Kind readers, for months Money McBags has promised to bring you a new Q&A with KITD CEO Kaleil Tuzman (Money McBags promised even before he went to the great hedge fund in the sky) and he profusely apologizes for its tardiness.  He actually emailed the below questions to Mr. Tuzman (at Mr. Tuzman’s request no less) so long ago that Italy was still solvent, DSK had yet to be turned down by his turn down service, and Money McBags had not only not heard of Jasmine Waltz, but had no idea she was creating such thought provoking art.

But as you all know, Mr. Tuzman is in charge of running a $~500MM market cap company and thus answering the questions of a simple dick joke writer sometimes get pushed aside for more important things like managing a fantasy baseball team, a vacation, an SEC filing, and apparently needing all 20 members of his management team to properly vet his responses.  Money McBags and Mr. Tuzman did keep in close contact by email over those two months (and Money McBags hopes his estate will posthumously publish all of his CEO emails in a tome titled:  CEOs Money McBags Knows) with the emails largely revolving around Mr. Tuzman promising to answer Money McBags’ questions in short time and Money McBags wondering how much better Kelly Brook would look in IP vs. analog or digital video.

The point is, below is a verbatim Q&A from Mr. Tuzman (Money McBags did nothing to protect the innocent, or his investment) which should give investors more insight in to KITD (a stock that Money McBags has had a stiffy for during the entire existence of the award winning When Genius Prevailed) than any sell side research out there and shows why Money McBags is still thought of as the world’s most dangerous analyst.

To be fair, Mr. Tuzman did mention that his legal team took out the funniest parts of his answers, but to be fairer, Robin Williams has been using that excuse for decades, so do with it as you will.  Either way, big ups to Mr. Tuzman for recognizing that the people demand information, for playing along, and for both titillating and informing.  So put your thinking caps on and enjoy:

1.   You have talked about how your IP solution is making the current digital video hardware and firmware (and yes, you have said hard.  Huhuhuhuh) almost obsolete.  So why is the market growing only 30% (or 20% to 25% according to what you pegged ioko growth as)?  What is causing the adoption rate not to accelerate as online video grows and your solution is cheaper than digital?  Can the adoption rate ever get as high as Malawi’s?

There are certain areas of IP video that are growing more quickly—including end-consumption of mobile video-on-demand for example, which is growing at a 40%+ annual clip globally. But for the provision of business-to-business enterprise software (which is what our video platform product is, at the end of the day), a 20-30% annual growth rate implies very rapid adoption, and compounding this growth rate leads to market dominance for IP- and software-based video technology, and widespread replacement of hardware-based systems by 2020. Remember, we’re talking about long-term capex decisions here by large and often slow-moving corporations. These types of shifts don’t happen overnight, and I have seen other growth companies fall into the trap of over-promising on how quickly their industries are evolving. As a management team, we take pride in the fact that we have met or exceeded each of our quarterly and annual financial targets for the last 3 years, and we prefer to be a bit conservative at times (though perhaps not as conservative as him or her).

2.  And why is Q1 usually sequentially down for digital media in the US?  Is it because when people go home for the holidays in Q4 they spend afternoons with the family NSFW guessing muffs and thus digital media spikes?

Digital media follows the same seasonal pattern as traditional media consumption.  You might want to check with an expert on these things (like someone from Nielsen or Kantar or this brilliant commentarist), but it boils down to the fact that in much of the world people tend to watch a lot of TV during the end-of-year holiday period, and then tend to watch a little less than they did during the holiday period as they kick off their year (as a side note, will be interesting to see how this holiday effect plays out as China becomes more of a force in global media consumption—given the Chinese New Year period in February and the lack of many alternative entertainment options). Anyway, seasonality isn’t that pronounced in our business (negative seasonality tends to mean flat to low growth on a sequential quarterly basis, not actual declines), but Q1 and Q3 are the softer quarters in our business (the third quarter being soft due to people’s northern hemisphere summer holiday activities).

