Avid Technology, Inc.
AVID TECHNOLOGY, INC. (Form: 10-Q, Received: 11/09/2017 17:04:48)




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 September 30, 2017
 
 
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 of 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 of the Exchange Act).  Yes ¨    No x

The number of shares outstanding of the registrant’s Common Stock, par value $0.01, as of November 6, 2017 was 41,186,120 .




AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

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 Avid Everywhere strategic plan and other strategic initiatives, 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, including Orad Hi-Tech Ltd (“Orad”), into our operations;
our anticipated benefits and synergies from, and the anticipated financial impact of, any acquired business (including Orad);
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 Avid Everywhere 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;
the effects of seasonality on our revenues and results of operations;
fluctuations in foreign exchange and interest rates;
our ability to effectively mitigate and remediate the material weakness in our internal control over financial reporting, and the expected timing thereof;
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, 2016, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues:
 
 
 
 
 
 
 
Products
$
54,319

 
$
63,740

 
$
152,980

 
$
223,841

Services
50,946

 
55,279

 
158,765

 
172,794

Total net revenues
105,265

 
119,019

 
311,745

 
396,635


 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
Products
29,485

 
26,793

 
80,478

 
82,405

Services
13,472

 
14,885

 
41,747

 
45,126

Amortization of intangible assets
1,950

 
1,950

 
5,850

 
5,850

Total cost of revenues
44,907

 
43,628

 
128,075

 
133,381

Gross profit
60,358

 
75,391

 
183,670

 
263,254


 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
16,025

 
19,953

 
51,904

 
62,791

Marketing and selling
25,652

 
27,231

 
80,481

 
89,027

General and administrative
15,193

 
13,822

 
43,268

 
48,359

Amortization of intangible assets
362

 
567

 
1,088

 
2,135

Restructuring (recoveries) costs, net
(582
)
 
5,314

 
6,464

 
7,878

Total operating expenses
56,650

 
66,887

 
183,205

 
210,190


 
 
 
 
 
 
 
Operating income
3,708

 
8,504

 
465

 
53,064


 
 
 
 
 
 
 
Interest and other expense, net
(4,701
)
 
(4,707
)
 
(13,465
)
 
(14,049
)
(Loss) income before income taxes
(993
)
 
3,797

 
(13,000
)
 
39,015

Benefit from income taxes
(1,065
)
 
(5,321
)
 
(326
)
 
(3,983
)
Net income (loss)
$
72

 
$
9,118

 
$
(12,674
)
 
$
42,998


 
 
 
 
 
 
 
Net income (loss) per common share – basic
$0.00
 
$0.23
 
$(0.31)
 
$1.08
Net income (loss) per common share – diluted
$0.00
 
$0.23
 
$(0.31)
 
$1.08

 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
41,133

 
40,194

 
40,954

 
39,814

Weighted-average common shares outstanding – diluted
41,355

 
40,476

 
40,954

 
39,950

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

1



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
72

 
$
9,118

 
$
(12,674
)
 
$
42,998

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,014

 
155

 
6,803

 
2,613

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
2,086

 
$
9,273

 
$
(5,871
)
 
$
45,611

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



2



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
 
September 30,
2017

December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
44,094

 
$
44,948

Accounts receivable, net of allowances of $10,494 and $8,618 at September 30, 2017 and December 31, 2016, respectively
40,864

 
43,520

Inventories
41,160

 
50,701

Prepaid expenses
8,537

 
6,031

Other current assets
9,925

 
5,805

Total current assets
144,580

 
151,005

Property and equipment, net
23,273

 
30,146

Intangible assets, net
15,995

 
22,932

Goodwill
32,643

 
32,643

Long-term deferred tax assets, net
1,355

 
1,245

Other long-term assets
7,404

 
11,610

Total assets
$
225,250

 
$
249,581

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
28,620

 
$
26,435

Accrued compensation and benefits
32,734

 
25,387

Accrued expenses and other current liabilities
32,848

 
34,088

Income taxes payable
806

 
1,012

Short-term debt
5,072

 
5,000

Deferred revenues
122,475

 
146,014

Total current liabilities
222,555

 
237,936

Long-term debt
191,300

 
188,795

Long-term deferred tax liabilities, net

 
913

Long-term deferred revenues
72,091

 
79,670

Other long-term liabilities
9,726

 
12,178

Total liabilities
495,672

 
519,492

 
 
 
 
Commitments and contingencies (Note 7)

 

 
 
 
 
Stockholders’ deficit:
 
 
 
Common stock
423

 
423

Additional paid-in capital
1,038,308

 
1,043,063

Accumulated deficit
(1,283,822
)
 
(1,271,148
)
Treasury stock at cost
(22,238
)
 
(32,353
)
Accumulated other comprehensive loss
(3,093
)
 
(9,896
)
Total stockholders’ deficit
(270,422
)
 
(269,911
)
Total liabilities and stockholders’ deficit
$
225,250

 
$
249,581

   
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)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(12,674
)

$
42,998

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 

 
Depreciation and amortization
16,932


19,169

(Recovery) provision for doubtful accounts
(158
)

890

Stock-based compensation expense
5,874


6,116

Non-cash provision for restructuring
3,191

 
1,137

Non-cash interest expense
7,255


7,935

Unrealized foreign currency transaction losses
6,885


2,021

Benefit from deferred taxes
(925
)

(5,187
)
Changes in operating assets and liabilities:
 

 
Accounts receivable
2,877


17,057

Inventories
9,542


(7,561
)
Prepaid expenses and other assets
(3,958
)

(1,493
)
Accounts payable
2,065


(19,627
)
Accrued expenses, compensation and benefits and other liabilities
543


(4,384
)
Income taxes payable
(161
)

347

Deferred revenues
(31,185
)

(108,343
)
Net cash provided by (used in) operating activities
6,103


(48,925
)
 
 
 
 
Cash flows from investing activities:
 

 
Purchases of property and equipment
(6,125
)

(9,681
)
Increase in other long-term assets
(24
)

(17
)
Decrease (increase) in restricted cash
1,790


(4,544
)
Net cash used in investing activities
(4,359
)

(14,242
)
 
 
 
 
Cash flows from financing activities:
 

 
Proceeds from long-term debt
912


100,000

Repayment of debt
(3,750
)

(2,500
)
Proceeds from the issuance of common stock under employee stock plans
219


5,914

Common stock repurchases for tax withholdings for net settlement of equity awards
(732
)

(803
)
Proceeds from revolving credit facilities


25,000

Payments on revolving credit facilities


(30,000
)
Payments for credit facility issuance costs


(5,020
)
Net cash (used in) provided by financing activities
(3,351
)

92,591

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
753


391

Net (decrease) increase in cash and cash equivalents
(854
)

29,815

Cash and cash equivalents at beginning of period
44,948


17,902

Cash and cash equivalents at end of period
$
44,094


$
47,717

Supplemental information:
 
 
 
Cash paid for income taxes, net of refunds
$
463

 
$
1,678

Cash paid for interest
7,406

 
5,767

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

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, “Avid” or the “Company”). 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of operations, comprehensive income (loss), financial position and cash flows of the Company 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, 2016 was derived from the Company’s audited consolidated financial statements and does not include all disclosures required by U.S. GAAP for annual financial statements. The Company filed audited consolidated financial statements as of and for the year ended December 31, 2016 in its Annual Report on Form 10-K for the year ended December 31, 2016 , 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 .

