Avid 2004 Annual Report Download - page 30

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
We develop, market, sell and support a wide range of software and hardware for digital media production,
management and distribution. 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 diverse range of product and service
offerings enables customers to “Make, Manage, and Move Media.” We operate our business in two reporting segments,
Video and Film Editing and Effects (Video) and Audio.
An important part of our strategy for the past few years has included expanding and enhancing our product lines
and increasing revenues through both acquisitions and internal development of products. In January 2004, we acquired
Munich, Germany-based NXN Software GmbH (“NXN”), a leading provider of asset and production management systems
specifically targeted for the entertainment and computer graphics industries. This acquisition expands our offering in digital
asset management by enabling our film and video post-production, broadcast, audio and 3D animation customers to
leverage the workflow capabilities of the Alienbrain® product line. NXN has been integrated into our Video segment. In
August 2004, we completed the acquisition of Irwindale, California-based M-Audio, a leading provider of digital audio and
MIDI solutions for electronic musicians and audio professionals. We have integrated M-Audio into our Audio segment and
will market its line of audio products alongside Digidesign's digital audio workstations for the professional and
home/hobbyist markets. Finally, in September 2004, we acquired Avid Nordic AB, a Sweden-based distributor of Avid
products operating in the Nordic and Benelux regions of Europe. This acquisition allows us to directly serve customers in
this region. We previously had no ownership interest in Avid Nordic AB.
We generally derive approximately half of our revenues from customers outside the United States. This business
is, for the most part, transacted through international subsidiaries and generally in the currency of the end-user customers.
Therefore, we are exposed to the risk that changes in foreign currency could materially impact, either positively or
adversely, our revenues, net income (loss) and cash flow. To hedge against the foreign exchange exposure of certain
forecasted receivables, payables and cash balances of our foreign subsidiaries, we enter into short-term foreign currency
forward-exchange contracts. We record gains and losses associated with currency rate changes on these contracts in results
of operations, offsetting remeasurement gains and losses on the related assets and liabilities. The success of this hedging
program depends on forecasts of transaction activity in the various currencies. To the extent that these forecasts are over- or
understated during the periods of currency volatility, we could experience unanticipated currency gains or losses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our 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 regularly re-evaluate our estimates and judgments, including those related to revenue recognition; allowances for
product returns and exchanges; allowance for bad debts; the valuation of inventories, goodwill and other intangible assets,
income tax assets; and reserves for recourse under financing transactions. We base our estimates and judgments on
historical experience and various other factors that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue
and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies most significantly affect the portrayal of our financial
condition and involve our most difficult and subjective judgments.
Revenue Recognition and Allowances for Product Returns and Exchanges
We recognize revenue from sales of products upon receipt of a signed purchase order or contract and product
shipment to distributors or end users, provided that collection is reasonably assured, the fee is fixed or determinable, and all
other revenue recognition criteria of SOP 97-2, "Software Revenue Recognition", as amended, and Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, are met. Within our Video
segment and for much of our Audio segment, we follow the guidance of SOP 97-2 for revenue recognition since our
products and services are software-related. However, for certain offerings in our Audio segment, software is incidental to
the delivered products and services. For these products, we record revenue based on satisfying the criteria in SAB No. 104.