3.  On the latest call you talked about Q3 now being the first clean quarter for the new and improved execution focused KITD (as opposed the old and dilution-tastic KITD), what caused that timeframe to speed up?  Money McBags thought last time you said it was up to the auditors to decide and yet you must be under much pressure from shareholders to put this thing together sooner.  So what happened?  And for the record, Money McBags loves that the timeframe has been sped up, though not as much as he loves this.

To be clear, we have always been completely execution-focused but the difference now in Q3 over Q2 is that we have completed almost all acquisition-related integration efforts to date, allowing us to shift our focus squarely on organic growth. The acquisitions of ioko and Polymedia were completed during the second quarter and we made a concerted effort to take all of the tough and necessary post-acquisition restructuring and integration actions (staff reductions, lease and vendor contract cancellations, product mothballing, etc.) during the second quarter. Our auditors at Grant Thornton have ultimate say on the application and timing of restructuring and integration charges, but having worked hard to complete these actions during Q2, we did our part as management and dramatically increased the probability that these charges will be applied during the second quarter. This “front-loading” was our goal, so we could have a second half of 2011 with minimal to zero M&A-related charges. That being said, we are beholden ultimately to our auditors’ assessment on these things, and Q3 may have a small amount of residual M&A-related charges from a timing perspective.  Consistent with our previous messaging to the market, we expect any below-the-line adjustments to EBITDA in Q3 to be minimal and expect to report clean, unadjusted EBITDA in Q4.

4.  For the readers, can you explain the “stickiness” of VAMS?  This is key to the story and Money McBags wants readers to understand that VAMS isn’t just sticky from streaming Pippa Middleton all day.

Video Asset Management Systems (VAMS) become effectively integrated with a variety of internal hardware and software systems at the client, including storage, content delivery network (CDN), editing and post-production, ad-serving, customer relationship management (CRM), billing, and enterprise resource planning (ERP) systems, to name a few. Staff at our clients (and sometimes even our clients’ vendors and customers) are trained on the KIT Platform related to workflows around video ingestion and transcoding, metatagging, content localization, digital rights management, programming and bundling. Finally, as a cloud-based, multi-tenant software delivery model, we actually “hold” ( or have unique access to) the video assets and related data on our platform, including historical usage information.

In summary, we have experienced a very “sticky” relationship with customers (with long-term contracts and overall <2% per annum attrition rates) due to (a) the integration of the KIT Platform with clients’ existing hardware and software systems, (b) clients’ investment in training and workflow on the KIT Platform, and (c) the residence and control of the clients’ video assets within the KIT Platform. At the same time, I am sure you will agree we are not the only industry with sticky products.

5.  You said by the end of the year you will be up to a run rate of ~$2.5MM in free cash flow per month.  What do you plan on doing with the cash?  And as Money McBags is a shareholder in RICK and loves when his companies have synergies, might he suggest several nights out for the bloated KITD management team?

While your suggestion of Rick’s Cabaret is appreciated, our management team is more inclined to asana poses and other important endeavors in our limited free time.

That said, we may use internally generated cash for additional, small acquisitions in certain geographies or client verticals that help us maintain and extend our leading market share in the IP-based VAMS industry. Despite concerns around historical below-the-line charges and the hard work implied by post-acquisition integration, we believe the consolidation approach to our industry we have taken over the last several years has been the right one in terms of creating long-term shareholder value—particularly given platform stickiness and the undeniable fact that it is much easier to get a client to begin with than to dislodge a client from an existing VAMS provider. Moreover, our services-oriented architecture allows us to effectively roll over acquired clients onto our core data layer without disrupting client relationships (evidenced by the fact we have had such low client attrition rates even in the context of many acquisitions over time).