The Company’s 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 the Company’s estimates.

The Company has generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with the proceeds of long-term debt and borrowings under its credit facilities. The Company’s principal sources of liquidity include cash and cash equivalents totaling $44.1 million as of September 30, 2017 .

In February 2016, the Company committed to a cost efficiency program that encompassed a series of measures intended to allow the Company to more efficiently operate in a leaner, more directed cost structure. These measures included reductions in the Company’s workforce, consolidation of facilities, transfers of certain business processes to lower cost regions and reductions in other third-party service costs. The cost efficiency program was substantially complete as of June 30, 2017.

In connection with the cost efficiency program, on February 26, 2016, the Company entered into a Financing Agreement (the “Financing Agreement”) with the lenders party thereto (the “Lenders”). Pursuant to the Financing Agreement, the Company entered into a term loan in the original aggregate principal amount of $100.0 million . The Financing Agreement also originally provided the Company with the ability to draw up to a maximum of $5.0 million in revolving credit. All outstanding loans under the Financing Agreement will become due and payable in February 2021, or in May 2020 if the $125.0 million in outstanding principal of 2.00% convertible senior notes due June 15, 2020 (the “Notes”) has not been repaid or refinanced by such time.

The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Company’s payment obligations may be accelerated. On March 14, 2017 (the “Amendment No. 1 Effective Date”), the Company entered into an amendment (the “First Amendment”) to the Financing Agreement. The First Amendment modified the covenant requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (a) total funded indebtedness to (b) consolidated EBITDA) such that following the Amendment No. 1 Effective Date, the Company is required to maintain a Leverage Ratio of no greater than 3.50:1.00 for the four quarters ended March 31, 2017, 4.20:1.00 for the four quarters ended June 30, 2017, 4.75:1.00 for the four quarters ended September 30, 2017, 4.80:1.00 for the four quarters ending December 31, 2017, 4:40:1.00 for each of the four quarters ending March 31, 2018 through March 31, 2019, respectively, and thereafter declining over time from 3.50:1.00 to 2.50:1.00. Following the Amendment No. 1 Effective Date, interest accrues on outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in

5



the Financing Agreement) plus 7.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%, at the option of the Company. As of September 30, 2017 , the Company was in compliance with the Financing Agreement covenants.

On November 9, 2017 (the “Amendment No. 2 Effective Date”), the Company entered into an amendment (the “Second Amendment”) to the Financing Agreement. The Second Amendment extended an additional $ 15.0 million term loan to the Company, thereby increasing the aggregate principal amount of the term loan to $ 115.0 million . The Second Amendment also increased the amount of available revolving credit by $ 5.0 million to an aggregate amount of $ 10.0 million . The additional $ 15.0 million term loan must be repaid in quarterly principal payments of $ 187,500 commencing in March 2018. The Second Amendment also granted the Company the ability to use up to $ 15.0 million to purchase Notes and modified the definition of consolidated EBITDA used in the Leverage Ratio calculation to adjust for expected changes in deferred revenue due to the adoption of Accounting Standards Codification (“ASC”) Topic 606, the new revenue recognition guidance.

The Company’s ability to satisfy the Leverage Ratio covenant in the future is dependent on its ability to maintain bookings and billings at or above levels experienced over the last 12 months. In recent quarters, the Company has experienced volatility in bookings and billings resulting from, among other things, (i) its transition towards subscription and recurring revenue streams and the resulting decline in traditional upfront product sales, (ii) volatility in currency rates and in particular the U.S. dollar against the Euro, (iii) significant changes and trends in the media industry and the impact they have had on the Company’s customers and (iv) the impact of new and anticipated product launches and features. In addition to the impact of new bookings and billings, U.S. GAAP revenues recognized as the result of the existence of Implied Maintenance Release PCS (as defined below) will be significantly lower in the remainder of 2017, as compared to 2016 periods, which will have an adverse impact on the Company’s Leverage Ratio.

In the event bookings and billings in future quarters are lower than the Company currently anticipates, the Company may be forced to take remedial actions which could include, among other things (and where allowed by the Lenders), (i) further cost reductions, (ii) seeking replacement financing, (iii) raising funds through the issuance of additional equity or debt securities or the incurrence of additional borrowings, or (iv) disposing of certain assets or businesses. Such remedial actions, which may not be available on favorable terms or at all, could have a material adverse impact on the Company’s business. If the Company is not in compliance with the Leverage Ratio and is unable to obtain an amendment or waiver, such noncompliance may result in an event of default under the Financing Agreement, which could permit acceleration of the outstanding indebtedness under the Financing Agreement and require the Company to repay such indebtedness before the scheduled due date. If an event of default were to occur, the Company might not have sufficient funds available to make the payments required. If the Company is unable to repay amounts owed, the lenders may be entitled to foreclose on and sell substantially all of the Company’s assets, which secure its borrowings under the Financing Agreement.

On January 26, 2017, the Company entered into an exclusive distributor agreement (the “Distributor Agreement”) with Beijing Jetsen Technology Co., Ltd. (“Jetsen”), pursuant to which Jetsen became the exclusive distributor for Avid products and services in the greater China region. The Distributor Agreement has a five -year term, and Jetsen is required to make at least $75.8 million of aggregate purchases under the agreement over the first three years. At the same time, the Company also entered into a securities purchase agreement (the “Securities Purchase Agreement”), with Jetsen, pursuant to which it agreed to sell to Jetsen shares of Avid common stock. In June 2017, Avid and Jetsen amended the Securities Purchase Agreement. Under the amended terms, Jetsen will invest $18.2 million in Avid, in return for a minority stake in the Company of between 4.5% and 8.9% of Avid outstanding common stock on a fully diluted basis. The closing of the investment is subject to closing conditions, including China regulatory approvals. In the event regulatory approval is not obtained in the fourth quarter of 2017, either party may elect to terminate the Securities Purchase Agreement for any reason. The exact number of shares to be issued and sold at closing will be determined by reference to the trading price of Avid common stock before closing.


6



The Company’s cash requirements vary depending on factors such as the growth of its business, changes in working capital, and capital expenditures. Management expects to operate the business and execute its strategic initiatives principally with funds generated from operations, remaining net proceeds from the term loan borrowings under the Financing Agreement and draw up to a maximum of $10.0 million under the Financing Agreement’s revolving credit facility. Management anticipates that the Company will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next 12 months, as well as for the foreseeable future.

Subsequent Events

The Company evaluated subsequent events through the date of issuance of these financial statements and, except for the subsequent events disclosed above and in Note 7 and Note 10, no subsequent events required recognition or disclosure in these financial statements.

Significant Accounting Policies - Revenue Recognition

General

The Company commences revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products the Company sells do not require significant production, modification or customization. Installation of the Company’s products is generally routine, consists of implementation and configuration and does not have to be performed by the Company.

At the time of a sales transaction, the Company makes an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When making this assessment, the Company considers customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not reasonably assured, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, the Company also assesses whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, the Company considers the payment terms of the transaction, the Company’s collection experience in similar transactions and the Company’s involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after the Company’s normal payment terms, the Company evaluates whether the Company has sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If the Company was to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period.

The Company often receives multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when the Company has concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, the Company accounts for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when the Company has concluded that two or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, the Company accounts for those orders as separate arrangements for revenue recognition purposes.

