Document




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
 
(Mark One)
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2018
 
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________
 
Commission File Number:  1-36254
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
04-2977748
(I.R.S. Employer
Identification No.)
 
75 Network Drive
Burlington, Massachusetts  01803
(Address of Principal Executive Offices, Including Zip Code)

(978) 640-6789
(Registrant’s Telephone Number, Including Area Code)
__________________
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 under the Exchange Act.
 
Large Accelerated Filer ¨
Non-accelerated Filer ¨
(Do not check if smaller reporting company)
 
Accelerated Filer x
Smaller Reporting Company ¨
Emerging growth company ¨
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Exchange Act).  Yes ¨   No x

The number of shares outstanding of the registrant’s Common Stock, par value $0.01, as of August 6, 2018 was 41,790,314.




AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-Q that relate to future results or events are forward-looking statements. Forward-looking statements may be identified by use of forward-looking words, such as “anticipate,” “believe,” “confidence,” “could,” “estimate,” “expect,” “feel,” “intend,” “may,” “plan,” “should,” “seek,” “will” and “would,” or similar expressions.

Forward-looking statements may involve subjects relating to, among others, the following:

our ability to successfully implement our strategy, including our cost saving strategies;

the anticipated trends and developments in our markets and the success of our products in these markets;

our ability to develop, market and sell new products and services;

our business strategies and market positioning;

our ability to achieve our goal of expanding our market positions;

anticipated trends relating to our sales, financial condition or results of operations, including our shift to a recurring revenue model and complex enterprise sales with elongated sales cycles;

the expected timing of recognition of revenue backlog as revenue, and the timing of recognition of revenues from subscription offerings;

our ability to successfully consummate acquisitions or investment transactions and successfully integrate acquired businesses;

our anticipated benefits and synergies from, and the anticipated financial impact of, any acquired business;

the anticipated performance of our products;

changes in inventory levels;

plans regarding repatriation of foreign earnings;

the outcome, impact, costs and expenses of any litigation or government inquiries to which we are or become subject;

the effect of the continuing worldwide macroeconomic uncertainty on our business and results of operations, including Brexit;

our ability to accelerate growth of our Cloud-enabled platform;

our compliance with covenants contained in the agreements governing our indebtedness;

our ability to service our debt and meet the obligations thereunder, including our ability to satisfy our conversion and repurchase obligations under our convertible notes due 2020;

seasonal factors;

fluctuations in foreign exchange and interest rates;

the risk of restatement of our financial statements;





estimated asset and liability values and amortization of our intangible assets;

our capital resources and the adequacy thereof; and

worldwide political uncertainty, in particular the risk that the United States may withdraw from or materially modify NAFTA or other international trade agreements.

Actual results and events in future periods may differ materially from those expressed or implied by forward-looking statements in this Form 10-Q. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed herein and in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, in Part II and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”). In addition, the forward-looking statements contained in this Form 10-Q represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

We own or have rights to trademarks and service marks that we use in connection with the operation of our business.  Avid is a trademark of Avid Technology, Inc.  Other trademarks, logos, and slogans registered or used by us and our subsidiaries in the United States and other countries include, but are not limited to, the following:  Avid Everywhere, Avid NEXIS, AirSpeed, EUCON, iNEWS, Interplay, MediaCentral, Mbox, Media Composer, NewsCutter, Nitris, Pro Tools, Sibelius and Symphony.  Other trademarks appearing in this Form 10-Q are the property of their respective owners.





PART I - FINANCIAL INFORMATION

ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net revenues:
 
 
 
 
 
 
 
Products
$
46,379

 
$
47,655

 
$
92,789

 
$
98,661

Services
52,236

 
54,718

 
103,763

 
107,819

Total net revenues
98,615

 
102,373

 
196,552

 
206,480


 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
Products
26,347

 
26,489

 
52,642

 
50,993

Services
13,986

 
14,181

 
27,971

 
28,275

Amortization of intangible assets
1,950

 
1,950

 
3,900

 
3,900

Total cost of revenues
42,283

 
42,620

 
84,513

 
83,168

Gross profit
56,332

 
59,753

 
112,039

 
123,312


 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
15,985

 
16,991

 
31,670

 
35,879

Marketing and selling
27,759

 
29,018

 
53,891

 
54,829

General and administrative
14,041

 
13,644

 
27,996

 
28,075

Amortization of intangible assets
363

 
363

 
726

 
726

Restructuring costs, net
268

 
6,063

 
3,175

 
7,046

Total operating expenses
58,416

 
66,079

 
117,458

 
126,555


 
 
 
 
 
 
 
Operating loss
(2,084
)
 
(6,326
)
 
(5,419
)
 
(3,243
)

 
 
 
 
 
 
 
Interest and other expense, net
(6,278
)
 
(3,918
)
 
(11,637
)
 
(8,764
)
Loss before income taxes
(8,362
)
 
(10,244
)
 
(17,056
)
 
(12,007
)
Provision for income taxes
144

 
587

 
399

 
739

Net loss
$
(8,506
)
 
$
(10,831
)
 
$
(17,455
)
 
$
(12,746
)

 
 
 
 
 
 
 
Net loss per common share – basic and diluted
$(0.20)
 
$(0.26)
 
$(0.42)
 
$(0.31)

 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
41,587

 
40,953

 
41,496

 
40,863

Weighted-average common shares outstanding – diluted
41,587

 
40,953

 
41,496

 
40,863

   
The accompanying notes are an integral part of the condensed consolidated financial statements.

1



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(8,506
)
 
$
(10,831
)
 
$
(17,455
)
 
$
(12,746
)
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,204
)
 
2,939

 
(1,056
)
 
4,789

 
 
 
 
 
 
 
 
Comprehensive loss
$
(10,710
)
 
$
(7,892
)
 
$
(18,511
)
 
$
(7,957
)
   
The accompanying notes are an integral part of the condensed consolidated financial statements.



2



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
 
June 30,
2018

December 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
60,209

 
$
57,223

Restricted cash
8,500

 

Accounts receivable, net of allowances of $1,164 and $11,142 at June 30, 2018 and December 31, 2017, respectively (Note 1)
47,703

 
40,134

Inventories
31,752

 
38,421

Prepaid expenses
10,731

 
8,208

Contract assets
15,544

 

Other current assets
6,867

 
10,341

Total current assets
181,306

 
154,327

Property and equipment, net
19,442

 
21,903

Intangible assets, net
9,057

 
13,682

Goodwill
32,643

 
32,643

Long-term deferred tax assets, net
1,282

 
1,318

Other long-term assets
10,222

 
10,811

Total assets
$
253,952

 
$
234,684

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,547

 
$
30,160

Accrued compensation and benefits
19,024

 
25,466

Accrued expenses and other current liabilities
39,373

 
31,549

Income taxes payable
1,720

 
1,815

Short-term debt
1,400

 
5,906

Deferred revenue
82,470

 
121,184

Total current liabilities
177,534

 
216,080

Long-term debt
230,661

 
204,498

Long-term deferred revenue
15,228

 
73,429

Other long-term liabilities
7,403

 
9,247

Total liabilities
430,826

 
503,254

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Stockholders’ deficit:

 
 
Common stock
423

 
423

Additional paid-in capital
1,028,334

 
1,035,808

Accumulated deficit
(1,193,791
)
 
(1,284,703
)
Treasury stock at cost
(8,358
)
 
(17,672
)
Accumulated other comprehensive loss
(3,482
)
 
(2,426
)
Total stockholders’ deficit
(176,874
)
 
(268,570
)
Total liabilities and stockholders’ deficit
$
253,952

 
$
234,684

   
The accompanying notes are an integral part of the condensed consolidated financial statements.


