaccurate.
Perhaps more troubling than the specifics of the transaction, are the allegations leveled against Mr. Hernandez by
two former employees who were also shareholders of Open Solutions. In 2012, two seemingly important former
employees of Open Solutions, a former COO and employee of 7 years, as well as the former Head of Marketing
and employee of 14 years, sued Mr. Hernandez and other Open Solutions officers for withholding financial
information and for violating their duty to care for shareholders (Table 39). While we are skeptical of most
litigation brought by former shareholders or employees, in the context of all of our other concerns, it may not be
imprudent to wonder if these allegations reflect a pattern.
________________________________________________________________________37
-------------------------------------------------------------------
________________________________________________________________________38
------------------------------------------------------------------VII. Deteriorating Fundamentals & 2H-Loaded 2015 Guidance

AVIDs new management team has done a brilliant job promoting the stock as a turnaround coming out of its
lengthy restatement. Despite being at the helm since January, 2013, AVIDs management team began its hype
machine towards the end of 2014, focusing on new products, new focus, and renewed momentum - all of which
are contributing to renewed bookings growth (Table 40 below). The sell-side has followed along without much
skepticism or criticism. However, like a basketball suppressed under water, mediocrity can only stay down for so
long before resurfacing to expose the underlying trends. Over the past two quarters, AVID's renewed
momentum appears to have collapsed with reported results that have fallen well short of expectations. AVIDs
management has maintained 2015 guidance for 0% - 3% revenue growth, despite confessing after its brutal
1Q15 that the annual goals would be more back-end weighted than initially expected. Despite the unmistakably
poor results from operations, the stock has completely de-coupled from the deteriorating fundamentals,
increasing 130% over the last twelve months. We believe a unique Russell 2000 rebalancing has created
significant demand for the shares from passive indexers (discussed later). As such, when the artificial liquidity
demand ceases in late June, we believe AVIDs core fundamentals will reassert themselves in stock trading.
Table 40 shows a completely misleading and promotional revenue model from one of AVIDs investor
presentations. The slides message would appear to be that projected revenue growth, excluding the pre-2011
amortized revenue, has turned up strongly, which will continue into the future (the purple line). If you believe
the slide, the underlying revenue growth has just been masked if one looks at GAAP by the declining pre-2011
recognized revenue (green line). While this slide appears enticing, despite the lack of actual percentage growth
markers on the y-axis, we would argue it is irresponsible and misleading. As seen in AVIDs chart (or rather the
impressionist painting considering the lack of numbers), the purple line of post-2010 revenue is drawn up-andto-the-right, with 2014 clearly suggesting a year of growth. Looking simply at the slope of the purple line, it
would probably be a surprise to know that 2014 post-2010 revenue grew by a whopping 0.5%, as depicted by
the dashed orange line that we have added. We do not understand how AVID can responsibly portray 0.5%
growth with a near perfect illustration of a 45-degree growth line, even with the disclaimer at the top of the slide.
________________________________________________________________________39
------------------------------------------------------------------Demonstrating a clear focus on the story, AVIDs management described 2014 as remarkable progress on the
4Q14 earnings call. We are not sure how 0.5% growth can be considered remarkable (emphasis added):
Over the past year, AVID has made some remarkable progress on our three-pronged transformation effort
As a result of solid execution, we have delivered on our commitment to drive improved financial results, while
also building a solid foundation for future growth and expansion.45
Looking beyond revenue, we argued earlier that bookings may be the most misleading and fudge-able metric.
Bookings, assuming reporting and conversion were actually reliable, would be the engine that drives AVIDs
future revenue. Therefore, it was not surprising that a central focus of managements story coming out of its
restatement was that a positive inflection in bookings had arrived.
We believe we had an inflection point for bookings growth in the third quarter of 2013, whereby we reversed the
trend of declining bookings and has since recorded four consecutive quarters of bookings growth. In fact,
quarterly bookings of $126.1 million for the first quarter and $127.7 million in the second quarter of 2014
represents an aggregate improvement of over 3% over the first half of 2013. We expect this growth trend
generally to continue as we execute against our transformative strategy, although we may experience an
occasional quarterly trend break reflecting the choppiness of deal timing and the effect of the restatement
process.46
AVID illustrated this bookings inflection by highlighting the growth in LTM bookings in its investor pitch book,