For many of its products, the Company has had an ongoing practice of making available, at no charge to customers, minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively “Software Updates”), for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element (“Implied Maintenance Release PCS”).

Over the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, the Company has taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release

7



PCS for many of its products, including Media Composer, Pro Tools and Sibelius product lines. In the third quarter and fourth quarter of 2015, respectively, the Company concluded that Implied Maintenance Release PCS for its Media Composer and Sibelius product lines had ceased. In the first quarter of 2016, in connection with the release of Cloud Collaboration in Pro Tools version 12.5, which was an undelivered feature that had prevented the Company from recognizing any revenue related to new Pro Tools 12 software sales as it represented a specified upgrade right for which vendor specific objective evidence (“VSOE”) of fair value was not available, the Company concluded that Implied Maintenance Release PCS for Pro Tools 12 product lines had also ended. As a result of the conclusion that Implied Maintenance Release PCS on Pro Tools 12 has ended, revenue and net income in the first quarter of 2016 increased approximately  $11.1 million , reflecting the recognition of orders received after the launch of Pro Tools 12 that would have qualified for earlier recognition using the residual method of accounting.  In addition, the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized on a ratable basis over a much longer expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The reduction in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional $12.0 million and $33.7 million of revenue during the three and nine months ended September 30, 2016 , respectively.

The Company enters into certain contractual arrangements that have multiple elements, one or more of which may be delivered subsequent to the delivery of other elements. These multiple-deliverable arrangements may include products, support, training, professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, the Company allocates revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, the Company first determines the selling price of each deliverable based on (i) VSOE of fair value if that exists, (ii) third-party evidence of selling price (“TPE”), when VSOE does not exist, or (iii) best estimate of the selling price (“BESP”), when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. The Company’s process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, the Company considers a number of data points, including:
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;
the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

In determining a BESP for Implied Maintenance Release PCS, which the Company does not sell separately, the Company considers (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from the Company’s established pricing practices had the deliverable been offered separately and (iv) the prices a customer would likely be willing to pay.

The Company estimates the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, the Company will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period.

The Company has established VSOE of fair value for some of the Company’s professional services, training and support offerings. The Company’s policy for establishing VSOE of fair value consists of evaluating standalone sales to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists.


8



In accordance with Accounting Standards Update (“ASU”) No. 2009-14, the Company excludes from the scope of software revenue recognition requirements the Company’s sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. The Company adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010.

Prior to the Company’s adoption of ASU No. 2009-14, the Company primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition. As a result of the Company’s adoption of ASU No. 2009-14 on January 1, 2011, a majority of the Company’s products are now considered non-software elements under U.S. GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition. Because the Company had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, the Company determines a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered.

Revenue Recognition of Non-Software Deliverables

Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally 12 months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non-software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from one to eight years.

Revenue Recognition of Software Deliverables

The Company recognizes the following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because the Company does not have VSOE of the fair value of its software products, the Company is permitted to account for its typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fair value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred and the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typically based on the price charged when the element is sold separately to customers. The Company is unable to use the residual method to recognize revenues for some arrangements that include products that are software deliverables under U.S. GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in some of the Company’s arrangements.

For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported.

9




From time to time, the Company offers certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced.

Recently Adopted Accounting Pronouncement

In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-04,  Simplifying the Test for Goodwill Impairment. The guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company adopted the revised guidance during the first quarter of 2017. The adoption of ASU 2017-04 had no immediate impact on the Company’s condensed consolidated financial statements upon adoption, however, it could impact the calculation of goodwill impairments in future periods.

Recent Accounting Pronouncements to be Adopted

In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 is the final updated standard on revenue recognition. The standard supersedes the most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance becomes effective for the Company on January 1, 2018, and early adoption as of January 1, 2017 is permitted.

Subsequently, the FASB has issued the following standards related to ASU No. 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients . The Company must adopt ASU No. 2016-08, ASU No. 2016-10 and ASU No. 2016-12 with ASU No. 2014-09 (collectively, the “new revenue standards”). 

Entities have the option of using either a full retrospective or a modified approach to adopt the new revenue standards. The Company expects to elect the modified transition method and, while the Company is still in the process of evaluating the impact of this new accounting standard, it expects the impact will be significant. The adoption will result in a significant cumulative reduction in deferred revenue as of January 1, 2018 because the Company will no longer require VSOE of fair value to recognize software deliverables with Implied Maintenance Release PCS upon delivery. Upon adoption of ASC 606, the Company expects to recognize a greater proportion of revenue upon delivery of its products, whereas some of the Company’s current product sales are initially recorded in deferred revenue and recognized over a long period of time (as described in detail in the “Significant Accounting Policies - Revenue Recognition” section above). Accordingly, the Company’s operating results may become more volatile as a result of the adoption.

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 the Company on January 1, 2019, and early adoption is permitted upon issuance. The Company is evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.

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

10



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 (“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. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.

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. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the impact of the adoption of ASU No. 2016-16 on its financial statements, as well as timing of its adoption of the standard.

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. The new guidance becomes effective for the Company on January 1, 2018, and early adoption is permitted upon issuance. The Company is currently evaluating the potential impact of adopting this standard on its financial statements, as well as the timing of its adoption of the standard.

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 compensation cost per share was greater than the average market price of the Company’s 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 the Company’s 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 September 30, 2017 and for the nine months ended September 30, 2016 .
 
September 30, 2017
 
September 30, 2016
Options
2,334

 
3,939

Non-vested restricted stock units
3,289

 
687

Anti-dilutive potential common shares
5,623

 
4,626


On June 15, 2015, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2020 (the “Notes”). The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, the Company entered into a capped call transaction with a third party. The Company uses the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into

11



shares of the Company’s common stock but the Company’s stock price was less than the conversion price as of September 30, 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

The Company measures deferred compensation investments on a recurring basis. As of September 30, 2017 and December 31, 2016 , the Company’s 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 the Company’s deferred compensation investments measured at fair value on a recurring basis (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
September 30,
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
$
1,838

 
$
460

 
$
1,378

 
$


 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31, 2016
 
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
$
2,035

 
$
493

 
$
1,542

 
$


Financial Instruments Not Recorded at Fair Value

The carrying amounts of the Company’s 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 September 30, 2017 , the net carrying amount of the Notes was $106.1 million , and the fair value of the Notes was approximately $95.1 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):
 
September 30, 2017
 
December 31, 2016
Raw materials
$
11,518

 
$
10,481

Work in process
300

 
291

Finished goods
29,342

 
39,929

Total
$
41,160

 
$
50,701



12



As of September 30, 2017 and December 31, 2016 , finished goods inventory included $9.5 million and $8.6 million , respectively, associated with products shipped to customers and deferred labor costs for arrangements where revenue recognition had not yet commenced.