3



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017 (1)
Cash flows from operating activities:
 
 
 
Net loss
$
(17,455
)

$
(12,746
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
Depreciation and amortization
10,899


11,531

Recovery for doubtful accounts
(43
)

(214
)
Stock-based compensation expense
2,255


3,393

Non-cash provision for restructuring
934

 
2,477

Non-cash interest expense
6,149


5,214

Unrealized foreign currency transaction (gains) losses
(921
)

4,763

Provision for (benefit from) deferred taxes
5


(746
)
Changes in operating assets and liabilities:
 

 
Accounts receivable
13,525


9,343

Inventories
653


9,482

Prepaid expenses and other assets
2,454


(3,287
)
Accounts payable
3,426


980

Accrued expenses, compensation and benefits and other liabilities
(12,275
)

(3,419
)
Income taxes payable
(37
)

991

Deferred revenue
(10,070
)

(21,690
)
Net cash (used in) provided by operating activities
(501
)

6,072



 

Cash flows from investing activities:
 

 
Purchases of property and equipment
(4,888
)

(3,108
)
Increase in other long-term assets
(17
)

(23
)
Net cash used in investing activities
(4,905
)

(3,131
)




Cash flows from financing activities:
 

 
Proceeds from long-term debt
22,688



Repayment of debt
(4,723
)

(2,500
)
Proceeds from the issuance of common stock under employee stock plans
256


217

Common stock repurchases for tax withholdings for net settlement of equity awards
(649
)

(497
)
Net cash provided by (used in) financing activities
17,572


(2,780
)






Effect of exchange rate changes on cash, cash equivalents and restricted cash
(399
)

625

Net increase in cash, cash equivalents and restricted cash
11,767


786

Cash, cash equivalents and restricted cash at beginning of period
60,433


49,948

Cash, cash equivalents and restricted cash at end of period
$
72,200


$
50,734

Supplemental information:
 
 
 
Cash and cash equivalents
$
60,209

 
$
47,434

Restricted cash
8,500

 

Restricted cash included in other long-term assets
3,491

 
3,300

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
72,200

 
$
50,734

 
 
 
 
Cash (refunded) paid for income taxes
$
(2,051
)
 
$
261

Cash paid for interest
$
5,829

 
$
4,450

  
The accompanying notes are an integral part of the condensed consolidated financial statements.

(1) The Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2017 has been revised to reflect the adoption, on January 1, 2018, of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The Condensed Consolidated Statements of Cash Flows reflects the changes during the periods in the total of cash, cash equivalents, and restricted cash. Therefore, restricted cash activity is included with cash when reconciling the beginning-of-period and end-of-period total amounts shown. Refer to Note 1 for further discussion.

4



AVID TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
FINANCIAL INFORMATION

The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “we” or “our”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. We prepared the accompanying unaudited condensed consolidated financial statements in accordance with the instructions for Form 10-Q and, therefore, include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 2017 was derived from our audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. We filed audited consolidated financial statements as of and for the year ended December 31, 2017 in our Annual Report on Form 10-K for the year ended December 31, 2017, which included information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017.

Our preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from our estimates.

Subsequent Events

We evaluated subsequent events through the date of issuance of these financial statements and no other subsequent events required recognition or disclosure in these financial statements.

Significant Accounting Policies - Revenue Recognition

We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. The Company accounts for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance and (v) collectability is probable. We recognize revenue upon transfer of control of promised products or services to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts, in an amount that reflects the consideration we expect to receive in exchange for those products or services.

See Note 9 for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.

We often enter into contractual arrangements that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These arrangements may include a combination of products, support, training and professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price (“SSP”) of each distinct performance obligation.

Our process for determining SSP for each performance obligation involves significant management judgment. In determining SSP, we maximize observable inputs and consider a number of data points, including:
the pricing of standalone sales (in the instances where available);
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis;

5



other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  We reduce transaction prices for estimated returns and other allowances that represent variable consideration under Accounting Standards Codification (“ASC”) Topic 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities.  Other forms of contingent revenue or variable consideration are infrequent.

While not a common practice for us, in the event we grant the customer the option to acquire additional products or services in an arrangement, we consider if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., an incremental discount compared to the range of discounts typically given for similar products or services).  If a material right is deemed to exist, we account for the option as a distinct performance obligation and recognize revenue when those future products or services are transferred or when the option expires.

We also record as revenue all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities.

We apply the practical expedient to not adjust the transaction price for the effects of a significant financing component when we expect that the period between when we transfer a good or service to a customer and when the customer pays for that good or service will be one year or less.  Payments under our contracts are typically due within in a short period from when our performance obligations are satisfied.

We apply the practical expedient for the deferral of sales commissions and other contract acquisition costs, which are expensed as incurred, where the amortization period would be one year or less.

Recently Adopted Accounting Pronouncements

On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. We recorded a net reduction to opening accumulated deficit of approximately $108 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The primary impact of ASC 606 that resulted in a significant decrease in deferred revenue is that vendor specific objective evidence of fair value is no longer required to recognize revenue for distinct software products upon delivery, which allows recognition upon delivery rather than on a ratable basis over a period of time.

A summary of the changes to balance sheet line items that resulted from the adoption of ASC 606 as of January 1, 2018 is as follows (in thousands):


6



 
As of January 1, 2018
 
As Previously Reported
 
Impact of Adoption of Topic 606 (5)(6)
 
As Adjusted(6)
Assets:
 
 
 
 
 
Accounts receivable, net(1)
$
40,134

 
$
21,088

 
$
61,222

Contract assets(2)

 
6,579

 
6,579

Inventory(3)
38,421

 
(5,716
)
 
32,705

Other long-term assets
10,811

 
865

 
11,676

Total assets
$
234,684

 
$
22,816

 
$
257,500

Liabilities:
 
 
 
 
 
Accrued expenses and other current liabilities (1)
$
31,549

 
$
11,139

 
$
42,688

Deferred revenue (current portion) (4)
121,184

 
(41,611
)
 
79,573

Long-term deferred revenue (4)
73,429

 
(55,079
)
 
18,350

Total liabilities
$
503,254

 
$
(85,551
)
 
$
417,703

Stockholders’ deficit:
 
 
 
 
 
Accumulated deficit
(1,284,703
)
 
108,367

 
(1,176,336
)
Total stockholders’ deficit
$
(268,570
)
 
$
108,367

 
$
(160,203
)

(1) 
The increase in accounts receivable and accrued expenses and other current liabilities is due to the reclassification of allowances for sales returns, rebates and other adjustments to selling prices that are considered variable consideration under ASC 606 and are now presented as a liability on our balance sheet. Accounts receivable also increased due to advanced contractual support billings now being recorded on a gross basis in accounts receivable when it is due, rather than being net against corresponding unamortized deferred revenue.
(2) 
For subscription contracts, we are now required under ASC 606 to record contract assets for annual and multi-year subscriptions that are billed monthly, resulting in an increase in contract assets at the date of adoption. In addition, some of our enterprise agreements have fixed payment schedules whereas the timing of the fulfillment of performance obligations under the contracts can vary, which can result in the fulfillment of performance obligations exceeding contract billings, which also results in contract assets.
(3) 
The reduction is due to inventory and deferred costs that were directly attributable to deferred revenue transactions that were reduced or eliminated due to the adoption of ASC 606 (as described in footnote 4 below), necessitating the elimination of corresponding inventory and deferred costs associated with those deferred revenue transactions.
(4) 
The reduction is primarily attributable to the elimination of the requirement to have vendor specific objective evidence of fair value for undelivered elements that existed under ASC 985, the prior applicable accounting guidance, for software products, which no longer precludes revenue recognition under ASC 606.
(5) See Note 9 for a further description of the components of revenue and related performance obligations under ASC 606 that resulted in cumulative changes to balance sheet accounts as a result of the adoption of ASC 606.
(6) The impact of the adoption of ASC 606 reported in our Form 10-Q for the three months ended March 31, 2018 has been revised in this filing to reflect an additional reduction to deferred revenue and accumulated deficit as of January 1, 2018 of $3.8 million.
The adoption of Topic 606, as compared to legacy GAAP required for revenue recognition, did not have a significant impact on revenue or net loss for the three and six months ended June 30, 2018.  The impact of ASC 606 to balance sheet line items as of June 30, 2018, after reflecting the opening balance sheet adjustments described in detail above, was not material. There was no tax impact associated with the adoption because our deferred tax assets related to deferred revenue have a full valuation allowance.