as well as four consecutive YoY quarters of growth, as shown in Table 41 below.
Unfortunately, the transformational 3% bookings growth reported in 1H14, as well as the 2Q14 bookings
inflection, appear to have quickly reverted back to declines. In the subsequent three quarters since reporting
2Q14, AVIDs bookings did not just decelerate, but actually declined. In 1Q15, AVIDs bookings collapsed to
an 11.2% year-over-year decline, while its trailing-twelve-months bookings declined by 3.7% year-over-year
(Table 42 below).47 There was some FX headwind in this decline, but for context, AVID had already assumed a
4% FX headwind in its 2015 bookings guidance.48 Adjusting for AVIDs 2015 guided FX headwind, bookings
were still down by 7.2% year-over-year in 1Q15, which compares to managements aggressive full year
guidance of up 1% to 5% in constant currency.49
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-------------------------------------------------------------------
We find it curious that investors continue to give AVID the benefit of the doubt about an expected reacceleration
in business trends that underpin part of the stock promote. The two quarters since completing the restatement
suggests poor execution relative to expectations, as well as fundamentals that are inconsistent with a healthy
backdrop, persists. Specifically, 4Q14 and 1Q15 bookings, which is the easiest metric to hit given its
subjectivity, missed the main analysts expectations by 8.7% and 10.3%, respectively. The sell-side has been
undeterred by results that have missed across almost all metrics, as shown in Table 43 below.
As the result of an extremely weak 1Q15, the already aggressive 2015 bookings guidance is even more 2Hweighted and unrealistic. In March 2015, AVID provided annual bookings guidance on its 4Q14 earnings call
that the CFO noted would be tilted towards the second half of the year (emphasis added):
I'd also like to mention that our quarterly [bookings] skew maybe tilted us a bit towards the second half of the
year as we fully implement our digital strategy for Tier 3 customers and the normally strong fourth quarter
seasonality.50
We believe AVIDs management has once again issued unrealistic guidance to support a promotional turnaround
story that seems completely detached from the underlying business trends. As such, a significant overhang has
been created with a high probability the 2H-weighted bookings guidance will be missed. As shown earlier, we
believe AVIDs management has a high degree of subjectively in how it calculates bookings. However, when
________________________________________________________________________41
------------------------------------------------------------------factoring in the massive de-bookings and/or weak bookings-to-revenue conversion, there appears to be no
fundamental justification for AVIDs bookings to suddenly reaccelerate. Reinforcing our opinion that AVID
has either misrepresented its business momentum, or had unacceptably poor backlog-to-revenue conversion, (or
both), we can turn to 4Q14. In September 2014, with just three-plus months remaining in the year, AVID
guided to annual 2014 bookings growth of 3% (Table 44 below). Less than one month later, AVID revised this
bookings growth guidance down to 0% to 3%, before ultimately reporting a bookings decline for 2014 of -0.8%.
While 0.8% may appear to be an insignificant annual decline, it is worth noting this implies that AVID missed its
4Q'14 expectations by 10% (full year bookings missed by $20 million, or $16 million constant currency, which
represented 10% of the $156 million of 4Q'14 bookings).
In addition to the 2014 misses of revenue, bookings, and free cash flow, we have also included AVIDs 2015
guidance in the table above. Considering AVIDs weak start to 2015, generating just $11.8 million of Adjusted
EBITDA (including FX gains discussed earlier) and $4.2 million of FCF (including restructuring and restatement
add-backs) in 1Q15, we believe AVID will miss its 2015 guidance for Adjusted EBITDA and FCF.
Additionally, we believe AVID will miss the 2Q15 implied buy-side estimate of approximately $138.5 million,
which appropriately accounts for managements commentary on deal slippage. [Note: as shown below, the
implied buy-side estimate is different than the sell-side consensus estimate average that does not accurately
reflect managements commentary based on one estimate that is irresponsibly low].
When AVID reported 1Q15 revenue of $119.6 million, they missed the consensus estimate of $131.9 million by
$12.3 million. Management attributed the miss to elongated sales cycles on large deals, as well as a disciplined
approach to avoiding the pressure of accepting unfavorable terms (i.e. lower pricing) in order to squeeze in deals
at the end of the quarter. AVID management emphasized that the large deals that had slipped out of March had
closed during the month of April (emphasis added):
[larger projects] tend to be longer discussions and have elongated as a result the sales process. As we've said in
the past, we're focused on growing profitability and signing the right deals for us and for our customers.
Question - Steven Frankel: Good afternoon. I, like everybody else, is trying to get my arms around the significant
shortfall relative to investor expectations. And just maybe can you give us a little more detail on the stretching out