5.
INTANGIBLE ASSETS AND GOODWILL

Amortizing identifiable intangible assets related to the Company’s acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for the Company’s products consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
 
  Gross
 
Accumulated Amortization
 
  Net
 
  Gross
 
Accumulated Amortization
 
Net
Completed technologies and patents
$
58,562

 
$
(45,074
)
 
$
13,488

 
$
57,994

 
$
(38,657
)
 
$
19,337

Customer relationships
54,906

 
(52,399
)
 
2,507

 
54,597

 
(51,002
)
 
3,595

Trade names
1,346

 
(1,346
)
 

 
1,346

 
(1,346
)
 

Capitalized software costs
4,911

 
(4,911
)
 

 
4,911

 
(4,911
)
 

Total
$
119,725

 
$
(103,730
)
 
$
15,995

 
$
118,848

 
$
(95,916
)
 
$
22,932

 
Amortization expense related to all intangible assets in the aggregate was $2.3 million and $2.5 million , respectively, for the three months ended September 30, 2017 and 2016 , and $6.9 million and $8.0 million , respectively, for the nine months ended September 30, 2017 and 2016 . The Company expects amortization of acquired intangible assets to be $2.3 million for the remainder of 2017 , $9.3 million in 2018 and $4.4 million in 2019 .

The acquisition of Orad in 2015 resulted in goodwill of $32.6 million as of September 30, 2017 and December 31, 2016 .

6.
OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Deferred rent
$
3,292

 
$
5,458

Accrued restructuring
843

 
1,256

Deferred compensation
5,591

 
5,464

   Total
$
9,726

 
$
12,178


7.
COMMITMENTS AND CONTINGENCIES

Commitments

The Company 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.

The Company has letters of credit that are used as security deposits in connection with the Company’s leased Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at September 30, 2017 , 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 the Company is not in default under the underlying leases and meets 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.

The Company also has 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 $1.2 million that otherwise support its ongoing operations. These letters

13



of credit have various terms and expire during 2017 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements.

Contingencies

The Company’s 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, the Company is 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. The Company does not believe these matters will have a material adverse effect on the Company’s financial position or results of operations. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, the Company’s 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. The Company’s results could be materially adversely affected if the Company is accused of, or found to be, infringing third parties’ intellectual property rights.

On October 30, 2017 the Company entered into settlement and patent cross-licensing agreements with Harmonic Inc. (“Harmonic”), ending its patent infringement litigation against Harmonic which commenced in 2011. Under the terms of the agreements, Harmonic will pay the Company $6.0 million . The first payment of $2.5 million was made on October 24, 2017; the remaining $3.5 million will be paid in two installments of $1.5 million and $2.0 million in 2019 and 2020, respectively. The Company will record a gain associated with the settlement of past patent infringements in the fourth quarter of 2017.

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 the Company and certain of its executive officers seeking unspecified damages and other relief on behalf of a purported class of purchasers of the Company’s 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 Securities Exchange Act of 1934 (“the Exchange Act”) and Rule 10b-5 promulgated thereunder. The complaint’s allegations relate generally to the Company’s disclosure surrounding the level of implementation of the Company’s Avid NEXIS solution product offerings. On February 7, 2017, the Court appointed a lead plaintiff and counsel in the matter. On June 14, 2017, the Company moved to dismiss the action. On July 31, 2017, the lead plaintiff filed an opposition to the Company’s motion to dismiss, and on August 21, 2017, the Company filed its reply brief. On October 13, 2017, after a mediation, the parties reached an agreement in principle to settle this litigation. The Company expects the majority of the settlement to be funded by its insurers. Finalization of the settlement is subject to a number of conditions, including execution of definitive documentation and approval by the court.

The Company considers all claims on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure requirements and whether to accrue for such claims in its consolidated financial statements. The Company records 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 September 30, 2017 and as of the date of filing of these consolidated financial statements, the Company believes 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, the Company provides indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to the Company’s 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 the Company could be required to make under these indemnification provisions is theoretically unlimited.  To date, the Company has not incurred material costs related to these indemnification provisions; accordingly, the Company believes the estimated fair value of these indemnification provisions

14



is immaterial. Further, certain of the Company’s arrangements with customers include clauses whereby the Company may be subject to penalties for failure to meet certain performance obligations; however, the Company has not recorded any related material penalties to date.

The Company provides 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, the Company records 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 nine months ended September 30, 2017 and 2016 (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Accrual balance at beginning of year
$
2,518

 
$
2,234

Accruals for product warranties
1,872

 
1,992

Costs of warranty claims
(1,897
)
 
(1,872
)
Accrual balance at end of period
$
2,493

 
$
2,354


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

8.
RESTRUCTURING COSTS AND ACCRUALS

In February 2016, the Company committed to a restructuring plan that encompassed a series of measures intended to allow the Company to more efficiently operate in a leaner, more directed cost structure. These included reductions in the Company’s workforce, 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 June 30, 2017 .

During the three and nine months ended September 30, 2017 , the Company recorded recoveries of $0.6 million and restructuring charges of $6.5 million , respectively. The restructuring charges for the  nine months ended   September 30, 2017  included  $1.0 million  for the severance costs and estimate adjustments related to approximately  64  terminated employees and  $5.4 million  for the closure of certain excess facility space, including $3.2 million of leasehold improvement write-offs and $0.8 million adjustments related to sublease assumptions associated with prior abandoned facilities.

During the three and nine months ended September 30, 2016 , the Company recorded restructuring charges of $5.3 million and restructuring charges of $7.9 million , respectively. During the nine months ended September 30, 2016 , the Company recorded restructuring charges of $5.0 million for the severance costs and estimate adjustments related to approximately 123 terminated employees and  $2.9 million  for the closure of certain excess facility space, including $1.1 million of leasehold improvement write-offs, and $0.8 million adjustments related to sublease assumptions associated with prior abandoned facilities.

15



Restructuring Summary

The following table sets forth the activity in the restructuring accruals for the nine months ended September 30, 2017 (in thousands):
 
Employee-
Related
 
Facilities/Other-Related
 
Total
Accrual balance as of December 31, 2016
$
7,018

 
$
3,093

 
$
10,111

New restructuring charges – operating expenses
1,930

 
1,485

 
3,415

Revisions of estimated liabilities
(902
)
 
760

 
(142
)
Non-cash write-offs

 
3,191

 
3,191

Accretion

 
278

 
278

Cash payments
(5,479
)
 
(2,970
)
 
(8,449
)
Foreign exchange impact on ending balance
(46
)
 
15

 
(31
)
Accrual balance as of September 30, 2017
$
2,521

 
$
5,852

 
$
8,373


The employee-related accruals at September 30, 2017 represent severance costs to former employees that will be paid out within 12 months, and are, therefore, included in the caption “accrued expenses and other current liabilities” in the Company’s consolidated balance sheets.

The facilities/other-related accruals at September 30, 2017 represent contractual lease payments, net of estimated sublease income, on space vacated as part of the Company’s restructuring actions. The leases, and payments against the amounts accrued, extend through December 2021 unless the Company is able to negotiate earlier terminations. Of the total facilities/other-related balance, $1.9 million is included in the caption “accrued expenses and other current liabilities”, $0.8 million is included in the caption “other long-term liabilities”, and $3.2 million of fixed asset write-off is reflected in the caption “property and equipment, net” in the Company’s condensed consolidated balance sheet as of September 30, 2017 .