In March 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), No. 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 118. The guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect and codify SAB No. 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment.  The ASU became effective upon issuance. We had applied SAB 118 upon the original issuance in December, 2017 prior to the codification in ASC 740. See discussion below regarding the status of our accounting for the impacts of the Tax Cuts and Jobs Act (TCJA).


7



On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The TCJA changed many aspects of U.S. corporate income taxation and included reduction of the corporate income tax rate from 35% to 21% , implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The TCJA was effective as of December 31, 2017 and at that time we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. As of June 30, 2018, we have not completed our accounting for the tax effects of the TCJA nor have we recorded any adjustments during the quarter ended June 30, 2018. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the one year measurement period guidance outlined in Staff Accounting Bulletin No. 118. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the TCJA. The accounting is expected to be complete within the one year measurement period particularly after the 2017 U.S. corporate income tax return is filed in 2018.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow (Topic 230). The guidance reduces diversity in how certain cash receipts and cash payments are presented and classified in the Statements of Cash Flows. Certain of ASU No. 2016-15 requirements are as follows: (i) cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, (ii) contingent consideration payments made soon after a business combination should be classified as cash outflows for investing activities and cash payment made thereafter should be classified as cash outflows for financing up to the amount of the contingent consideration liability recognized at the acquisition date with any excess classified as operating activities, (iii) cash proceeds from the settlement of insurance claims should be classified on the basis of the nature of the loss, (iv) cash proceeds from the settlement of Corporate-Owned Life Insurance, or COLI, Policies should be classified as cash inflows from investing activities and cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities and (v) cash paid to a tax authority by an employer when withholding shares from an employee's award for tax-withholding purposes should be classified as cash outflows for financing activities. We adopted the guidance on January 1, 2018. The adoption of ASU 2016-15 had no material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740). The guidance requires companies to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the income statement as income tax expense (or benefit) in the period in which the transfer occurs. We adopted the guidance on January 1, 2018. The adoption of ASU 2016-16 had no impact on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires companies to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, companies will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet is required. We adopted the guidance on January 1, 2018. The adoption of ASU 2016-18 had no material impact on our consolidated financial statements. Restricted cash amounts, presented within the statements of financial position and cash flows, are cash collateralized letters of credit that are used as security deposits in connection with our facility leases and operations.

Recent Accounting Pronouncements to be Adopted

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The guidance requires an entity to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The new guidance becomes effective for us on January 1, 2019, and early adoption is permitted upon issuance. We are currently evaluating the impact of this guidance on our consolidated financial statements and have compiled an initial inventory of our leases. These leases are primarily related to office space in the United States and foreign locations and are currently classified as operating leases under generally accepted accounting principles.

2.
NET INCOME PER SHARE

Net income per common share is presented for both basic income per share (“Basic EPS”) and diluted income per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common share equivalents outstanding during the period.

The potential common shares that were considered anti-dilutive securities were excluded from the diluted earnings per share calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized

8



compensation cost per share was greater than the average market price of our common stock for the relevant period, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to our employees that vest based on performance conditions, market conditions, or a combination of performance and market conditions.

The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities at June 30, 2018 and 2017.
 
June 30, 2018
 
June 30, 2017
Options
943

 
2,382

Non-vested restricted stock units
2,677

 
3,163

Anti-dilutive potential common shares
3,620

 
5,545


On June 15, 2015, we issued $125.0 million aggregate principal amount of our 2.00% Convertible Senior Notes due 2020, or the Notes. The Notes are convertible into cash, shares of our common stock or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, we entered into a capped call transaction with a third party. We use the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into shares of our common stock but our stock price was less than the conversion price as of June 30, 2018 and 2017, and, therefore, the Notes are excluded from Diluted EPS. The Capped Call is not reflected in diluted net income per share as it will always be anti-dilutive.

3.
FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

We measure deferred compensation investments on a recurring basis. As of June 30, 2018 and December 31, 2017, our deferred compensation investments were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are money market and mutual funds. Assets valued based on other observable inputs and classified as Level 2 are insurance contracts.

The following tables summarize our deferred compensation investments measured at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
June 30,
2018
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
1,546

 
$
407

 
$
1,139

 
$


 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31, 2017
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
1,743

 
$
484

 
$
1,259

 
$


Financial Instruments Not Recorded at Fair Value


9



The carrying amounts of our other financial assets and liabilities including cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement. As of June 30, 2018, the net carrying amount of the Notes was $107.4 million, and the fair value of the Notes was approximately $108.3 million based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy.

4.
INVENTORIES

Inventories consisted of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Raw materials
$
11,311

 
$
11,217

Work in process
583

 
397

Finished goods
19,858

 
26,807

Total
$
31,752

 
$
38,421


As of June 30, 2018 and December 31, 2017, finished goods inventory included $4.0 million and $8.2 million, respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced. As discussed in Note 1, $5.7 million of inventory was eliminated upon the adoption of ASC 606 on January 1, 2018 as such inventory was directly attributable to deferred revenue transactions that were also eliminated upon adoption.

5.
INTANGIBLE ASSETS AND GOODWILL

Amortizing identifiable intangible assets related to our acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for our products consisted of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
 
 Gross
 
Accumulated Amortization
 
 Net
 
 Gross
 
Accumulated Amortization
 
Net
Completed technologies and patents
$
58,365

 
$
(50,728
)
 
$
7,637

 
$
58,609

 
$
(47,072
)
 
$
11,537

Customer relationships
54,838

 
(53,418
)
 
1,420

 
54,946

 
(52,801
)
 
2,145

Trade names
1,346

 
(1,346
)
 

 
1,346

 
(1,346
)
 

Capitalized software costs
4,911

 
(4,911
)
 

 
4,911

 
(4,911
)
 

Total
$
119,460

 
$
(110,403
)
 
$
9,057

 
$
119,812

 
$
(106,130
)
 
$
13,682

 
Amortization expense related to all intangible assets in the aggregate was $2.3 million for both the three months ended June 30, 2018 and 2017, and $4.6 million for both the six months ended June 30, 2018 and 2017. We expect amortization of acquired intangible assets to be $4.6 million for the remainder of 2018 and $4.4 million in 2019.

The acquisition of Orad in 2015 resulted in goodwill of $32.6 million as of June 30, 2018 and December 31, 2017.


10



6.
OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Deferred rent
$
1,677

 
$
2,970

Accrued restructuring
447

 
731

Deferred compensation
5,279

 
5,546

   Total
$
7,403

 
$
9,247


7.
COMMITMENTS AND CONTINGENCIES

Commitments

We entered into a long-term agreement to purchase a variety of information technology solutions from a third party in the second quarter of 2017, which included an unconditional commitment to purchase a minimum of $12.8 million of products and services over the initial three-year term of the agreement. We have purchased $3.2 million pursuant to this agreement as of June 30, 2018 to develop Azure certified solutions.

We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at June 30, 2018, be eligible to draw against the letters of credit to a maximum of $1.3 million in the aggregate. The letters of credit are subject to aggregate reductions provided we are not in default under the underlying leases and meet certain financial performance conditions. In no case will the letters of credit amounts be reduced to below $1.2 million in the aggregate throughout the lease periods, all of which extend to May 2020.

We also have letters of credit in connection with security deposits for other facility leases totaling $1.1 million in the aggregate, as well as letters of credit totaling $1.4 million that otherwise support our ongoing operations. These letters of credit have various terms and expire during 2018 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.

We issued a letter of credit totaling $8.5 million to one of our sole-source suppliers in February 2018. The supplier is eligible to draw on the letter of credit in the event that we are insolvent or unable to pay on our purchase orders for certain key hardware components of our product. The letter of credit is valid for one year from its issuance date, and may automatically renew based on the terms of the underlying agreement.

Contingencies

Our industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described below, we are involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. We do not believe these matters will have a material adverse effect on our financial position or results of operations. However, the outcome of legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, our financial position or results of operations may be negatively affected by the unfavorable resolution of one or more of these proceedings for the period in which a matter is resolved. Our results could be materially adversely affected if we are accused of, or found to be, infringing third parties’ intellectual property rights.

