With the market shooting up to whatever number is just above infinity (we’ll call it Bernankity) thanks to the Fed’s strategy that somehow revolves around making rich people feel richer on paper so they will hire poor people, Money McBags is going to focus today on DGIT who just put up a spanktastic Q.  He will be back tomorrow with his usual daily market report.

Money McBags first mentioned DGIT on 8/30/10 when it had a ridonkulous sell off due to lowering guidance which was only perceived as lower because some dickbag on the Street just had numbers way too fucking high as his model either had an unnoticed circular reference or a desire to see if Excel could handle transfinite cardinal numbers.   Either way, the supposed lowered guidance caused all kinds of models to trip (and luckily not these models, but algorithmic models) and gave this already decently shorted stock a cause for negative headlines.

Shorts pointed to the “lowered” guidance on the heels of DGIT’s deal with Ascent Media ending as fodder to yell about DGIT’s near monopoly coming to an end (though if it were coming to this end, Money McBags could understand) and to continue to highlight the emergence of sort of competitor Extreme Reach and the aforementioned Ascent Media.  The story of those two competitors coming in to take share away from DGIT is a story older than “boy meets girl” or “girl has a fucking headache so boy goes to rub one off in the bathroom” (and Money McBags highly recommends chapter six of that story), but the noise with the Ascent Media relationship last Q was certainly enough to warrant some rethinking of DGIT’s business, but not enough for the 40% collapse that DGIT saw after a decent earnings number.

Since then, Money McBags has written about DGIT several times saying a return to the mid $20s is pretty much a no brainer (or as it’s known on the award winning When Genius Prevailed a “Carrie Prejean“) and after today’s Q, the stock is now back up to ~$28 so hopefully you all got in ~$16 and have made >50% in two short months.  That said, let’s take a look at some of the highlights from the Q:

1.  Revenue was up 18% to ~$57MM which was ahead of their $51M to $53MM guidance last Q. They said the outperformance was driven by a stronger August and September which perhaps was driven by the election season but they never quite gave a good reason for this on the call (though to be honest, Money McBags was multitasking during the call and had to turn his head many times so he may have missed their explanation).

2.  HD revenue was up 54%.  This is the growth driver of the company and it was driven by increasing demand by marketers who want their customers to see products in HD because one really needs to see the Shake Weight in HD to understand its awesomeness.  The growth was also driven by a 10% sequential increase in HD adoption by broadcast networks as more channels move to HD because America demands clearer pictures of Katie Couric’s colonoscopy and Olivia Munn.  HD is going to continue to grow so this is still a multi year growth market as HD is only 8.5% of all ad deliveries ad volume was up 95% for DGIT.

3.  Unicast revenue was up 31% to $4.1MM. Money McBags doesn’t quite know what to make of Unicast as it is more of a headscratcher than psychics in California bitching that people on welfare can longer use welfare cards for their services (because really, shouldn’t psychics have seen that one coming?).  At the time, it was considered a pretty crappy acquisition for DGIT seeing as how it is a competitive market and people like GOOG (whom you may have heard of before) can offer similar solutions.  That said, they are growing this business, the purchase price is a sunk cost, so maybe there is a bit of upside here.

4.  EPS was up 55% to $.34 and non-gaap net income was up to $.44 per share as they not only grew topline but also had nice operating leverage.

5.  Match Point, their most recent acquisition for which they paid $26MM (or 1.3MM lap dances to make it easier for everyone to understand) a couple of months ago, was forecast to add ~$5MM in revenue in Q4.  That said, management did a poor job of explaining their guidance for this on the call as their full year guidance was raised by ~$6MM-$8MM from $230MM-$234MM to $238MM-$240MM, but they beat their previous guidance for Q3 by ~$4MM so adding in Match Point to the $4MM beat should have raised guidance by ~$9MM (though the low end of previous guidance to the high end of new guidance is $10MM, but that is kind of a jackholed way of looking at it).  This is definitely something that needs to be better understood.