9.
PRODUCT AND GEOGRAPHIC INFORMATION

The Company, through the evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers (the Company’s chief executive officer and chief financial officer), has determined that the Company has one reportable segment. The following table is a summary of the Company’s revenues by type for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Video products and solutions net revenues
$
27,058

 
$
39,182

 
$
82,585

 
$
118,252

Audio products and solutions net revenues
27,261

 
24,558

 
70,395

 
105,589

Products and solutions net revenues
54,319

 
63,740

 
152,980

 
223,841

Services net revenues
50,946

 
55,279

 
158,765

 
172,794

Total net revenues
$
105,265

 
$
119,019

 
$
311,745

 
$
396,635



16



The following table sets forth the Company’s revenues by geographic region for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
United States
$
38,624

 
$
45,982

 
$
121,309

 
$
145,384

Other Americas
7,377

 
9,702

 
20,581

 
30,674

Europe, Middle East and Africa
41,526

 
44,524

 
121,647

 
159,243

Asia-Pacific
17,738

 
18,811

 
48,208

 
61,334

Total net revenues
$
105,265

 
$
119,019

 
$
311,745

 
$
396,635


10.
LONG-TERM DEBT AND CREDIT AGREEMENT

Long-term debt consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Term Loan, net of unamortized debt issuance costs of $3,144 at September 30, 2017 and $4,042 at December 31, 2016
$
89,356

 
$
92,208

Notes, net of unamortized original issue discount and debt issuance costs of $18,896 at September 30, 2017 and $23,413 at December 31, 2016, respectively
106,104

 
101,587

Other long-term debt
912

 

    Total debt
196,372

 
193,795

Less: current portion
5,072

 
5,000

Total long-term debt
$
191,300

 
$
188,795


2.00% Convertible Senior Notes due 2020

On June 15, 2015, the Company issued $125.0 million aggregate principal amount of its 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 nine months ended September 30, 2017 and 2016 was $6.4 million and $6.1 million , respectively, reflecting the coupon and accretion of the discount.

Credit Facility

On February 26, 2016, the Company entered into the Financing Agreement with the Lenders. Pursuant to the Financing Agreement, the Lenders originally agreed to provide the Company 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. All outstanding loans under the Financing Agreement will become due and payable on the earlier of February 26, 2021 and the date that is 30 days prior to June 15, 2020 if the $125.0 million in outstanding principal of the Notes has not been repaid or refinanced by such time. The Company granted a security interest on substantially all of its assets to secure the obligations under the Credit Facility and the Term Loan. The Company borrowed the full amount of the Term Loan, or $100.0 million , as of the closing date of the Financing Agreement, and there were no amounts outstanding under the Credit Facility as of September 30, 2017 .

The Company may prepay all or any portion of the Term Loan prior to its stated maturity, subject to the payment of certain fees based on the amount repaid. The Term Loan requires quarterly principal payments of $1.25 million, which commenced in June 2016. The Term Loan also requires the Company to use 50% of excess cash flow, as defined in the Financing Agreement, to repay outstanding principal of the loans under the Financing Agreement.


17



The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Company’s payment obligations may be accelerated. On March 14, 2017 (the “Amendment No. 1 Effective Date”), the Company entered into an amendment (the “First Amendment”) to the Financing Agreement. The First Amendment modified the covenant requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (a) total funded indebtedness to (b) consolidated EBITDA) such that following the Amendment No. 1 Effective Date, the Company is required to maintain a Leverage Ratio of no greater than 3.50:1.00 for the four quarters ended March 31, 2017, 4.20:1.00 for the four quarters ended June 30, 2017, 4.75:1.00 for the four quarters ended September 30, 2017, 4.80:1.00 for the four quarters ending December 31, 2017, 4:40:1.00 for each of the four quarters ending March 31, 2018 through March 31, 2019, respectively, and thereafter declining over time from 3.50:1.00 to 2.50:1.00. Following the Amendment No. 1 Effective Date, interest accrues on outstanding borrowings under the credit facility and the term loan (each as defined in the Financing Agreement) at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 7.25% or a Reference Rate (as defined in the Financing Agreement) plus 6.25%, at the option of the Company. The Company recorded $5.9 million and $4.6 million of interest expense on the Term Loan for the nine months ended September 30, 2017 and 2016 , respectively. As of September 30, 2017 , the Company was in compliance with the Financing Agreement covenants.

On November 9, 2017 (the “Amendment No. 2 Effective Date”), the Company entered into an amendment (the “Second Amendment”) to the Financing Agreement. The Second Amendment extended an additional $ 15.0 million term loan to the Company, thereby increasing the aggregate principal amount of the term loan to $ 115.0 million . The Second Amendment also increased the amount of available revolving credit by $ 5.0 million to an aggregate amount of $ 10.0 million . The additional $ 15.0 million term loan must be repaid in quarterly principal payments of $ 187,500 commencing in March 2018. The Second Amendment also granted the Company the ability to use up to $ 15.0 million to purchase Notes and modified the definition of consolidated EBITDA used in the Leverage Ratio calculation to adjust for expected changes in deferred revenue due to the adoption of ASC 606.

11.    STOCKHOLDERS’ EQUITY

Stock-Based Compensation

Information with respect to option shares granted under all the Company’s stock incentive plans for the nine months ended September 30, 2017 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, 2017
2,847,502


2,847,502

$10.43
 
 
Granted



$—
 
 
Exercised



$—
 
 
Forfeited or canceled
(513,285
)

(513,285
)
$13.49
 
 
Options outstanding at September 30, 2017
2,334,217


2,334,217

$9.75
2.51
$—
Options vested at September 30, 2017 or expected to vest
 
 
2,334,217

$9.75
2.51
$—
Options exercisable at September 30, 2017
 
 
2,315,467

$9.77
2.51
$—

18




Information with respect to the Company’s non-vested restricted stock units for the nine months ended September 30, 2017 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, 2017
1,513,098

642,683

2,155,781

$6.85
 
 
Granted
1,130,596

639,703

1,770,299

$4.61
 
 
Vested
(538,384
)

(538,384
)
$7.84
 
 
Forfeited
(70,142
)
(28,276
)
(98,418
)
$6.17
 
 
Non-vested at September 30, 2017
2,035,168

1,254,110

3,289,278

$5.16
0.86
$14,900
Expected to vest
 
 
2,674,871

$5.08
0.86
$12,117

Stock-based compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Cost of products revenues
$
14

 
$
12

 
$
39

 
$
43

Cost of services revenues
49

 
145

 
508

 
445

Research and development expenses
222

 
73

 
474

 
222

Marketing and selling expenses
582

 
547

 
1,375

 
1,508

General and administrative expenses
1,614

 
951

 
3,478

 
3,898

 
$
2,481

 
$
1,728

 
$
5,874

 
$
6,116


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 and hardware for digital media content production, 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, that enable the creation, distribution and optimization of audio and video content. 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 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 products include feature films, television programming, live events, news broadcasts, sports productions, commercials, music, video and other digital media content.

Our mission is to create the most powerful and collaborative media network that enables the creation, distribution and monetization of the most inspiring content in the world. Guided by our Avid Everywhere strategic vision, we strive to deliver the industry’s most open, tightly integrated and efficient platform for media, connecting content creation with collaboration, asset protection, distribution and consumption of media in the world - from the most prestigious and award-winning feature films, music recordings, and television shows, to live concerts, sporting events and news broadcasts. We have been honored over time for our technological innovation with 15 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award.  Our solutions were used in all 2017 Oscar nominated films for Best Picture, Best Film Editing and Best Original Song. Every 2017 Grammy nominee for Record of the Year and Album of The Year relied on our music creation solutions powered by our MediaCentral Platform.