In November 2016, a purported securities class action lawsuit was filed in the U.S. District Court for the District of Massachusetts (Mohanty v. Avid Technology, Inc. et al., No. 16-cv-12336) against us and certain of our executive officers seeking unspecified damages and other relief on behalf of a purported class of purchasers of our common stock between August 4, 2016 and November 9, 2016, inclusive. The complaint purported to state a claim for violation of federal securities laws as a result of alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5

11



promulgated thereunder. The complaint’s allegations relate generally to our disclosure surrounding the level of implementation of our Avid NEXIS solution product offerings. On February 7, 2017, the Court appointed a lead plaintiff and counsel in the matter. On June 14, 2017, we moved to dismiss the action. On July 31, 2017, the lead plaintiff filed an opposition to our motion to dismiss, and on August 21, 2017, we filed our reply brief. On October 13, 2017, after a mediation, the parties reached an agreement in principle to settle this litigation. The settlement was approved by the court and the settlement payment was made by our insurers in May 2018.

Following the termination of our former Chairman and Chief Executive Officer on February 25, 2018, we received a notice alleging that we breached the former employee’s employment agreement. While we intend to defend any claim vigorously, when and if a claim is actually filed, we are currently unable to estimate an amount or range of any reasonably possible losses that could occur as a result of this matter.

We consider all claims on a quarterly basis and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our condensed consolidated financial statements. We record a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

At June 30, 2018 and as of the date of filing of these condensed consolidated financial statements, we believe that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim, (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

Additionally, we provide indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to our products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions is theoretically unlimited.  To date, we have not incurred material costs related to these indemnification provisions; accordingly, we believe the estimated fair value of these indemnification provisions is immaterial. Further, certain of our arrangements with customers include clauses whereby we may be subject to penalties for failure to meet certain performance obligations; however, we have not recorded any related material penalties to date.

We provide warranties on externally sourced and internally developed hardware. For internally developed hardware, and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, we record an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the six months ended June 30, 2018 and 2017 (in thousands):
 
Six Months Ended June 30,
 
2018
 
2017
Accrual balance at beginning of year
$
2,545

 
$
2,518

Accruals for product warranties
1,073

 
1,304

Costs of warranty claims
(1,201
)
 
(1,261
)
Accrual balance at end of period
$
2,417

 
$
2,561


The warranty accrual is included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheet.

8.
RESTRUCTURING COSTS AND ACCRUALS

In February 2016, we committed to a cost efficiency program that encompassed a series of measures intended to allow us to more efficiently operate in a leaner, more directed cost structure. These included reductions in our workforce,

12



consolidation of facilities, transfers of certain business processes to lower cost regions, and reductions in other third-party services costs. The cost efficiency program was substantially complete as of December 31, 2017.

During the three and six months ended June 30, 2018, we recorded restructuring charges of $0.3 million and $3.2 million, respectively. The restructuring charges for the six months ended June 30, 2018 included $0.8 million of severance costs adjustments, $1.5 million facility restructuring accrual adjustments resulted from the consolidation of our facilities in Burlington, Massachusetts, and $0.9 million of leasehold improvement write-off.

During the three and six months ended June 30, 2017, we recorded restructuring charges of $6.1 million and $7.0 million, respectively. The restructuring charges for the six months ended June 30, 2017 included $2.5 million for the severance costs related to approximately 58 terminated employees, and $4.5 million for the closure of certain excess facility space, including leasehold improvement write-offs and adjustments to sublease assumptions associated with prior abandoned facilities.

Restructuring Summary

The following table sets forth restructuring expenses recognized for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Employee
$
687

 
$
1,686

 
$
855

 
$
2,362

Facility
(1,619
)
 
2,373

 
1,072

 
2,629

Total facility and employee charges
(932
)
 
4,059

 
1,927

 
4,991

Other
1,200

 
2,004

 
1,248

 
2,055

Total restructuring charges, net
$
268

 
$
6,063

 
$
3,175

 
$
7,046


The following table sets forth the activity in the restructuring accruals for the six months ended June 30, 2018 (in thousands):
 
Employee
 
Facility
 
Total
Accrual balance as of December 31, 2017
$
1,998

 
$
2,479

 
$
4,477

Restructuring charges and revisions
855

 
1,072

 
1,927

Accretion

 
96

 
96

Cash payments
(1,766
)
 
(1,723
)
 
(3,489
)
Foreign exchange impact on ending balance
3

 
1

 
4

Accrual balance as of June 30, 2018
$
1,090

 
$
1,925

 
$
3,015

Less: current portion
1,090

 
1,478

 
2,568

Long-term accrual balance as of June 30, 2018
$

 
$
447

 
$
447


The employee restructuring accrual at June 30, 2018 represents severance costs to former employees that will be paid out within 12 months, and is, therefore, included in the caption “accrued expenses and other current liabilities” in our condensed consolidated balance sheets as of June 30, 2018.

The facility restructuring accrual at June 30, 2018 represents contractual lease payments, net of actual or estimated sublease income, on space vacated as part of our restructuring actions. The leases, and payments against the amounts accrued, extend through 2026 unless we are able to negotiate earlier terminations. Of the total facility restructuring balance, $1.5 million is included in the caption “accrued expenses and other current liabilities” and $0.4 million is included in the caption “other long-term liabilities” in our condensed consolidated balance sheet as of June 30, 2018.


13



9.
REVENUE

Revenue Components and Performance Obligations

Video Products and Solutions

We offer a wide range of video products and solutions from sales of storage and workflow solutions, our media management solutions and our video creative tools, which include our Media Composer, NEXIS, Airspeed, Maestro and Media Central product lines that consist of software licenses or integrated hardware and software solutions. We sell these products to customers under a contract or signed quote and payment terms are generally 30 to 60 days from delivery. Each individual product sold to a customer represents a distinct performance obligation for us and revenue is recognized at the point in time when control of the product transfers, which is typically when the product is shipped to the customer or, in the case of certain software licenses, when the software license term commences and is accessible by the customer.

Audio Products and Solutions

We offer a wide range of audio products and solutions from sales of digital audio software and workstation solutions and our control surfaces, consoles and live-sound systems, which include our Pro Tools, Pro Tools HD, Pro Tools | S6, VENUE | S6L and Sibelius product lines that consist of software licenses or integrated hardware and software solutions. We sell these products to customers under a contract or signed quote and payment terms are generally 30 to 60 days from delivery. Each individual product sold to a customer represents a distinct performance obligation for us and revenue is recognized at the point in time when control of the product transfers, which is typically when the product is shipped to the customer or, in the case of certain software licenses, when the software license term commences and is accessible by the customer.

Subscription Services

We offer subscription versions of many of our software products with monthly, annual and multi-year terms. While we are beginning to offer subscription versions for most of our product portfolio in connection with our cloud strategy, current subscription sales primarily consist of our Media Composer, Pro Tools and Sibelius offerings. We sell these products to customers under standard terms and conditions and payment is due upfront, except for webstore transactions which are billed monthly. Contract assets for annual and multi-year subscriptions billed monthly are recorded on our balance sheet upon customer commitment. Subscription services have several performance obligations, including a right to use the software and stand-ready performance obligations to (i) provide unspecified bug fixes and software enhancements, or Software Updates, and (ii) call support when and if needed. The estimated SSP of the right to use the licensed software is recognized at a point in time once control has been transferred and the customer has the ability to access the software. Stand-ready performance obligations related to Software Updates and call support are satisfied over time and revenue is recognized ratably over the term of the subscription.

Support Services

We offer support contracts, which are typically annual, for our video and audio products. Support contracts for individual products are sold bundled with initial product offerings or as renewals once initial contracts have lapsed. Support contracts are also sold on an enterprise basis where a customer purchases support for all Avid products owned. Support contracts are provided under our standard terms and conditions and payment is due in advance of the support being provided. Support contracts include stand-ready performance obligations to provide (i) Software Updates, (ii) call support and (iii) hardware maintenance. Support contract performance obligations are satisfied over time and revenue is recognized ratably over the term of the support contract.

Historically, for many of our products, we had an ongoing practice of making when-and-if-available Software Updates available to customers free of charge for a period of time after initial sales to customers. The expectation created by this practice of providing free Software Updates represents an implied obligation of a form of post-contract customer support (“Implied PCS”) which represents a performance obligation. While we have ceased providing Implied PCS on new product offerings, we continue to provide Implied PCS for older products that were predominately sold in prior years. Revenue attributable to Implied PCS performance obligations is recognized over time on a ratable basis over the period that Implied PCS is expected to be provided, which is typically six years.