6.  And speaking of KITD’s management team, how do you deal with an organization that is now more top heavy than Christina Hendricks using iAugment?  As Money McBags has written, upper management seems more bloated than Bunny De La Cruz‘s fupa after a triple creampie (and only click the link if you must).  At least 4 of ioko’s senior managers joined KITD’s senior management team (and no offense. but this Scott Sahadi guy from ioko looks like he is 25 years late for the Miami Vice extras casting call.  For fucksake, if his shirt were unbuttoned anymore, his sphincter would be showing.  Come on Scott, you’re running a fucking company and not getting ready to go meet Jack Tripper at the Reagle Beagle, so button the fuck up) along with every other CEO/CFO/CTO/C3P0 from companies you have acquired over the past couple of years.

Not only did you have 4 speakers on your last call, but when KITD was in Vegas you said: “I think we had something on the order of 20 team members from around the Company in senior positions people were able to meet and we are hoping that many of you will have the chance to meet leaders across the business going forward.”  Bringing 20 senior managers to a conference in Vegas is more like the start of a Sabrina Deep Fan Bang than it is a way to run a company.  So how are you going to continue to manage this as too many chef’s in a kitchen is never good (unless these are the chefs and you ordered a plate of awesomeness)?

Money, I am pretty sure you will take this the wrong way (though not too worried because you have a healthy sense of self), but have you ever managed an operating company? We have over 1,200 employees across three geographical divisions (Americas, EMEA and Asia-Pacific) and have 10 executive management team members globally (P&L and divisional heads) and an additional 14 SVP-level executives—mostly in sales roles. These ratios of less than 1% (for executive management) and 2% (for senior management generally) are below general business bogeys, and significantly below software industry standards. We are proud of the fact that our lean management team has absorbed executives from previous acquisitions—which we see as evidence of successful team integration. Your reference to 20 senior KIT digital team members in Las Vegas is made out of context (though not as out of context as this). The Las Vegas-based National Association of Broadcasters (NAB) conference was going on at the time of our April conference call introducing the ioko acquisition, giving us the opportunity to introduce investors to the senior ioko team by telephone.

NAB is one of the year’s top two trade shows for us (the other one being IBC in Amsterdam each September), where we meet with many of our top global accounts and client prospects. It is our practice to send senior salespeople from around the world to a handful of top trade shows per year, as we find this is a very cost-effective approach to sales, and we also use these trade venues to gather senior management generally for strategy sessions as a means to economize on travel expense. With due respect, avoiding duplicative expense and piggybacking internal meetings on client events (no, not that kind of piggbybacking, Money!) is precisely the “way to run a company”. I would also remind your readers that because of our disciplined approach and our use of lower cost employment jurisdictions for senior technical and operational staff (like the Czech Republic and India), we estimate we run at per capita G&A costs that are 30-40% lower than our U.S.-based competition.

Now, with respect to Scott Sahadi’s dress code: I know that you are a suit-and-tie man, Money, but our clients (who are often technical or creative executives) don’t necessarily share the same passion for formality. Scott’s done well selling to and serving clients in the past at firms like ioko, Verisign and Bay Networks, so maybe this chest hair thing is the right approach. Seriously speaking, as a company with a truly global client base, we are a company that embraces different characters and personalities. Unlike certain competitors who force a rote or cookie-cutter approach, our clients appreciate our local resources and cultural diversity.

7.  You said that sports was a vertical with a huge opportunity for KITD, and one area Money McBags hopes you are looking in to is the water sports market.  Not only do those people love video (and Money McBags doesn’t suggest you go this UNBELIEVABLY NSFW link, but it shows their passion) but if you can get to them while competitors are lying prostrate, they will certainly shower you with gold.  That said, are you in discussion with leagues, or teams, or how does that work?


We have a number of sports-focused clients—including IMG, ESPN, several Champions League and other top European soccer clubs, the Washington Redskins, etc.—and we are constantly pitching new business in this category. However, to be fair, a VAMS competitor of ours named Deltatre is the current leader in the sports category, which tends to require particular workflow development for editing, post-production, data overlays and rights management, as well as integration with sports-focused firmware systems. We will continue to devote R&D resources to the sports category, and as always will pay close attention to developments in the field.

