The Digital Hand Behind The Screen

Avid software is the tool of choice for creating TV shows, games, and movies

On Oct. 25, Avid Technology Inc. (AVID ) CEO David Krall marched onto a stage at a swanky New York nightclub and smiled with anticipation as he unveiled his company's newest product. He pointed to a towering black cabinet stacked with 128 memory-filled engines -- a $107,000-plus server named Unity ISIS -- and explained how it will allow broadcast news stations and television production houses to store and share thousands of hours of digital video. "This is enough to give any geek goose bumps," Krall proclaimed.

Avid's ability to excite geeks has fueled an impressive growth spurt. Thanks to a string of acquisitions and deft product launches, the 18-year-old company has rapidly become a leading provider of digital tools for creating newscasts, television shows, movies, and video games. It counts among its customers such big names as Pixar Animation Studios (PIXR ), CBS News (VIA ), and David E. Kelley Productions, creator of such TV hits as Boston Legal. Avid even boasts two Academy Awards for technical excellence. In the three years ending in May, the Tewksbury (Mass.) company's sales grew at an average rate of 10.9% a year, to $628 million, and profits ballooned 389% a year, landing the company at No. 46 on BusinessWeek's annual Hot Growth list of the 100 fastest-growing small companies.

As all corners of the media industry -- from news to gaming -- continue to adopt the next generation of digital technologies, Avid's software and hardware have a chance to become crucial, must-have gear. Avid's digital editing software, for instance, has quickly become a favorite in the broadcast news business, where stations increasingly are ditching antiquated videotape-based editing systems. By storing video clips on Avid's servers, multiple editors can work on the same footage simultaneously. It's a far cry from the old days, when everyone working on a story had to pass around a single tape. "It makes producing the news a lot quicker," says Michael Chan, director of technical operations for NY1 (TWX ), a 24-hour Manhattan cable news network that has been transitioning to a totally tapeless newsroom using Avid's products. Piper Jaffray Co. (PJC ) estimates that only 26% of the 1,971 news stations in the U.S. have switched from tape to digital. Avid estimates that the rest could convert by the end of the decade.

As is the case with many small tech companies, though, Avid is prone to getting beat up on Wall Street over unexpected slipups. In fact, earlier this year Avid's new Unity ISIS server was giving Wall Street hives rather than goose bumps. Krall and his team misjudged how long it would take to develop the server, so it hit the market a full quarter late and forced Avid to report second-quarter earnings in July that were a staggering 28% lower than what analysts expected. The company's shares plunged 28% in a day, from $55.30 to $39.80. But after a much better third quarter, Avid's shares have rebounded, to $49.

Indeed, since the disappointing second-quarter news, Krall has been on a bit of a roll. On Aug. 9, Avid bolstered its position by acquiring rival Pinnacle Systems, which makes editing software for video pros and consumers. The $238.4 million deal will allow Avid to provide the software that news channels use to create the ubiquitous news "crawls" that run along the bottom of the TV screen, as well as a host of on-air graphics. And in September, Avid booked its single biggest news deal yet: CBS chose Avid's digital editing system for its New York and London newsrooms. The company won't disclose the amount of the deal, saying only that it's a multimillion-dollar score.

MAKING FACES

When he became chief executive in 2001, Krall used Avid's technological expertise to expand its presence in other busy media fields, including the ultra-hot video-game segment. One of Avid's newest products, Softimage/Face Robot, helps animators imbue their characters with lifelike facial expressions. With Face Robot, game makers hook up sensors to real actors, capturing their grimaces and growls, and instantly graft the expressions onto their fictional characters. Los Angeles-based Blur Studio tested Avid's software while creating cinematic effects for the latest X-Men video game. "With our old system we couldn't get a realistic look," says Jeff Wilson, animation supervisor at Blur. "[Avid's tools] are the newest and freshest. Everyone else is tired and creaky."

While Avid has a technological lead on rivals, well-heeled competitors are bearing down at every corner. The Pinnacle buy added consumer editing software, available at Best Buy Co. (BBY ) and other electronics stores. It's a top seller among proud parents and others who like to add Hollywood-style special effects to home movies. But rivals such as Adobe Systems Inc. (ADBE ) have recently entered the fray. And on the broadcast and entertainment side, the formidable Apple Computer Inc. (AAPL ) is starting to make inroads with its digital editing products, analysts say. "It's a manageable threat, but one Avid needs to watch," says Christopher Rowen, an analyst at SunTrust Robinson Humphrey Capital Markets (STI ). Rowen estimates Avid's 2005 sales will jump 32% over last year, to $776.9 million, and that net profits will rise 25%, to $93.6 million.

Krall has spent much of the fall meeting with investors to soothe frayed nerves after the ISIS delay. "Avid has been in the penalty box," he says. But if he can post the kind of performance that Wall Street is counting on, Krall is hoping that all will soon be forgiven.

By Arlene Weintraub

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