14




Professional Services, Training and Other

We sell a variety of professional services, training and other services that complement product and support offerings. Professional services consist primarily of standard configuration, commissioning (i.e., setting up equipment purchased) and on-air support (i.e., monitoring a customer’s production environment available during initial system go-live, live sporting events, etc.) and providing customization services for some of our products. We also offer training and certification programs for many of our products and workflows. Other revenues include shipping and handling charges and reimbursable travel expenses. We sell professional services, training and other services under contracts, signed quote and, for larger projects, statements of work that outline the customer’s specifications and requirements. Services are primarily sold on a time and materials basis, however, fixed fee arrangements are also executed from time to time. Payments are generally billed upon completion of the service or, for larger projects, on an installment basis as services are rendered. While the nature of service deliverables can vary significantly, each service deliverable generally represents a distinct performance obligation and revenue is recognized over time, typically in proportion of the total hours incurred as a percentage of total estimated hours required to complete the project.

Enterprise Agreements

From time to time, we enter into enterprise wide agreements whereby the customer agrees to purchase specified products and services from us over an extended period of time, often for a single fixed contractual price. For such agreements, management identifies each performance obligation in the contract and allocates the total contract price to each performance obligation based on relative estimated SSP. Once the transaction price is allocated to individual performance obligations, the components are recognized in the respective categories of revenue above consistent with the timing of the recognition of performance obligations described therein.

Disaggregated Revenue and Geography Information

Through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (our chief executive officer and chief financial officer), we have determined that we have one reportable segment. The following table is a summary of our revenues by type for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017(1)
 
2018
 
2017(1)
Video products and solutions net revenues
$
26,927

 
$
26,706

 
$
58,501

 
$
55,527

Audio products and solutions net revenues
19,452

 
20,949

 
34,288

 
43,134

Products and solutions net revenues
46,379

 
47,655

 
92,789

 
98,661

Subscription services
8,326

 
3,865

 
16,791

 
7,586

Support services
36,076

 
43,543

 
69,836

 
85,429

Professional services, training and other services
7,834

 
7,310

 
17,136

 
14,804

Services net revenues
52,236

 
54,718

 
103,763

 
107,819

Total net revenues
$
98,615

 
$
102,373

 
$
196,552

 
$
206,480



15



The following table sets forth our revenues by geographic region for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017(1)
 
2018
 
2017(1)
Revenues:
 
 
 
 
 
 
 
United States
$
38,100

 
$
45,905

 
$
75,648

 
$
82,685

Other Americas
6,364

 
6,413

 
12,750

 
13,204

Europe, Middle East and Africa
40,206

 
37,986

 
80,969

 
80,121

Asia-Pacific
13,945

 
12,069

 
27,185

 
30,470

Total net revenues
$
98,615

 
$
102,373

 
$
196,552

 
$
206,480


(1) As a result of our adoption of ASC 606 effective January 1, 2018 using the modified retrospective method, prior period amounts have not been adjusted to conform with ASC 606 and therefore may not be comparable.

Contract Asset

Contract asset activity for the six months ended June 30, 2018 was as follows (in thousands):
 
June 30, 2018
Contract asset at January 1, 2018
$
6,579

Revenue in excess of billings
14,233

Customer billings
(5,268
)
Contract asset at June 30, 2018
$
15,544


The increase in contract assets during the six months ended June 30, 2018 is due to (i) continued growth in our subscription offerings and (ii) the timing of payments due under our enterprise network agreements which predominately are payable annually whereas performance obligations are fulfilled on a continuous basis.

Deferred Revenue

Deferred revenue activity for the six months ended June 30, 2018 was as follows (in thousands):
 
June 30, 2018
Deferred revenue at January 1, 2018
$
101,740

Billings deferred
50,765

Recognition of prior deferred revenue
(54,807
)
Deferred revenue at June 30, 2018
$
97,698


A summary of the significant performance obligations included in deferred revenue as of June 30, 2018 is as follows (in thousands):
 
June 30, 2018
Product
$
9,261

Subscription
753

Support Contracts
62,448

Implied PCS
19,043

Professional services, training and other
6,193

Deferred revenue at June 30, 2018
$
97,698



16



We expect deferred revenue recorded as of June 30, 2018 will be recorded as revenue within the next 12 months, except for Implied PCS performance obligations and long-term support agreements. We expect $6 million, $5 million, $3 million, and $1 million of Implied PCS deferred revenue recorded as of June 30, 2018 will be recognized as revenue for the years ended December 31, 2019, 2020, 2021, and 2022, respectively. We expect $2 million and $1 million of long-term support deferred revenue recorded as of June 30, 2018 will be recognized for the years ended December 31, 2019 and 2020 respectively.


10.
LONG-TERM DEBT AND CREDIT AGREEMENT

Long-term debt consisted of the following (in thousands):
 
June 30, 2018
 
December 31, 2017
Term Loan, net of unamortized debt issuance costs of $2,909 at June 30, 2018 and $3,499 at December 31, 2017
$
123,153

 
$
102,751

Notes, net of unamortized original issue discount and debt issuance costs of $13,629 at June 30, 2018 and $17,026 at December 31, 2017, respectively
107,371

 
105,974

Other long-term debt
1,537

 
1,679

    Total debt
232,061

 
210,404

Less: current portion
1,400

 
5,906

Total long-term debt
$
230,661

 
$
204,498


The following table summarizes the maturities of our borrowing obligations as of June 30, 2018 (in thousands):

Fiscal Year
Term Loan
 
Notes
 
Other Long-Term Debt
 
Total
2018
$
638

 
$

 
$
62

 
$
700

2019
1,275

 

 
132

 
1,407

2020
2,231

 
121,000

 
141

 
123,372

2021
4,781

 

 
152

 
4,933

2022
6,375

 

 
162

 
6,537

Thereafter
110,762

 

 
888

 
111,650

Total before unamortized discount
126,062

 
121,000

 
1,537

 
248,599

Less: unamortized discount and issuance costs
2,909

 
13,629

 

 
16,538

Less: current portion of long-term debt
1,275

 

 
125

 
1,400

Total long-term debt
$
121,878

 
$
107,371

 
$
1,412

 
$
230,661


2.00% Convertible Senior Notes due 2020

On June 15, 2015, we issued $125.0 million aggregate principal amount of our Notes in an offering conducted in accordance with Rule 144A under the Securities Act of 1933. The Notes pay interest semi-annually on June 15 and December 15 of each year at an annual rate of 2.00% and mature on June 15, 2020, unless earlier converted or repurchased in accordance with their terms prior to such date. Total interest expense for the three and six months ended June 30, 2018 was $2.2 million and $4.4 million, respectively, reflecting the coupon and accretion of the discount.

On December 15, 2017, we purchased 2,000 of our 125,000 outstanding Notes and settled $2.0 million of the Notes for $1.7 million in cash. We recorded $2.0 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial loss on the extinguishment of debt.


17



On February 8, 2018, we purchased an additional 2,000 of our 123,000 outstanding Notes and settled another $2.0 million of the Notes for $1.7 million in cash. We recorded $2.0 million extinguishment of debt, an immaterial amount of equity reacquisition, and an immaterial loss on the extinguishment of debt.

Term Loan and Credit Facility

On February 26, 2016, we entered into the Financing Agreement with the Lenders. Pursuant to the Financing Agreement, the Lenders originally agreed to provide us with (a) a term loan in the aggregate principal amount of $100.0 million (the “Term Loan”), and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $5.0 million in borrowings outstanding at any time. We granted a security interest on substantially all of our assets to secure the obligations under the Term Loan and the Credit Facility. The Term Loan requires us to use 50% of excess cash flow, as defined in the Financing Agreement, to repay outstanding principal of the loans under the Financing Agreement. The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which our payment obligations may be accelerated.

On November 9, 2017, we entered into an amendment and extended an additional $15.0 million term loan and increased the amount available under the Credit Facility by $5.0 million.