Operations Overview

Our strategy is built on three pillars, Avid Everywhere, The Avid Advantage and the Avid Customer Association, (“ACA”). Avid Everywhere is our strategic vision for connecting creative professionals and media organizations with their audiences in a more powerful, efficient, collaborative, and profitable way. Central to the Avid Everywhere vision is the Avid MediaCentral Platform, an open, extensible, and customizable foundation that streamlines and simplifies workflows by integrating all Avid or third party products and services that run on top of it. The platform provides secure and protected access, which 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 production and distribution environment for the media industry. The Avid Advantage complements Avid Everywhere by offering a new standard in service, support and education to enable our customers to derive more efficiency from their Avid investment. Finally, the ACA is an association of dedicated media community visionaries, thought leaders and users designed to provide essential strategic leadership to the media industry, facilitate collaboration between Avid and key industry leaders and visionaries, and strengthen relationships between our customers and us. This preeminent client and user community helps shape our collective future.

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 more than 84,000 paying cloud-enabled subscribers in the third quarter of 2017, a 69% increase from the third quarter of 2016 . 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 an increasing portion of our total revenue is recognized ratably rather than up front, and as new product offerings are sold at a wider variety of price points.

In April 2017, we entered into a strategic alliance agreement with Microsoft Corporation to develop and market cloud-based solutions and cloud services aimed at the media and entertainment industry. As part of the agreement, we have chosen Microsoft Azure as our preferred cloud hosting platform, and will develop and launch a range of Software-as-a-Service (“SaaS”) and Platform-as-a-Service (PaaS) offerings powered by the Avid MediaCentral Platform.

As a complement to our core strategy, we continue to review and implement programs throughout the Company to reduce costs, increase operational efficiencies, align talent and enhance our business, including the cost efficiency program announced in

20



February 2016. The cost efficiency program encompassed a series of measures intended to allow us to more efficiently operate in a leaner, more directed cost structure. These measures included reductions in our workforce, 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 June 30, 2017 .

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.

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, 2016 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, nor have there been any significant changes to the policies applied or methodologies used by management to measure the critical accounting estimates.

Revenue Recognition

General

We commence revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products we sell do not require significant production, modification or customization. Installation of our products is generally routine, consists of implementation and configuration and does not have to be performed by us.

At the time of a sales transaction, we make an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When making this assessment, we consider customer credit-worthiness and historical payment experience. If it is determined from the outset of the arrangement that collection is not reasonably assured, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, we also assess whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, our collection experience in similar transactions without making concessions and our involvement, if any, in third-party financing transactions, among other factors. If the fee is not fixed or determinable, revenues are recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. If a significant portion of the fee is due after our normal payment terms, we evaluate whether we have sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If we were to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period.

We often receive multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when we have concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, we account for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when we have concluded that two or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, we account for those orders as separate arrangements for revenue recognition purposes.

21




For many of our products, we have had an ongoing practice of making available, at no charge to customers, minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively the “Software Updates”) for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element, or Implied Maintenance Release PCS.

Over the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, we have taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release PCS for many of our products, including our Media Composer, Pro Tools and Sibelius product lines. In the third quarter and fourth quarter of 2015, respectively, we concluded that Implied Maintenance Release PCS for our Media Composer and Sibelius product lines had ceased. In the first quarter of 2016, in connection with the release of Cloud Collaboration in Pro Tools version 12.5, which was an undelivered feature that had prevented us from recognizing any revenue related to new Pro Tools 12 software sales as it represented a specified upgrade right for which vendor specific objective evidence or (“VSOE”) of fair value was not available, we concluded that Implied Maintenance Release PCS for our Pro Tools 12 product lines had also ended. As a result of the conclusion that Implied Maintenance Release PCS on Pro Tools 12 has ended, revenue and net income in the first quarter of 2016 increased approximately $11.1 million , reflecting the recognition of orders received after the launch of Pro Tools 12 that would have qualified for earlier recognition using the residual method of accounting.  In addition, the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized on a ratable basis over a much longer expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The reduction in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional $12.0 million and $33.7 million of revenue during the three and nine months ended September 30, 2016 , respectively.

Management will continue to evaluate the judgment of whether Implied Maintenance Release PCS exists on each product line and version. Since the remaining products that contain Implied Maintenance Release PCS largely consist of products that fall under the non-software revenue recognition guidance, where management defers a small portion of revenue based on the best estimated selling price of Implied Maintenance Release PCS rather than the entire order value as required for transactions that fall under software revenue recognition guidance, any further determinations that Implied Maintenance Release PCS no longer exists for other product lines will be unlikely to result in a significant impact to the financial statements in any future periods.

As a result of the conclusion that Implied Maintenance Release PCS no longer exists for Pro Tools 12, prospective revenue recognition on new product orders will be recognized upfront, assuming all other revenue recognition criteria are met and VSOE of fair value exists for all undelivered elements. The cessation of Implied Maintenance Release PCS for Pro Tools and other products subject to software revenue recognition guidance, in addition to the initial impact of immediately recognizing revenue related to orders that would have qualified for earlier recognition using the residual method of accounting, resulted in increased revenue throughout 2016 as the elimination of Implied Maintenance Release PCS also results in the accelerated recognition of preexisting maintenance and product revenues that still do not qualify for the residual method of accounting but are now being recognized on an accelerated basis over a shorter remaining contractual maintenance period as compared to (i) the previous model of being recognized over a longer expected period of Implied Maintenance Release PCS and (ii) the prospective model of recognizing revenue ratably over a longer original contractual maintenance support period. As a result of the compressed recognition period for these prior transactions and longer recognition of the respective renewals, we expect significant decreases in revenues related to impacted product lines in 2017 as recognition from old contracts is completed and new contracts are recognized over a traditional maintenance period.

We enter into certain contractual arrangements that have multiple elements, one or more of which may be delivered subsequent to the delivery of other elements. These multiple-deliverable arrangements may include products, support, training, professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, we allocate revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, we first determine the selling price of each deliverable based on (i) VSOE of fair value if that exists, (ii) third-party evidence of selling price, or TPE, when VSOE does not exist; or (iii) best estimate of the selling price or (“BESP”) when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. Our process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, we consider a number of data points, including:
the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;

22



contractually stated prices for deliverables that are intended to be sold on a standalone basis;
the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and
other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

In determining a BESP for Implied Maintenance Release PCS, which we do not sell separately, we consider (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from our established pricing practices had the deliverable been offered separately and (iv) the prices a customer would likely be willing to pay.

We estimate the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, we will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period.

We have established VSOE of fair value for all professional services and training and for some of our support offerings. Our policy for establishing VSOE of fair value consists of evaluating standalone sales to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists.

In accordance with Accounting Standards Update, or ASU, No. 2009-14, we exclude from the scope of software revenue recognition requirements our sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. We adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010.

Prior to our adoption of ASU No. 2009-14, we primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification, or ASC, Subtopic 985-605, Software - Revenue Recognition. As a result of our adoption of ASU No. 2009-14 on January 1, 2011, a majority of our products are now considered non-software elements under U.S. GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition . Because we had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, we determine a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered.

The timing of revenue recognition of customer arrangements follows a number of different accounting models determined by the characteristics of the arrangement, and that timing can vary significantly from the timing of related cash payments due from customers. One significant factor affecting the timing of revenue recognition is the determination of whether each deliverable in the arrangement is considered to be a software deliverable or a non-software deliverable. For transactions occurring after January 1, 2011, our revenue recognition policies have generally resulted in the recognition of approximately 70% of billings as revenue in the year of billing, and prior to January 1, 2011, the previously applied revenue recognition policies resulted in the recognition of approximately 30% of billings as revenue in the year of billing. We expect this trend to continue in future periods.