6.  The company’s balance sheet remains hella strong with ~$66MM in cash after the Match Point acquisition, no debt, and FCF of $23MM during the Q.  Now most of you readers may remember someone tried to call Money McBags out on this company on the award winning When Genius Prevailed’s message board (read here and here and trust Money McBags you will especially enjoy the second one) by trying to show that DGIT does not earn returns above their cost of capital (though this was done using old numbers on current invested capital) and was not growing (despite every metric growing including number of shorts).  As Money McBags opined to this misguided and yet vociferous commenter, “he has chunks of investors like you in his stool” and Money McBags has proven to be correct here because the company now has generated ~$52MM in FCF for the first 9 months of the year which is an 11% ROIC and on pace for a 16% ROIC both of which are greater than DGIT’s ~10% cost of capital.  Anyway, you should all read the comments section to see how shorts act by using old information to try to kill a stock.  That said, Money McBags always enjoys the back and forth with people who are too busy highlighting every singe footnote of Securities Analysis to see the growth through the ROICs.

7.  They are buying back shares.  They spent $4.4MM on buy backs this Q and Money McBags believes they still have ~$25MM on their buy back plan

8.  They claim losing the Ascent Media partnership on the wholesale side has actually helped their business.  This was from their COO on the call when asked about Ascent:

our sales team has gone out and successfully acquired roughly over 30 new programmings that we did not service prior to this period of time. And a lot of these content owners went through a very deep process, evaluated all the platforms in the market extensively. In many cases, we were put up against a head-to-head bake off on quality of service, technology, reliability, and as I had mentioned in the earlier in the conference, we won several key RFPs in the last few months

Pretty interesting shit.

So what the fuck do we do here?  Guidance is for a good Q4 with revenues of ~$68MM which gets Money McBags to an EPS of ~$.50 keeping gross margins as the same % of sales and using a four quarter rolling average to get operating costs.  But really, who fucking cares about Q4, it’s 2011 that is more relevant and Money McBags took a swag at that by growing HD revenue by 30% (and remember it is growing not just faster than that, but a fuckload faster than that, but Money McBags is well aware that things can’t grow forever) and growing the rest of the business (SD, Match Point, Unicast, and Unibrow) by 10% to get to ~$275MM in revenue for ~18% overall growth (which you’ll notice is actually less than just mulitplying Q4 revenue guidance by 4 in a strange mathematical twist since the earlier quarters are much lower than Q4 and Money McBags is using y/y growth rates and not sequential.  Anyway, that’s a convoluted way of saying the revenue estimate may actually be too low).

Money McBags then held the gross margin % the same and juiced up operating costs by 15% allowing them some margin leverage, taxed them at 41.5% and gave them no credit for any more share buy backs.  Using those numbers, Money McBags gets to ~$1.95 in eps for next year or ~$125MM-~$130MM of EBITDA depending on what you want to estimate for stock based comp (it has been running ~$1MM to $2MM a Q and rather than doing any kind of complicated estimate, Money McBags is just going to use the historical numbers because for stupid shit like this the 80/20 rule is good enough).  So based on those numbers, DGIT is now trading at ~14.5x Money McBags’ EPS guess and ~6x his EV/EBITDA guess.  So after this rally, DGIT is no longer stupid cheap, but getting close to a fair value given some of its longer term risks.  Money McBags would be trimming his profits in to this bitch but thinks there is still some upside given that his numbers may be low and it is still pretty cheap on an EBITDA basis.

That said, since the easy money has been made, Money McBags would like to get a few questions answered.  So DGIT management, Money McBags knows you are out there so perhaps you can supply answers to the below (as always, Money McBags can be reached at moneymcbags@gmail.com or at nightly at a Rick’s Cabaret champagne room near you).

1.  Can you explain pricing in the market?  On the call, an analyst correctly called you out for saying that HD volume grew 90% but HD revenue only grew 54% and your answer completely missed the question.   If volume was up almost twice as much as revenue, that would imply some kind of price declines, so can you explain this so Money McBags can understand because your explanation made less sense to him than people getting excited for the McRib coming back.

2.  What is up with guidance?  Money McBags showed that you didn’t really raise it by as much as the beat and the Match Point acquisition, and while it is splitting hairs a bit (and it is such a small discrepancy that it is like splitting Bridget the Midget‘s cunt hairs), what gives?

3.  Can you talk a little bit more about the cost synergies of Match Point and where you see this business going?

4.  As for Unicast, what can this business be for real and what kind of competition are you seeing now that it is growing for you?  How does it win business against competitors?  Is it a better service?  Better technology?  Cheaper?  Or does it just have bigger tits?

Anyway, after today’s run Money McBags hopes you take some profits, remember to tip your analyst this holiday season, and do some due diligence around competition in this space because now DGIT needs to perform to make us more money.

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