On May 10, 2018, we entered into an amendment to the Financing Agreement, which extended the maturity of the Financing Agreement to May 2023, and increased the Term Loan by $22.7 million and the amount available under the Credit Facility by $12.5 million. Under the terms of the amendment, aggregate quarterly principal repayments beginning September 30, 2018 through June 30, 2020 will be $318,750, then from July 1, 2020 through June 30, 2021 equal to $796,875, finally from July 1, 2021 through May 10, 2023 equal to $1,593,750. Following the amendment effective date, interest accrues on outstanding borrowings under the Term Loan and Credit Facility (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.625% or a Reference Rate (as defined in the Financing Agreement) plus 5.625%, at our option. The amendment modified the covenant requiring us to maintain a Leverage Ratio (defined to mean the ratio of (a) the sum of indebtedness under the Term Loan and Credit Facility, capitalized leases and non-cash collateralized letters of credit to (b) consolidated EBITDA) of no greater than 3.00:1.00 for the four quarters ended June 30, 2018 through December 31, 2018, 2.50:1.00 for the four quarters ending March 31, 2019 through December 31, 2019, 2.25:1.00 for the four quarters ending March 31, 2020 through March 31, 2021, 2.00:1.00 for the four quarters ending June 30, 2021 through December 31, 2022, respectively, and thereafter declining to 1.50:1.00.

The maximum available credit under the Credit Facility is $22.5 million. There were no amounts outstanding under the Credit Facility as of June 30, 2018. We were in compliance with the Financing Agreement covenants as of June 30, 2018. We recorded $2.7 million and $5.0 million of interest expenses on the Term Loan for the three and six months ended June 30, 2018, respectively.

11.    STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Information with respect to option shares granted under all of our stock incentive plans for the six months ended June 30, 2018 was as follows:
 
Time-Based Shares
Performance-Based Shares
Total Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at January 1, 2018
2,290,017


2,290,017

$9.65
 
 
Granted



$—
 
 
Exercised



$—
 
 
Forfeited or canceled
(1,347,040
)

(1,347,040
)
$10.47
 
 
Options outstanding at June 30, 2018
942,977


942,977

$8.49
2.11
$—
Options vested at June 30, 2018 or expected to vest
 
 
942,977

$8.49
2.11
$—
Options exercisable at June 30, 2018
 
 
942,977

$8.49
2.11
$—

18




Information with respect to our non-vested restricted stock units for the six months ended June 30, 2018 was as follows:
 
Non-Vested Restricted Stock Units
 
Time-Based Shares
Performance-Based Shares
Total Shares
Weighted-
Average
Grant-Date
Fair Value
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at January 1, 2018
1,809,138

1,254,110

3,063,248

$5.10
 
 
Granted
1,218,706

732,884

1,951,590

$4.63
 
 
Vested
(437,570
)

(437,570
)
$5.63
 
 
Forfeited
(841,460
)
(1,059,091
)
(1,900,551
)
$5.02
 
 
Non-vested at June 30, 2018
1,748,814

927,903

2,676,717

$4.73
1.21
$13,892
Expected to vest
 
 
2,356,699

$4.85
1.21
$12,231

Stock-based compensation was included in the following captions in our condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018

2017
 
2018
 
2017
Cost of products revenues
$
24

 
$
10

 
$
43

 
$
25

Cost of services revenues
50

 
410

 
84

 
459

Research and development expenses
51

 
164

 
203

 
252

Marketing and selling expenses
373

 
437

 
733

 
793

General and administrative expenses
1,054

 
961

 
1,192

 
1,864

 
$
1,552

 
$
1,982

 
$
2,255

 
$
3,393


19



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Business Overview

We develop, market, sell, and support software, hardware and integrated solutions for video and audio content creation, management and distribution. We do this by providing an open and efficient platform for digital media, along with a comprehensive set of tools and workflow solutions. Digital media are video, audio or graphic elements in which the image, sound or picture is recorded and stored as digital values, as opposed to analog or tape-based signals. Our products and solutions are used in production and post-production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; live-sound performance venues; advertising agencies; government and educational institutions; corporate communications departments; and by independent video and audio creative professionals, as well as aspiring professionals. Projects produced using our tools, platform and ecosystem include feature films, television programming, live events, news broadcasts, sports productions, commercials, music, video and other digital media content.

Our mission is to enable our clients to create, connect and collaborate through continuous innovation of an open media ecosystem, powerful common platform and tools. Our clients rely on Avid to create prestigious and award-winning feature films, music recordings, television shows, live concerts, sporting events and news broadcasts. Avid has been honored for technological innovation with 15 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award. Our creative tools and workflow solutions were used in all 2018 Oscar nominated films for Best Film Editing, Best Sound Editing, Best Sound Mixing, and Best Original Score and used in the winner of Best Picture.

Operations Overview

Our strategy for connecting creative professionals and media organizations with audiences in a more powerful, efficient, collaborative, and profitable ways leverages our Avid MediaCentral Platform - the open, extensible, and customizable foundation that streamlines and simplifies content workflows by integrating all Avid or third party products and services that run on top of it. The platform provides secure and protected access, and enables the creation and delivery of content faster and easier through a set of modular application suites and new public and private marketplaces, that together, represent an open, integrated and flexible media production and distribution environment for the media industry. Our Avid Advantage Support Plans reinforce our strategy by offering a new standard in service, support and education to enable our customers to derive more efficiency from their Avid investment. In addition, the Avid Customer Association (“ACA”), was established as an innovative and influential media technology community representing thousands of organizations and over 20,000 professionals from all levels of the industry. The ACA fosters collaboration between Avid, its customers and other industry colleagues to help shape our product offerings as well as providing a means to shape our industry together.

Another key element of our strategy is our transition to a subscription or recurring revenue based model. We started offering cloud-based subscription licensing options for some of our products and solutions in 2014, and had approximately 108,000 paying cloud-enabled subscribers in the second quarter of 2018, a 39% increase from the second quarter of 2017. These licensing options offer choice in pricing and deployment to suit our customers’ needs and are expected to increase recurring revenue on a longer term basis. However, during our transition to a recurring revenue model, we expect that our revenue, deferred revenue, and cash flow from operations will be adversely affected as new product offerings are sold at a wider variety of price points.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues and expenses. Actual results may differ from these estimates.


20



We believe that our critical accounting policies and estimates are those related to revenue recognition and allowances for sales returns and exchanges; stock-based compensation; income tax assets and liabilities; and restructuring charges and accruals. We believe these policies and estimates are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most complex and subjective estimates and judgments. A discussion of our critical accounting policies and estimates may be found in our Annual Report on Form 10-K for the year ended December 31, 2017 in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies and Estimates” and below. There have been no significant changes to the identification of the accounting policies and estimates that are deemed critical. On January 1, 2018, we adopted ASC Topic 606 using the modified retrospective method applied to contracts not completed as of January 1, 2018. See Note 1, Note 9, and the Revenue Recognition discussion below for a further description. As a result of our adoption of ASC 606 effective January 1, 2018 using the modified retrospective method, prior period revenue amounts have not been adjusted to conform with ASC 606 and therefore may not be comparable.

Revenue Recognition

We enter into contracts with customers that include various combinations of products and services, which are typically capable of being distinct and are accounted for as separate performance obligations. We account for a contract when (i) it has approval and commitment from both parties, (ii) the rights of the parties have been identified, (iii) payment terms have been identified, (iv) the contract has commercial substance and (v) collectibility is probable. We recognize revenue upon transfer of control of promised products or services to customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts, in an amount that reflects the consideration we expect to receive in exchange for those products or services.

See Note 9 for disaggregated revenue schedules and further discussion on revenue and deferred revenue performance obligations and the timing of revenue recognition.

We often enter into contractual arrangements that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These arrangements may include a combination of products, support, training and professional services. We allocate the transaction price of the arrangement based on the relative estimated standalone selling price of each distinct performance obligation.

Our process for determining SSP for each performance obligation involves significant management judgment. In determining SSP, we maximize observable inputs and consider a number of data points, including:
the pricing of standalone sales (in the limited instances where available);
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;
contractually stated prices for deliverables that are intended to be sold on a standalone basis;
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.