Revenue Recognition of Non-Software Deliverables

Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of our product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally 12 months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non-

23



software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from one to eight years.

Revenue Recognition of Software Deliverables

We recognize the following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because we do not have VSOE of the fair value of our software products, we are permitted to account for our typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fair value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred and the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typically based on the price charged when the element is sold separately to customers. We are unable to use the residual method to recognize revenues for some arrangements that include products that are software deliverables under U.S. GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in some of our arrangements.

For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported.

From time to time, we offer certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced.


24



RESULTS OF OPERATIONS

The following table sets forth certain items from our consolidated statements of operations as a percentage of net revenues for the three and nine months ended September 30, 2017 and 2016 :
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues:
 
 
 
 
 
 
 
Product
51.6
 %
 
53.6
 %
 
49.1
 %
 
56.4
 %
Services
48.4
 %
 
46.4
 %
 
50.9
 %
 
43.6
 %
Total net revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenues
42.7
 %
 
36.7
 %
 
41.1
 %
 
33.6
 %
Gross margin
57.3
 %
 
63.3
 %
 
58.9
 %
 
66.4
 %
Operating expenses:
 
 
 
 
 
 
 
Research and development
15.2
 %
 
16.8
 %
 
16.6
 %
 
15.8
 %
Marketing and selling
24.4
 %
 
22.9
 %
 
25.8
 %
 
22.4
 %
General and administrative
14.4
 %
 
11.6
 %
 
13.9
 %
 
12.2
 %
Amortization of intangible assets
0.3
 %
 
0.5
 %
 
0.4
 %
 
0.5
 %
Restructuring costs, net
(0.6
)%
 
4.5
 %
 
2.1
 %
 
2.0
 %
Total operating expenses
53.7
 %
 
56.3
 %
 
58.8
 %
 
52.9
 %
Operating income
3.6
 %
 
7.0
 %
 
0.1
 %
 
13.5
 %
Interest and other expense, net
(4.5
)%
 
(4.0
)%
 
(4.3
)%
 
(3.5
)%
(Loss) income before income taxes
(0.9
)%
 
3.0
 %
 
(4.2
)%
 
10.0
 %
Benefit from income taxes
(1.0
)%
 
(4.5
)%
 
(0.1
)%
 
(1.0
)%
Net income (loss)
0.1
 %
 
7.5
 %
 
(4.1
)%
 
11.0
 %

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, 2016 .

Net Revenues for the Three Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
Net Revenues
 
$
 
%
 
Net Revenues
Video products and solutions
$
27,058

 
$
(12,124
)
 
(30.9)%
 
$
39,182

Audio products and solutions
27,261

 
2,703

 
11.0%
 
24,558

Products and solutions
54,319

 
(9,421
)
 
(14.8)%
 
63,740

Services
50,946

 
(4,333
)
 
(7.8)%
 
55,279

Total net revenues
$
105,265

 
$
(13,754
)
 
(11.6)%
 
$
119,019



25



Net Revenues for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
Net Revenues
 
$
 
%
 
Net Revenues
Video products and solutions
$
82,585

 
$
(35,667
)
 
(30.2)%
 
$
118,252

Audio products and solutions
70,395

 
(35,194
)
 
(33.3)%
 
105,589

Products and solutions
152,980

 
(70,861
)
 
(31.7)%
 
223,841

Services
158,765

 
(14,029
)
 
(8.1)%
 
172,794

Total net revenues
$
311,745

 
$
(84,890
)
 
(21.4)%
 
$
396,635


The following table sets forth the percentage of our net revenues attributable to geographic regions for the three and nine months ended September 30, 2017 and 2016 :
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
United States
37%
 
39%
 
39%
 
37%
Other Americas
7%
 
8%
 
7%
 
8%
Europe, Middle East and Africa
39%
 
37%
 
39%
 
40%
Asia-Pacific
17%
 
16%
 
15%
 
15%

Video Products and Solutions Revenues

Video products and solutions revenues are derived primarily from sales of our storage and workflow solutions, our media management solutions and our video creative tools. Video products and solutions revenues decreased $12.1 million , or 30.9% , for the three months ended September 30, 2017 , and decreased $35.7 million , or 30.2% , for the nine months ended September 30, 2017 compared to the same periods in 2016 . The decrease in video revenues was primarily due to lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. As a result of our adoption of ASU No. 2009-13 and ASU No. 2009-14 on January 1, 2011, many of our product orders now qualify for upfront revenue recognition; however, prior to adoption of this accounting guidance, the same orders required ratable recognition over periods of up to eight years. Deferred revenue associated with transactions executed prior to the adoption of ASU No. 2009-13 and ASU No. 2009-14 was largely amortized in 2016.
 
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 increased $2.7 million , or 11.0% , for the three months ended September 30, 2017 , and decreased $35.2 million , or 33.3% , for the nine months ended September 30, 2017 , compared to the same periods in 2016 . The increase for the three months ended September 30, 2017 was primarily due to strengthened sales of our Pro Tools and control surface products. The decrease in audio revenues for the nine months ended September 30, 2017 was primarily due to the accelerated revenue recognition of Pro Tools 12 during the nine months ended September 30, 2016 as a result of the cessation of Implied Maintenance Release PCS for Pro Tools. The decrease during the period was also due to the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010.

Services Revenues

Services revenues are derived primarily from maintenance contracts, as well as professional services and training. Services revenues decreased $4.3 million , or 7.8% , for the three months ended September 30, 2017 , and decreased $14.0 million , or 8.1% , for the nine months ended September 30, 2017 , compared to the same periods in 2016 . The decrease was primarily due to the accelerated revenue recognition of maintenance contracts and increasing conversion rates of new maintenance contracts into revenue during the three and nine months ended September 30, 2016 as the result of the determination that Implied Maintenance Release PCS on Pro Tools 12 no longer existed during the three months ended March 31, 2016. T he previously discussed lower

26



amortization of deferred revenues attributable to transactions executed on or before December 31, 2010 also contributed to the decreases.

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 September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
Costs
 
$
 
%
 
Costs
Products
$
29,485

 
$
2,692

 
10.0%
 
$
26,793

Services
13,472

 
(1,413
)
 
(9.5)%
 
14,885

Amortization of intangible assets
1,950

 

 
—%
 
1,950

    Total cost of revenues
$
44,907

 
$
1,279

 
2.9%
 
$
43,628

 
 
 
 
 
 
 
 
Gross profit
$
60,358

 
$
(15,033
)
 
(19.9)%
 
$
75,391


Costs of Revenues and Gross Profit for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
Costs
 
$
 
%
 
Costs
Products
$
80,478

 
$
(1,927
)
 
(2.3)%
 
$
82,405

Services
41,747

 
(3,379
)
 
(7.5)%
 
45,126

Amortization of intangible assets
5,850

 

 
—%
 
5,850

    Total cost of revenues
$
128,075

 
$
(5,306
)
 
(4.0)%
 
$
133,381

 
 
 
 
 
 
 
 
Gross profit
$
183,670

 
$
(79,584
)
 
(30.2)%
 
$
263,254



27



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, 2016 . Our total gross margin percentage for the three months ended September 30, 2017 decreased to 57.3% from 63.3% for the same period in 2016 , and for the nine months ended September 30, 2017 decreased to 58.9% from 66.4% for the same period in 2016 . The decreases were primarily due to the decreased revenue from our products and services as discussed above, partially offset by cost savings resulting from our programs to reduce costs and increase operational efficiencies.