of product cycles and why you don't think that's something that might happen every quarter this year and so you
have trouble converting to revenue?
________________________________________________________________________42
------------------------------------------------------------------Answer - Louis Hernandez, Jr.: So the enterprise selling cycle around these products we're talking about, which
is really around large strategic enterprise deals, really what we saw was we had a pretty good line of sight at
the end of the quarter on a number of very large deals. And we saw those deals close in a matter of weeks after
the end of the quarter. Now if we wanted to, literally, we could have said yes to a number of these deals at the
end of the quarter and took the deals the way they were. Instead, we made a choice to really [solve] for deals that
we thought were generally better for the company. And we felt like, as we got through the month of April and we
saw those deals indeed close, that gets us the comfort that this really was a trend that was manageable.
Based on Mr. Hernandezs assurances that the large slipped deals closed in April, presumably the bulk of the
shortfall, if not all of it, should have then closed in April. If we assume the $12.3 million of revenue shortfall
shifted from 1Q to 2Q, as managements comments suggest, then the consensus 2Q15 revenue estimate should
have increased from $126.2 million prior to the earnings call to $138.5 million, all else equal (Table 45 below).
As such, we believe most buy-side investors will use $138.5 million for 2Q15 revenue as the true litmus test for
whether AVIDs management was sincere about its underlying operations.
Ironically, despite being the most vocal promoter, Dougherty inexplicably reduced its 2Q15 estimate by $4.4
million, despite the visible frustration in the Q&A segment of the call pasted above. This is even odder
considering the Dougherty analyst is quite good. Despite the $12.3 million 1Q15 miss, related to the deals that
were simply pushed into April, BWS Financial only increased its 2Q15 estimate by $1.4 million. The net result
of the sell-side refusing to hold management accountable for the push-outs was that sell-side consensus estimates
actually declined by $1.4 million to a laughably low $124.8 million. While beats are generally received
favorably by investors, we believe the buy-side 2Q15 revenue benchmark for AVID is $138.5 million. We
understand why analysts would want to justify their ratings and bullish arguments by positioning AVID for a
meet (or beat) after two disastrous quarters. However, a 2Q15 revenue number below the $138.5 million
implied by the 1Q shortfall falling to 2Q will represent a buy-side miss and further undermine managements
credibility. No matter what AVID reports in 2Q15, we believe they have minimal chance of hitting the 2H15
expected ramp.
________________________________________________________________________43
------------------------------------------------------------------VIII. Fair Value is $5.53, Representing 69% Downside, with Russell 2000 Buying Nearly Complete
We believe AVIDs current valuation has severely decoupled from the business's underlying fundamentals. The
combination of misleading financial metrics and a wildly promotional turnaround story espoused by
management and the sell-side have effectively created a materially misvalued equity price. However, we believe
the most significant contributor to AVID's strength in 2015 has been the ephemeral buying related to AVID's
addition back into the Russell 2000 Index.
When AVID was delisted from the NASDAQ, it was removed from the Russell 2000 index in 2014. However,
after regaining its NASDAQ listing, AVID again became eligible for the Russell 2000 index, based on its market
cap exceeding the ~ $170 million threshold. As such, all investors, ETF's, and passive indices that track the
Russell 2000 Index are required to own the appropriate weighting of AVID shares. AVIDs shares have
exhibited incessant accumulation over the last several months, as arbs and indexers begin their large purchase
requirements. According to Credit Suisse, the June 26, 2015 Russell 2000 Index rebalance has resulted in
demand for approximately 3.4 million AVID shares (Table 46). This represents slightly more than 11 days of
average trading volume. This one-time transitory demand driver helps explain AVID's persistent strength,
especially in the face of disappointing earnings (Table 47). As can be seen in the chart below, AVID's stock
gapped down sharply after each of its last two earnings reports. However, in the face of approximately 3.4
million shares that needed to be acquired over a few months, the stock miraculously levitated out of each
disappointment. With months of artificial demand nearing its end (preliminary R2K addition/deletion lists began
circulating in February), we believe a large stock price decline will occur that brings AVID sellers back inline
with a lower level of natural stock buyers.
________________________________________________________________________44
------------------------------------------------------------------As the unusually large benefit of the Russell 2000 rebalancing runs its course, we believe AVID shares will rerate towards fair value, which may happen quickly considering the momentum investor base that appears to have
missed so many warnings signs.