8.  You mentioned wanting to ease back from talking with the Street and potentially hiring an IR person.  You know Money McBags was just in the market for a job, and as he knows your company and can handle the Street, would he have made it past the resume screen or would his demands of a foosball table, his own administrative assistant, and the need for a workplace like Ana Catarian Bezerra‘s been too much?  That said, Money McBags would have fit right in with the awesome names already on the KITD management team such as Daniel Goodfellow, Richard Craig-McTouchyFeely, and the vixenly Elin Askfelt (and Money McBags would certainly ask if that could be felt).

Money, as much as I respect your acumen in dissecting our results and how closely you have your fingers on the pulse of investors’ questions and related trends, we have exceeded our Jewish (me, Barak Bar-Cohen, Lou Schwartz et al.) and hairy-chested (Scott, Alex Blum, Robin Smyth et al.) quota on the management team, and are currently looking for someone with a French-Eskimo heritage and a good Brazilian body wax, given the current climate in the small-cap investment universe. And, yes, there do seem to be cultural antecedents.

9.  Speaking of IR, after your previous earnings call when your stock cratered, you sent out an email to select investors (and Money McBags was on that list and still would like the ok from you print your email and Money McBags’ response because the readers of the award winning When Genius Prevailed would clearly be interested to see the difference between how you handle the street and how Money McBags does) but then after the ioko deal, you sent out another email only to analysts (and Money McBags was not on your distribution list for that, so really?  Money McBags thought we shared a moment) and hosted at least two conference calls for large investors.

Can you explain this strategy and why you didn’t disseminate this information to retail investors who support your stock?  Money McBags’ email was blowing up all day when that happened with regular people who have no contact with you or the company, anxiously looking for answers (and Money McBags does find it funny that anyone would come to him looking for answers unless the answers are “69, on a trapeze, and up the butt”), so why not throw them a bone?

I am not sure I follow your reference to the thread of emails that were sent and to whom (not as clear as this logical thread for example), but I can tell you that our investor relations communication rules are as follows: 1) When we are asked specific questions by investors and the answers have been addressed previously in the public domain, we will respond directly to those investors and will occasionally copy other investors or market participants who have asked us similar questions in the past; 2) When we are expressing clarifying information to the market that is not an answer to a specific investor question, we send this to all the sell-side research analysts who cover us, as opposed to picking and choosing certain analysts or investors, in order to avoid selective disclosure, and communicate information to the market in a uniform fashion; and 3) We occasionally send general business update notes (which do not contain any non-public information) to our client and prospects database, and anybody who has signed up to be included on these updates off of the investor relations section of our website. Of course, we do reserve the right to block distribution to market commentarists who make crude, sexist jokes and/or make fun of helpless targets.

10.  When are you going to be the lens to lens backbone for, pornhub, and the tubes of the world because those fuckers deliver some content?  And shit, the fucking LeBrons?  Money McBags doesn’t want to point out the taintedness of LeBron’s brand (it is more tainted than Faye Reagan‘s chin after performing a rusty trombone), but Money McBags assumes you are a Celtics fan and, well, you know how that just went.

Discussing the adult content business with you is liking discussing footwork in the paint with Kevin McHale or strains of mary-jane with Robert Parish, so I will only comment that adult content has been an innovating force in the digital media arena for some time, and we work with companies that touch on this space (no pun intended) where appropriate—in fact nearly every cable or telco these days generates a material amount of revenues in this segment. And, yes, you are correct that I am a Celtics fan.

11.  And why are you even fucking around and trying to build a brand?  No really, what is the point?  You are going to be half of the market so why waste dollars on letting people know you’re better than the competition when the competition is like a He PingPing nut hair compared to KITD’s full 1980s Ron Jeremy cockstache?  That said, if you really are dead set on marketing, this seems to be an effective campaign.

Thank you for your insightful suggestion to use lewd trading cards as a marketing technique. In actual fact, we project to spend less than 2% of revenues on all marketing (including trade shows, direct marketing, search optimization and so on) this year, and virtually none of this is on what I would call “building a brand”. Although we feel that that our marketing spend should probably go up over time (cloud-based B2B software and services companies tend to spend as much as 5% on marketing), we have chosen to spend on more aggressive sales initiatives in the near-term—including generous direct salespeople commission plans, partner/channel sales commissions and paid lead generation. We had actually intended to spend more on traditional brand marketing this year but switched gears in the first quarter when we realized we had hired the ad agency that came up with this campaign. JK.