We only include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASC 606, which we estimate based on historical return experience and other relevant factors, and record a corresponding refund liability as a component of accrued expenses and other current liabilities.  Other forms of contingent revenue or variable consideration are infrequent.

While not a common practice for us, in the event we grant the customer the option to acquire additional products or services in an arrangement, we consider if the option provides a material right to the customer that it would not receive without entering into the contract (e.g., an incremental discount compared to the range of discounts typically given for similar products or services).  If a material right is deemed to exist, we account for the option as a distinct performance obligation and recognize revenue when those future products or services are transferred or when the option expires.

21



We also record as revenue all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities.

Our contracts rarely contain significant financing components as payments from customers are due within a short period from when our performance obligations are satisfied.

We are applying the practical expedient for the deferral of sales commissions and other contract acquisition costs, which are expensed as incurred, because the amortization period would be one year or less.


RESULTS OF OPERATIONS

The following table sets forth certain items from our condensed consolidated statements of operations as a percentage of net revenues for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net revenues:
 
 
 
 
 
 
 
Product
47.0
 %
 
46.6
 %
 
47.2
 %
 
47.8
 %
Services
53.0
 %
 
53.4
 %
 
52.8
 %
 
52.2
 %
Total net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
42.9
 %
 
41.6
 %
 
43.0
 %
 
40.3
 %
Gross margin
57.1
 %
 
58.4
 %
 
57.0
 %
 
59.7
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
16.2
 %
 
16.6
 %
 
16.1
 %
 
17.4
 %
Marketing and selling
28.1
 %
 
28.4
 %
 
27.4
 %
 
26.6
 %
General and administrative
14.2
 %
 
13.3
 %
 
14.2
 %
 
13.6
 %
Amortization of intangible assets
0.4
 %
 
0.4
 %
 
0.5
 %
 
0.3
 %
Restructuring costs, net
0.3
 %
 
5.9
 %
 
1.6
 %
 
3.4
 %
Total operating expenses
59.2
 %
 
64.6
 %
 
59.8
 %
 
61.3
 %
Operating loss
(2.1
)%
 
(6.2
)%
 
(2.8
)%
 
(1.6
)%
Interest and other expense, net
(6.4
)%
 
(3.8
)%
 
(5.9
)%
 
(4.2
)%
Loss before income taxes
(8.5
)%
 
(10.0
)%
 
(8.7
)%
 
(5.8
)%
Provision for income taxes
0.1
 %
 
0.6
 %
 
0.2
 %
 
0.4
 %
Net loss
(8.6
)%
 
(10.6
)%
 
(8.9
)%
 
(6.2
)%

Net Revenues

Our net revenues are derived mainly from sales of video and audio hardware and software products and solutions for digital media content production, management and distribution, and related professional services and maintenance contracts. We commonly sell large, complex solutions to our customers that, due to their strategic nature, have long lead times where the timing of order execution and fulfillment can be difficult to predict.  In addition, the rapid evolution of the media industry is changing our customers’ needs, businesses and revenue models, which is influencing their short-term and long-term purchasing decisions. As a result of these factors, the timing and amount of product revenue recognized each quarter related to these large orders, as well as the services associated with them, can fluctuate from quarter to quarter and cause significant volatility in our quarterly operating results. For a discussion of these factors, see the risk factors discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.


22



Net Revenues for the Three Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018
 
Change
 
2017
 
Net Revenues
 
$
 
%
 
Net Revenues
Video products and solutions
$
26,927

 
$
221

 
0.8%
 
$
26,706

Audio products and solutions
19,452

 
(1,497
)
 
(7.1)%
 
20,949

Products and solutions
46,379

 
(1,276
)
 
(2.7)%
 
47,655

Services
52,236

 
(2,482
)
 
(4.5)%
 
54,718

Total net revenues
$
98,615

 
$
(3,758
)
 
(3.7)%
 
$
102,373


Net Revenues for the Six Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018
 
Change
 
2017
 
Net Revenues
 
$
 
%
 
Net Revenues
Video products and solutions
$
58,501

 
$
2,974

 
5.4%
 
$
55,527

Audio products and solutions
34,288

 
(8,846
)
 
(20.5)%
 
43,134

Products and solutions
92,789

 
(5,872
)
 
(6.0)%
 
98,661

Services
103,763

 
(4,056
)
 
(3.8)%
 
107,819

Total net revenues
$
196,552

 
$
(9,928
)
 
(4.8)%
 
$
206,480


The following table sets forth the percentage of our net revenues attributable to geographic regions for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
United States
39%
 
45%
 
39%
 
40%
Other Americas
6%
 
6%
 
6%
 
6%
Europe, Middle East and Africa
41%
 
37%
 
41%
 
39%
Asia-Pacific
14%
 
12%
 
14%
 
15%

Video Products and Solutions Revenues

Video products and solutions revenues are derived primarily from sales of our storage and workflow solutions, media management solutions and video creative tools. Video products and solutions revenues increased $0.2 million, or 0.8%, for the three months ended June 30, 2018, and increased $3.0 million, or 5.4%, for the six months ended June 30, 2018, compared to the same periods in 2017. The increases were primarily the result of improved storage product sales.
 
Audio Products and Solutions Revenues

Audio products and solutions revenues are derived primarily from sales of our digital audio software and workstation solutions and our control surfaces, consoles and live-sound systems. Audio products and solutions revenues decreased $1.5 million, or 7.1%, for the three months ended June 30, 2018, and decreased $8.8 million, or 20.5%, for the six months ended June 30, 2018, compared to the same periods in 2017. The decreases were primarily due to the accelerated revenue recognition of Pro Tools 12 during the three and six months ended June 30, 2017 as the result of the cessation of Implied Maintenance Release PCS for Pro Tools.

Services Revenues


23



Services revenues are derived primarily from maintenance contracts, as well as professional services and training. Services revenues decreased $2.5 million, or 4.5%, for the three months ended June 30, 2018, and decreased $4.1 million, or 3.8%, for the six months ended June 30, 2018, compared to the same periods in 2017. The decreases in services revenues were primarily due to the accelerated revenue recognition of support contracts during the three and six months ended June 30, 2017 as the result of the cessation of Implied Maintenance Release PCS for Pro Tools.

Cost of Revenues, Gross Profit and Gross Margin Percentage

Cost of revenues consists primarily of costs associated with:
  
procurement of components and finished goods;
assembly, testing and distribution of finished products;
warehousing;
customer support related to maintenance;
royalties for third-party software and hardware included in our products;
amortization of technology; and
providing professional services and training.

Amortization of technology represents the amortization of developed technology assets acquired as part of acquisitions.

Costs of Revenues and Gross Profit for the Three Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018
 
Change
 
2017
 
Costs
 
$
 
%
 
Costs
Products
$
26,347

 
$
(142
)
 
(0.5)%
 
$
26,489

Services
13,986

 
(195
)
 
(1.4)%
 
14,181

Amortization of intangible assets
1,950

 

 
—%
 
1,950

    Total cost of revenues
$
42,283

 
$
(337
)
 
(0.8)%
 
$
42,620

 
 
 
 
 
 
 
 
Gross profit
$
56,332

 
$
(3,421
)
 
(5.7)%
 
$
59,753


Costs of Revenues and Gross Profit for the Six Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018
 
Change
 
2017
 
Costs
 
$
 
%
 
Costs
Products
$
52,642

 
$
1,649

 
3.2%
 
$
50,993

Services
27,971

 
(304
)
 
(1.1)%
 
28,275

Amortization of intangible assets
3,900

 

 
—%
 
3,900

    Total cost of revenues
$
84,513

 
$
1,345

 
1.6%
 
$
83,168

 
 
 
 
 
 
 
 
Gross profit
$
112,039

 
$
(11,273
)
 
(9.1)%
 
$
123,312



24



Gross Margin Percentage

Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, fluctuates based on factors such as the mix of products sold, the cost and proportion of third-party hardware and software included in the systems sold, the offering of product upgrades, price discounts and other sales-promotion programs, the distribution channels through which products are sold, the timing of new product introductions, sales of aftermarket hardware products such as disk drives and currency exchange-rate fluctuations. For a discussion of these factors, see the risk factors discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. Our total gross margin percentage for the three months ended June 30, 2018 decreased to 57.1% from 58.4% for the same period in 2017, and for the six months ended June 30, 2018 decreased to 57.0% from 59.7% for the same period in 2017. The decreases were primarily due to the decreased revenue in the 2018 periods from our products and services as a result of the cessation of Implied Maintenance Release PCS for Pro Tools in the 2017 periods, and increased material costs as a result of more hardware product sales, partially offset by cost savings resulting from our programs to increase operational efficiencies.

