CEO Interview: He puts the KIT in KITD
As you all know, Money McBags has thoroughly covered KITD on When Genius Prevailed over the past several months as it is a small, controversial company that Money McBags believes has big potential and yet is extremely cheap because it is fundamentally a bit weird and simply misunderstood.
Money McBags posted several questions for CEO Kaleil Tuzman after KITD’s last Q and after trading emails, wrestling with his legal department, and apparently never seeing the Bad Idea Jeans commercials, Mr. Tuzman was kind enough to take some time away from diluting shareholders (I keed, I keed) for a few minutes to answer those questions. So below are Mr. Tuzman’s unedited responses (and yes, they are really from him, links and everything. Money McBags jokes about much on this site but he would never cross an ethical boundary, unless that boundary were related to Alice Eve and the ethical dilemma were whether to tell her about the rodeo he was holding).
The questions are bolded, Mr. Tuzman’s answers are italicized, and so it goes…
1. The competition. Yeah, you can make fun of the online video platform providers for having a commodity business, but what about your business isn’t a commodity? What is it that you do better than others? Or is this really a land grab game and you are in the best position to grab the land given your balance sheet and brand equity. You have talked about this in generalities, but Money McBags would like to better understand. For instance, you said you grew your relationship with GM by 3x once you acquired that customer relationship. What services/solutions did you sell them to grow that relationship that the previous provider could not offer them?
First, I would never make fun of anybody (except maybe this guy). We see online video platform (OVP) providers as fulfilling an important place in the market: the provision of easy-to-use and easy-to-deploy tools for publishing video primarily on websites. By our count, there are over 50 OVP companies in the market that are commercially active—and that doesn’t take into account corporate initiatives to provide free or near-free online video solutions at large companies like Google and Adobe. I don’t think there’s a real debate at this point as to whether we’re seeing commoditization of the traditional OVP market from a technical perspective, but that doesn’t mean companies can’t differentiate by providing better client service and support, integrating content and other value-added services (but not these kinds of services, Money), or focusing on certain specific geographies and client verticals.
Actually our entry-level product, VX Media Suite, could be qualified as an OVP, but we’re not focused on reselling bandwidth and storage like so many OVPs are, and VX Media Suite is geared towards complex corporate (non-media company) deployments where the value proposition to the client has more to do with realizing internal efficiencies and integration with CMS and ERP systems than straight over-the-top (OTT) video publishing (not to be confused with this Over-the-Top). VX Media Suite is also 3-screen capable, and tends to support a lot of live broadcasting (for internal corporate communications, investor relations, staff training, “closed circuit” community broadcasts, etc.)—something you see almost none of with the traditional OVP providers. Clients using our OTT-oriented solution include FedEx, Bristol-Myers Squibb, Home Depot, Intel and General Motors. As GM was going through their Chapter 11 and associated massive cost-cutting process they substantially increased their usage (and consequent spend) on our IP video communications platform, as part of their movement away from expensive, traditional closed circuit internal communications systems—which involve dedicated satellite carriage, Ka-band dishes and dedicated classroom environments in distributed locations.
Our higher-end VX Enterprise offering is what we describe as a video asset management system (VAMS), supporting large content originators and network operators (Vodafone, Telefonica, Telecom Argentina, Associated Press and others) for all of the content management and syndication needs related to OTT distribution, “on-deck” mobile TV and IPTV/hybrid IPTV cable systems. VX Enterprise is often deployed at operators’ head-ends, and in all cases integrates with operators’ CRM and identity management systems, various DRM solutions and payment gateways; it supports over 70 different ingestion protocols and video publishing to over 400 different end device types—including Smartphones, so-called “fortress devices” (Nokia and Ericsson, primarily), STBs, gameboxes, and connected TVs. VX Enterprise is highly differentiated, it is to a typical OVP offering as Madonna is to Tila Tequila.
2. If the market is growing 40% per some industry reports, how the fuck are you able to pay the low multiples you have been for acquisitions? Why would those companies not hold out for more, or just grow 40% with the market? Again, what is it that you do to these businesses to energize growth?
Oy vey (for an Irish mope, that’s Yiddish for “oh, grief”, not to be confused with the related “vey iz mir”, which is what Woody Allen said when news of his interesting tastes first emerged). Do I have to answer this one? OK, so the politically correct response is that smaller companies (particularly those overseas in less developed M&A markets) have less access to liquidity and can do better by combining with KIT digital (not that kind of combining) and realizing gains in our stock over the long-term. We look for sellers with good underlying businesses but with some sort of capital structure tension or balance sheet issue that is likely to spell a better price for us as a buyer. Now, the politically incorrect response: we’re stingy (yes even cheap, but if you try to make some sort of connection between that comment and my Yiddishkeit above beware that I actually am Jewish and have a nasty left hook—especially for a hermaphrodite) and we wear down counterparties with relentless repetition of the same offer in windowless conference rooms.
Seriously speaking we find that companies, like people, get fatigued, and half of the battle in “energizing growth” in acquired companies is refreshing entrepreneurial enthusiasm (which is as abnormal as this kind of refreshment, but vastly more pleasant) and client relationships to realize sales synergies. Balancing this with the necessary cost-cutting we do after acquisitions to extract G&A synergies is always a challenge. Since our acquisitions have been focused on adding clients by geographical and sales vertical expansion—as opposed to technology and product addition—the challenge has been straightforward and ultimately achievable.
3. What the fuck is going on with even hinting at a share buy back after you diluted Money McBags and other shareholders the other month because you saw such great opportunities and wanted to have a war chest for presumably when Brightcove goes public? Money McBags gets that your stock is cheap (just re-read his analysis), but WTF?