Ignoring the hype of the investor presentations, there is simply no evidence in the financial results that supports
the argument AVID is in the midst of a successful turnaround. Valuing AVID requires analyzing its financials
with a dose of reality. As discussed earlier, we believe sell-side estimates for 2015 and beyond are unrealistic.
Current Bloomberg consensus numbers are not yet updated for BWSs revised numbers or Sidoti estimates from
the June 17 initiation. In Table 48 below, we show the estimates of these three analysts, as well as the resulting
average, which we would expect to become the Bloomberg consensus once updated ( we exclude Sidotis
EBITDA and EPS estimates as they are based on GAAP and not comparable to the other two adjusted analyst
estimates). Currently, the sell-side analysts expect AVID to grow 2016 revenues, excluding pre-2011
amortization, by 13.8% on average (Table 48 below). For perspective on how unreasonable this appears,
consider AVID has missed the last two quarters, while failing to generate organic growth that exceeded 6.2% in
any year over the last decade! Even worse, this 6.2% high water mark for growth (2010) benefitted from a
uniquely easy comparison after revenue collapsed by 18.5% in 2009.
In Table 49 below, we have provided our estimates for 2015-2017, which make generously bullish assumptions.
Our key assumptions for AVID are as follows (all assumptions EXCLUDE pre-2011 deferred revenues):
We assume revenue growth of 5% (2015), 3% (2016), and 3% (2017). These assumptions for revenue
generously assume historic trends reverse, specifically the 4.3% revenue decline in 2013, miniscule 0.5%
increase in 2014, and 1Q'15 YoY decline of 6.4%. The 5% revenue growth for 2015 is at the high-end of
constant currency bookings growth guidance of 1-5%. Said another way, we are giving management credit
for delivering bookings growth that will unlikely materialize.
We assume gross margins improve to 55.0% from 2015 2017. This again appears generous considering a
53.6% gross margin in 2014 and 53.7% gross margin in 1Q'15. With the bulk of restructuring behind AVID,
the 130 basis point increase from 1Q'15 to full year 2015 is an optimistic assumption, in our view, yet we
will make it for the sake of the argument.
We assume 2015 operating expenses at the midpoint of management's guidance for flat to down 4%,
implying $265.0 million of opex. We again generously assume opex stays flat in dollar terms for 2016 and
2017, despite giving AVID credit for acceleration in revenue growth.
With the generous assumptions listed above, we expect AVID to generate pure Adjusted EBITDA (excluding the
pre-2011 deferred revenue accounting artifact) of $10.8 million in 2016 and $18.6 million in 2017. Earnings per
share are also expected to be negative, with a loss of ($0.22) and (-$0.03) in 2016 and 2017, respectively. Note
that these results would still represent a commendable improvement from negative $19.2 million of EBITDA in
________________________________________________________________________45
------------------------------------------------------------------2014, and an even worse run-rate for 2015 extrapolating the negative $5.9 million of EBITDA in 1Q'15 (**
again adjusted to properly exclude the pre-2011 accounting artifact). With only $1.0 million of pre-2011 deferred
revenue amortization remaining in 2017, the reported metrics should be very similar to GAAP results - Adjusted
EBITDA of $19.6 million and EPS of $0.00. Net/Net, we expect AVID's earnings will be ZERO two years from
now, even with a generous set of assumptions.
Despite the miserable outlook for growth and earnings, we have applied a very generous multiple of 18.0x
EV/EBITDA on 2016 expectations. For a sanity check, and to make sure we have been adequately fair, we use
Dougherty's target multiple as a proxy. As seen in Table 50 on the following page, when Dougherty initiated on
AVID (January 2015), the well-intentioned analyst set an $18 price target based on 10x his 2015 EBITDA
estimates. His EBITDA estimate of $72.3 million inadvertently included $58.2 million 51 of pre-2011 deferred
revenue amortization that will evaporate over the next two years. Had the analyst applied the same 10x multiple
on the correct $14.1 million of EBITDA, which excludes the amortization of pre-2011 deferred revenues, his
price target would have been closer to $4.00, or 78% lower than the published $18 target. We do not believe
investors will knowingly pay 10x for $58.2 million of amortizing revenue that is a by-product of an accounting
restatement. However, we are willing to generously apply the same 10x multiple (10.4x to be precise) to 2017
EBITDA that Dougherty used for its price target, despite: misleading financials, metrics like bookings, EBITDA
and cash flow that we believe are disingenuous, disclosure shenanigans with hedges and opex, fundamentals that
have appeared significantly weaker than management's turnaround spin would suggest, and a 2H'15 ramp that
appears way too high.
We arrive at a fair value of $5.53, representing 69% downside to the current price.
________________________________________________________________________46
-------------------------------------------------------------------
________________________________________________________________________47
-------------------------------------------------------------------
Credit Suisse estimates as illustrated in Table 46

