Avid Focused on Margins, Lost Crucial Sales. Investors Beware.

Back in early February, shares of Avid Technology (NAS: AVID) jumped sky-high on a seemingly terrific earnings report. That's when I started a bearish CAPScall on the maker of software for media production. "I think investors will wake up from this euphoric jump to find that Avid's long-term prospects don't measure up," I said. "Focusing on margin growth without destroying the underlying business is very, very hard. It's a risky turnaround plan."

Today, Avid is proving me right.

The company just published preliminary results for the first quarter. $152 million in sales fell far below the $160 million expected by Wall Street analysts. Management sees a GAAP operating loss of $15 million, which would be the weakest result since the spring of 2009.

The culprit of Avid's disappointing numbers is a 30% year-over-year drop in sales to the enthusiast market. That's where Avid sells tools for making music and movies to amateurs like you and me, helping us make and manage media with somewhat simplified versions of the professional tools. That's a price-sensitive market that doesn't play well with attempts to ratchet up gross margins. I'm surprised that Avid didn't see that backlash coming.

Apple (NAS: AAPL) is presumably stealing Avid's enthusiast customers by the bucketload with its own desktop software, but also with the iPad product line that looks more attuned to media creation with every new iteration. Avid makes iPad apps too, but some of its core customers seem to just go for Apple's built-in tools.

And while Adobe Systems (NAS: ADBE) may have its own share of problems, the full suite of Adobe's creative tools is about to get a supposedly huge update. Prosumers might be waiting for more info on that event before committing to Avid's solutions.

So I feel pretty good about my call on Avid today as shares plunged more than 17% in after-hours action. At these prices, Avid has taken a 60% haircut over the last year and I'm pretty sure we haven't seen the worst of it yet. Avid investors should consider moving their at-risk capital to a basket of stronger technology stocks instead.

At the time this article was published Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Adobe Systems and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple.Motley Fool newsletter serviceshave recommended creating a diagonal call position in Adobe Systems. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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