Gross Margin % for the Three Months Ended June 30, 2018 and 2017
 
2018 Gross
Margin %
 
Change
 
2017 Gross
Margin %
Products
43.2%
 
(1.2)%
 
44.4%
Services
73.2%
 
(0.9)%
 
74.1%
Total
57.1%
 
(1.3)%
 
58.4%

Gross Margin % for the Six Months Ended June 30, 2018 and 2017
 
2018 Gross
Margin %
 
Change
 
2017 Gross
Margin %
Products
43.3%
 
(5.0)%
 
48.3%
Services
73.0%
 
(0.8)%
 
73.8%
Total
57.0%
 
(2.7)%
 
59.7%

Operating Expenses and Operating Loss

Operating Expenses and Operating Loss for the Three Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018
 
Change
 
2017
 
Expenses
 
$
 
%
 
Expenses
Research and development
$
15,985

 
$
(1,006
)
 
(5.9)%
 
$
16,991

Marketing and selling
27,759

 
(1,259
)
 
(4.3)%
 
29,018

General and administrative
14,041

 
397

 
2.9%
 
13,644

Amortization of intangible assets
363

 

 
—%
 
363

Restructuring costs, net
268

 
(5,795
)
 
(95.6)%
 
6,063

Total operating expenses
$
58,416

 
$
(7,663
)
 
(11.6)%
 
$
66,079

 
 
 
 
 
 
 
 
Operating loss
$
(2,084
)
 
$
4,242

 
(67.1)%
 
$
(6,326
)


25



Operating Expenses and Operating Loss for the Six Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018
 
Change
 
2017
 
Expenses
 
$
 
%
 
Expenses
Research and development
$
31,670

 
$
(4,209
)
 
(11.7)%
 
$
35,879

Marketing and selling
53,891

 
(938
)
 
(1.7)%
 
54,829

General and administrative
27,996

 
(79
)
 
(0.3)%
 
28,075

Amortization of intangible assets
726

 

 
—%
 
726

Restructuring costs, net
3,175

 
(3,871
)
 
(54.9)%
 
7,046

Total operating expenses
$
117,458

 
$
(9,097
)
 
(7.2)%
 
$
126,555

 
 
 
 
 
 
 
 
Operating loss
$
(5,419
)
 
$
(2,176
)
 
67.1%
 
$
(3,243
)

Research and Development Expenses

Research and development (“R&D”) expenses include costs associated with the development of new products and the enhancement of existing products, and consist primarily of employee compensation and benefits; facilities costs; depreciation; costs for consulting and temporary employees; and prototype and other development expenses. R&D expenses decreased $1.0 million, or 5.9%, for the three months ended June 30, 2018, and decreased $4.2 million, or 11.7%, for the six months ended June 30, 2018, compared to the same periods in 2017. The table below provides further details regarding the changes in components of R&D expenses.

Change in R&D Expenses for the Three Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018 Decrease
From 2017
 
$
 
%
Consulting and outside services
$
(544
)
 
(17.0
)%
Personnel-related
(248
)
 
(2.6
)%
Facilities and information technology
(194
)
 
(5.6
)%
Other
(20
)
 
(2.3
)%
Total R&D expenses decrease
$
(1,006
)
 
(5.9
)%

Change in R&D Expenses for the Six Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018 Decrease
From 2017
 
$
 
%
Personnel-related
$
(2,120
)
 
(10.6
)%
Consulting and outside services
(1,374
)
 
(21.1
)%
Facilities and information technology
(589
)
 
(8.1
)%
Other
(126
)
 
(6.2
)%
Total R&D expenses decrease
$
(4,209
)
 
(11.7
)%

The decreases in all R&D expense categories for the three and six months ended June 30, 2018, compared to the same periods in 2017, were primarily the result of our cost efficiency program completed at the end of 2017.


26



Marketing and Selling Expenses

Marketing and selling expenses consist primarily of employee compensation and benefits for selling, marketing and pre-sales customer support personnel; commissions; travel expenses; advertising and promotional expenses; web design costs and facilities costs. Marketing and selling expenses decreased $1.3 million, or 4.3%, for the three months ended June 30, 2018, and decreased $0.9 million, or 1.7%, for the six months ended June 30, 2018, compared to the same periods in 2017. The table below provides further details regarding the changes in components of marketing and selling expenses.
 
Change in Marketing and Selling Expenses for the Three Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018 (Decrease) Increase
From 2017
 
$
 
%
Foreign exchange loss
$
(2,255
)
 
(127.7
)%
Personnel-related expenses
614

 
3.3
 %
Advertising and promotion
565

 
15.7
 %
Consulting and outside services
(150
)
 
(21.2
)%
Other
(33
)
 
(0.8
)%
Total marketing and selling expenses decrease
$
(1,259
)
 
(4.3
)%

Change in Marketing and Selling Expenses for the Six Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018 (Decrease) Increase
From 2017
 
$
 
%
Foreign exchange loss
$
(3,194
)
 
(100.5
)%
Personnel-related expenses
662

 
1.8
 %
Sales kickoff meeting
638

 
81.2
 %
Advertising and promotion
607

 
12.1
 %
Consulting and outside services
461

 
47.7
 %
Other
(112
)
 
(1.3
)%
Total marketing and selling expenses decrease
$
(938
)
 
(1.7
)%

For the three months ended June 30, 2018, net foreign exchange gains, which are included in marketing and selling expenses, were $0.5 million, compared to losses of $1.8 million for the same period in 2017. For the six months ended June 30, 2018, foreign exchange gains and losses offset to zero, compared to losses of $3.2 million for the same period in 2017. The foreign exchange gains and losses are resulted from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities. The large changes were primarily due to the euro-dollar exchange rate volatility. The increases in personnel-related expenses for the three and six months ended June 30, 2018, compared to the same periods in 2017, were primarily due to higher commissions and travel expenses. The increase in sales kickoff meeting expenses for the six months ended June 30, 2018, compared to the same period in 2017, was the result of the cancellation of 2017 sales kickoff meeting due to the cost efficiency program which was substantially completed in 2017. The increases in advertising and promotion expenses for the three and six months ended June 30, 2018, compared to the same periods in 2017, were primarily the result of more spending on the National Association of Broadcasters trade show. The increase in consulting and outside services for the six months ended June 30, 2018, compared to the same period in 2017, was primarily due to more contractors used to meet higher demand for professional services from our customers during the first quarter of 2018.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist primarily of employee compensation and benefits for administrative, executive, finance and legal personnel; audit, legal and strategic consulting fees; and insurance, information systems and

27



facilities costs. Information systems and facilities costs reported within general and administrative expenses are net of allocations to other expenses categories. G&A expenses increased $0.4 million, or 2.9%, for the three months ended June 30, 2018, and decreased $0.1 million, or 0.3%, for the six months ended June 30, 2018, compared to the same periods in 2017. The table below provides further details regarding the changes in components of G&A expenses.

Change in G&A Expenses for the Three Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018 Increase (Decrease)
From 2017
 
$
 
%
Personnel-related
$
1,023

 
17.3
 %
Consulting and outside services
(534
)
 
(12.4
)%
Facilities and information technology expenses
(92
)
 
(2.6
)%
Total G&A expenses increase
$
397

 
2.9
 %

Change in G&A Expenses for the Six Months Ended June 30, 2018 and 2017
(dollars in thousands)
 
2018 (Decrease) Increase
From 2017
 
$
 
%
Consulting and outside services
$
417

 
4.8
 %
Personnel-related
(387
)
 
(3.1
)%
Facilities and information technology expenses
(371
)
 
(7.9
)%
Other