http://www.americanbanker.com/issues/177_189/lawsuit-charges-open-solutions-with-withholding-financial-data-10531371.html
3 AVID Customer Tier Growth Strategy Presentation May 2015
4
AVID 1Q14 Earnings Call, September 9, 2014
5 http://www.sec.gov/Archives/edgar/data/896841/000089684115000018/avid-12312014x10k.htm
8 http://www.sec.gov/Archives/edgar/data/896841/000089684112000055/exhibit_99-1x10292012.htm
9 AVID Investor Presentation of September 12, 2014. Page 36.
10 http://www.sec.gov/Archives/edgar/data/896841/000089684111000031/f10q_033111.htm
11 http://www.sec.gov/Archives/edgar/data/896841/000089684111000022/f10k_123110.htm. Consists of short-term deferred
revenues of $39.1 and $43.6m and long-term deferred revenues of $7.3m and $5.9m for 2009 and 2010, respectively.
14
AVID 1Q14 Earnings Call, September 9, 2014
16 AVID Investor Presentation of September 12, 2014. Page 63
17 http://www.sec.gov/Archives/edgar/data/896841/000089684115000019/a03-16x2015exhibit.htm
19 http://www.sec.gov/Archives/edgar/data/896841/000089684115000044/a05-07x20158xkxexhibit991.htm
20 https://www.sec.gov/rules/final/33-8176.htm
21
1Q14 earnings call on 9/24/14
23 http://www.sec.gov/Archives/edgar/data/896841/000089684115000046/avid-03312015x10q.htm
24 AVID 1Q15 earnings call
25 www.debevoise.com/files/publication/1a8b6eca-af5c-475e-af38b51b4c4dbe49/Presentation/publicationattachment/b47782ad-331d-4091-8d3a33048cbfe2c1/Major%20Changes%20Memo.pdf
26 http://www.sec.gov/rules/final/33-8176.htm#p157_26120
31 Dougherty & Company AVID note on 3/17/15
34 AVID Investor Presentation on March 17, 2015. Page 4
39 AVID 4Q14 earnings call.
41
http://www.sec.gov/Archives/edgar/data/896841/000089684115000046/avid-03312015x10q.htm
46 AVID 1Q14 earnings call. 9/24/14
2
________________________________________________________________________48

Avid Technology, Inc. (AVID) : Ugly Financials With Loads of Deception

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Avid Technology, Inc. (AVID) : Ugly Financials With Loads of Deception

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COPPERFIELD RESEARCH

Avid Technology, Inc. (AVID): Ugly Financials with Loads of Deception

IMPORTANT Disclaimer Please read this Disclaimer in its entirety before

------------------------------------------------------------------I. Background & Accounting Restatement:

------------------------------------------------------------------I. Background & Accounting Restatement

2) Free Cash Flow Wildly Overstated by Adjustments and Unsustainable Inflows

314,700 + 119,850 = 434,550, NOT 405,000

3) FX Forward Contracts Suddenly Discontinued in March 2015

purposes. The facts appear to suggest otherwise.

------------------------------------------------------------------V. More Financial Reporting Incongruities & Confusing Guidance

------------------------------------------------------------------VII. Deteriorating Fundamentals & 2H-Loaded 2015 Guidance

Credit Suisse estimates as illustrated in Table 46

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