I have learned as of late that the concept of a share buyback is as polarizing as Sarah Palin. During our last earnings broadcast Q&A, we simply answered an investor question of whether we had considered a share buyback given our current price levels by acknowledging that the topic came up in a recent board meeting but that we had decided to postpone any discussion until our next board meeting in November. I don’t control the topics that come up in our board meetings, as much as I might like to (though I do endeavor to keep them from being this boring). For the record, I agree with you and I feel our cash is better used to support our stated acquisition strategy given the “land grab” dynamic in our market space, but I will never shut the door on future strategic options.
4. What are operating margins going to be like going forward and what kind of leverage can you get in SG&A and marketing costs? And didn’t that question sound as boring and douchey as a sell side analyst? Should I next say it is for my model (though this is my model so that should make it ok)?
Yes, that question was so boring and douchey that I am going to reciprocate with a boring and douchey response: as we have said on previous investor calls, we are targeting getting to the mid- to high 20s (from our current high teens level) in operating margins over the next 18-24 months. Our incremental margins on our software sales are quite high; given the scalability of our SaaS model, our G&A doesn’t need to ramp at nearly the same pace as revenues, and we are getting increasing leverage out of indirect and channel sales (although not as much leverage as this guy is getting out of the EU.)
5. Is it true what they say about the girls in Prague and do they really like playing chess?
Czechs clearly excel in hockey, classical music, existential thought, manly poetry and IP video solutions. I wouldn’t know anything about the women, as all I do is work and answer douchey questions from investors.
6. What is the real deal with DSOs? Let’s talk shareholder to CEO about this. What would DSOs have been last Q without the statistical aberration and if that is all it was, why didn’t you explain it then? You’re certainly articulate enough to do so, so what happened?
There were two statistical aberrations in Q1, neither of which I did a good job of articulating (though I thank you for the sweet compliment and I am available for a martini later, big boy): #1) our DSOs are higher at the end of Q1 because most of our clients are big corporations who do their end-of-year audit during the first few months of the calendar year and tend to sort through our usage fee billing more carefully (looking for flaws throughout the year) before finally closing the books and paying their bills, and #2) the Multicast acquisition was completed at the very end of Q1, and therefore added accounts receivable into the numerator of the DSO ratio while adding almost no revenues to the denominator of the ratio. Our DSOs normalized in Q2 to around 90 days, which is in line with most SaaS companies and where they’ve been at KIT digital for most of the last several years. Our collections have always been reliable (with little to no bad receivables), which has nothing to do with your friends Vinnie and Sal, but which may be related to a certain big-boned Sicilian named Rosario Davi who works out of our NY office.
7. Whose idea was the video conference in front of a bunch of TVs and how can Money McBags get The Price Is Right, Baywatch, and Barney and Friends on them next time you have a video conference? Should he send his requests to the forgotten Daniel Goodfellow?
We did the last earnings call broadcast from our control center in Atlanta, which is where all the cool kids hang out. It is also where we monitor a lot of our faith-based clients’ live feeds, so I kind of doubt there was racy content in the background or someone doing the WWE suck-it motion. That said, I have already passed your request on to Daniel (who will be back as his jovial self on our next earnings broadcast) that you’d like Barney to do a cameo. You’re one weird dude, Money.
So there it is, straight from Mr. Tuzman’s keyboard to WGP.
The top five things Money McBags learned/confirmed were:
1. KITD’s size and balance sheet have played a strong role in allowing them to acquire new companies and serve the added purpose of helping to “reinvigorate” sales of those companies.
2. Live video feeds are a big competitive advantage for them (note to KITD, for the love of Alexis Texas, please cut a deal with the very NSFW Spankwire to help their live feeds become seamless).
3. The DSO spike was a result of not one, but two statistical anomalies (do I hear three next time? Going once, going twice, sold to the CPA in the white.). The answer makes logical sense, though the delay in getting it out to the street and the inability to articulate it early on still remains more of a head scratcher than Paris Hilton’s tongue.
4. There really must not be shit to do in the Czech Republic if Mr. Tuzman is spending his free time surfing for just the right Tila Tequila shot to likely give Money McBags’ computer AIDS (because yes, the disease runs that strongly in her).
5. There are no plans for a buyback and it was just some shareholder on the call vying for air time. Makes sense, but good to hear.
Anyway, a sincere thank you from Money McBags to Mr. Tuzman for his answers and his time. KITD remains cheaper than sand in the desert or bad ideas at the Fed as it is trading at ~5x Money McBags’ 2011 EBITDA estimate which assumes only 35% topline growth (and that growth is below market estimates and includes no acquisitions, so is likely too low).
While the shorts point to fears about accounting irregularities with KITD’s acquisitions and European domicile (something that wasn’t helped by the DSO spike the other Q, and yet something the shorts haven’t actually been able to prove in their search for a boogeyman), a promotional management team with an end game of selling so might be cutting corners, revenue exposure to Europe, a reliance on acquisitions, and a hard to understand competitive advantage, Money McBags hopes this interview dispels some of that by giving a closer look at how KITD is differentiated, how they are able to win deals, how the DSO spike from last Q was likely an anomaly, and once again, how Alice Eve is hot.
The company is cheap so continue to do your research.
|Print article||This entry was posted by Money McBags on August 31, 2010 at 2:56 pm, and is filed under Detailed Small Cap Idea, Interview. Follow any responses to this post through RSS 2.0. You can leave a response or trackback from your own site.|
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