12.  Can you talk in regular non-techie English for the average retail investor about what OTT means and how you are taking over this segment?  Who else is doing this and why can you do it better?

OTT stands for “Ode to Tupac and Timbaland” and is a panegyric for two pioneers who have, each in his own way, helped shape today’s urban music sensibility.

Alternatively, in the IP video world, OTT has been known to refer to content initiatives that are delivered “Over-the-Top”, riding on top of a service from a network operator (like an internet service provider) that you already pay for without requiring any formal affiliation (technology or business-wise) with your network operator. Good example of OTT video services that have taken off in the browser-based environment include Netflix and Hulu. Electronic device manufacturers are now building TVs and video game consoles that can use general Internet connectivity (fixed line or wireless) to pull content “over-the-top” (piggybacking on someone else’s network) and deliver it to the particular device’s screen. These connected devices need no additional hardware or advanced knowledge to operate.

Even the cable and telco operators themselves are now diving into the OTT arena, as they realize that how important it is to provide their subscribers with the video content they might be subscribing to in one network environment (via cable connection in their living room, for example, or via a mobile operator’s on-deck services on their smartphone) in other network environments that the cable or telco may not own or control. This is being driven by the network operators’ increased cognizance that customers (particularly the under-25 cohort) demands content where they want it, when they want it.

At KIT digital, we have been pioneers in some of the most innovative and highly-trafficked OTT initiatives globally, including deployments with AT&T, BBC, BSkyB, CUTV (China), Disney, Newscorp (Fox), Vodafone and others. We were the earliest or one of the earliest to play in this space, with large-scale commercial deployments dating back to 2003, and today we have the deepest client base in the industry, with over 2,200 clients in more than 45 countries. Because we are constantly learning from individual clients’ needs and adding functionality onto the multi-tenant KIT Platform, we are able to roll out new workflow to our overall client base more quickly than our competitors. We currently estimate that we have 40-45% market share in the IP-based VAMS segment, and would like to extend this even further over the near- and medium-term.

12.  Now that Money McBags has gone back to work on the buyside, do you think the hole in the online financial analysis market that his absence has created can ever be filled (and remember, it is a hole so big it gives both Paul Krugman and Whitezilla inferiority complexes)?  Also, are you free next week for a call with Money McBags and his new PM?

Your shoes are obviously quite big (and no, I am not obliquely trying to help you get over that dysmorphic image perception thing); I can’t imagine who will assume the throne you are abdicating…really.

And, yes, I’d be happy to do a call next week with you and your PM, so long as there are no lewd or scatological comments. Likely?

Again, apologies for the delay. I have been quite busy.

So there it is.  We learned more about OTT, we learned more about the growth of the enterprise IP video market, and we learned more about the delicious Kate Upton (ok maybe not that last one, but one can still dream).

As much as Money McBags chides Mr. Tuzman, KITD is one of Money McBags’ biggest holdings (though not as big as this holding would be if only he had the chance) as it is cheaper than hiring Chinese auditors to juggle your receivables.  KITD is trading at only ~7x Money McBags’ 2012 EBITDA estimate and likely ~10x to 12x a normalized and clean EPS (Money McBags’ column on their last acquisition contains more detail on valuation) despite growing ~30% and being the market leader.  You just don’t find shit like that anywhere.

Money McBags has doubled and tripled down on KITD as it has mostly treaded water during the rally but he will eat a bag of dik dik (that is if it is properly sautéed) if Mr. Tuzman does not sell the company in the mid $20s within the next two years.  As always, do your own due diligence (especially if this is your due diligence, and shout out to Money McBags’ fans on Zerohedge for that), but hopefully this Q&A has helped you understand KITD in a bit more detail.

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