Gross Margin % for the Three Months Ended September 30, 2017 and 2016
 
2017 Gross
Margin %
 
Change
 
2016 Gross
Margin %
Products
45.7%
 
(12.3)%
 
58.0%
Services
73.6%
 
0.5%
 
73.1%
Total
57.3%
 
(6.0)%
 
63.3%

Gross Margin % for the Nine Months Ended September 30, 2017 and 2016
 
2017 Gross
Margin %
 
Change
 
2016 Gross
Margin %
Products
47.4%
 
(15.8)%
 
63.2%
Services
73.7%
 
(0.2)%
 
73.9%
Total
58.9%
 
(7.5)%
 
66.4%

Operating Expenses and Operating Income

Operating Expenses and Operating Income for the Three Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
Expenses
 
$
 
%
 
Expenses
Research and development
$
16,025

 
$
(3,928
)
 
(19.7)%
 
$
19,953

Marketing and selling
25,652

 
(1,579
)
 
(5.8)%
 
27,231

General and administrative
15,193

 
1,371

 
9.9%
 
13,822

Amortization of intangible assets
362

 
(205
)
 
(36.2)%
 
567

Restructuring costs, net
(582
)
 
(5,896
)
 
(111.0)%
 
5,314

Total operating expenses
$
56,650

 
$
(10,237
)
 
(15.3)%
 
$
66,887

 
 
 
 
 
 
 
 
Operating income
$
3,708

 
$
(4,796
)
 
(56.4)%
 
$
8,504


28




Operating Expenses and Operating Income for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
Expenses
 
$
 
%
 
Expenses
Research and development
$
51,904

 
$
(10,887
)
 
(17.3)%
 
$
62,791

Marketing and selling
80,481

 
(8,546
)
 
(9.6)%
 
89,027

General and administrative
43,268

 
(5,091
)
 
(10.5)%
 
48,359

Amortization of intangible assets
1,088

 
(1,047
)
 
(49.0)%
 
2,135

Restructuring costs, net
6,464

 
(1,414
)
 
(17.9)%
 
7,878

Total operating expenses
$
183,205

 
$
(26,985
)
 
(12.8)%
 
$
210,190

 
 
 
 
 
 
 
 
Operating income
$
465

 
$
(52,599
)
 
(99.1)%
 
$
53,064


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 $3.9 million , or 19.7% , for the three months ended September 30, 2017 , and decreased $10.9 million , or 17.3% , for the nine months ended September 30, 2017 , compared to the same periods in 2016 . 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 September 30, 2017 and 2016
(dollars in thousands)
 
2017 Decrease
From 2016
 
$
 
%
Personnel-related
$
(2,371
)
 
(21.1
)%
Facilities and information technology
(799
)
 
(19.3
)%
Consulting and outside services
(588
)
 
(16.6
)%
Other
(170
)
 
(16.5
)%
Total research and development expenses decrease
$
(3,928
)
 
(19.7
)%

Change in R&D Expenses for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 Decrease
From 2016
 
$
 
%
Personnel-related
$
(6,701
)
 
(18.8
)%
Consulting and outside services
(1,715
)
 
(15.3
)%
Facilities and information technology
(1,634
)
 
(13.3
)%
Computer hardware and supplies
(422
)
 
(31.1
)%
Other
(415
)
 
(17.3
)%
Total research and development expenses decrease
$
(10,887
)
 
(17.3
)%


29



The decreases in all R&D expense categories for the three and nine months ended September 30, 2017 , compared to the same periods in 2016 , were primarily the result of our cost efficiency program.

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 $1.6 million , or 5.8% , for the three months ended September 30, 2017 , and decreased $8.5 million , or 9.6% , for the nine months ended September 30, 2017 , compared to the same periods in 2016 . 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 September 30, 2017 and 2016
(dollars in thousands)
 
2017 (Decrease) Increase
From 2016
 
$
 
%
Foreign exchange losses
$
1,076

 
194.9
 %
Personnel-related
(997
)
 
(5.8
)%
Advertising and promotion
(539
)
 
(28.0
)%
Bad debt
(467
)
 
(89.2
)%
Facilities and information technology
(416
)
 
(8.6
)%
Consulting and outside services
(406
)
 
(28.1
)%
Other
170

 
20.9
 %
Total marketing and selling expenses decrease
$
(1,579
)
 
(5.8
)%

Change in Marketing and Selling Expenses for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 (Decrease) Increase
From 2016
 
$
 
%
Personnel-related
$
(6,648
)
 
(11.9
)%
Foreign exchange losses
2,990

 
164.6
 %
Consulting and outside services
(2,406
)
 
(39.7
)%
Advertising and promotion
(1,566
)
 
(19.7
)%
Bad debt
(1,048
)
 
(117.8
)%
Other
132

 
0.8
 %
Total marketing and selling expenses decrease
$
(8,546
)
 
(9.6
)%

The decreases in personnel-related, consulting and outside services, and advertising and promotion expenses for the three and nine months ended September 30, 2017 , compared to the same periods in 2016 , were primarily the result of our cost efficiency program. The decreases in bad debt expense for the three and nine months ended September 30, 2017 , compared to the same periods in 2016 , were due to high bad debt reserve set up during 2016 and no additional reserve required in 2017. During the three and nine months ended September 30, 2017 , net foreign exchange losses (specifically, resulting from foreign currency denominated transactions and the revaluation of foreign currency denominated assets and liabilities), which are included in marketing and selling expenses, were $1.6 million and $4.8 million , respectively, compared to loss of $0.6 million and $1.8 million , respectively, during the three and nine months ended September 30, 2016 .

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

30



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 $1.4 million , or 9.9% , for the three months ended September 30, 2017 , and decreased $5.1 million , or 10.5% , for the nine months ended September 30, 2017 , compared to the same periods in 2016 . 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 September 30, 2017 and 2016
(dollars in thousands)
 
2017 Increase (Decrease)
From 2016
 
$
 
%
Consulting and outside services
$
1,551

 
44.2
 %
Other
(180
)
 
(1.8
)%
Total general and administrative expenses decrease
$
1,371

 
9.9
 %

Change in G&A Expenses for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017 Decrease
From 2016
 
$
 
%
Personnel-related
$
(3,893
)
 
(17.0
)%
Facilities and information technology
(611
)
 
(8.2
)%
Consulting and outside services
(327
)
 
(2.3
)%
Other
(260
)
 
(6.9
)%
Total general and administrative expenses decrease
$
(5,091
)
 
(10.5
)%

The decreases in all G&A expense categories for the nine months ended September 30, 2017 , compared to the same period in 2016 , were primarily the result of our cost efficiency program. The increase in consulting and outside services for the three months ended September 30, 2017 , compared to the same period in 2016 , was primarily due to increased legal professional fees related to class actions and settlements.

Benefit from Income Taxes

Benefit from Income Taxes for the Three Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
 
 
$
 
%
 
 
Benefit from income taxes
$
(1,065
)
 
$
4,256

 
(80.0)%
 
$
(5,321
)

Benefit from Income Taxes for the Nine Months Ended September 30, 2017 and 2016
(dollars in thousands)
 
2017
 
Change
 
2016
 
<