KITD pre-announced their earnings today and in typical KITD fashion, they managed to both titillate and confound, like watching a hot chick deep throat Lexington Steele.  CEO Kaleil Tuzman certainly likes to keep things more interesting than a war of words between NFL players (and trust Money McBags that link is pure awesomeness) so Money McBags will break it all down for you below:

The Good:

1.  Q3 will be solid.  Revenue will be >$27MM and up 147% y/y and 18% sequentially as they continue to sell the fuck out of some shit (and buy companies to grow inorganically, but whatever).  The only bit of a head scratcher here is that their operating EBITDA will be up just 5% sequentially to $4.4MM from $4.2MM which is ~16% margin as opposed to the 18% of last Q.  In the release, Mr. Tuzman says “we have been consciously investing in additional above-the-line resources in direct sales, channel sales, deployment and product development” so if Money McBags reads between the lines, it looks like the EBITDA margin decline was simply caused by investing in the business rather than buying growth at lower margins or cutting prices to continue to grow.  Sounds reasonable enough.

2.  Q4 2010 will be very solid. Guidance for the full year was given as >$100MM in revenue (Money McBags last guess was $108MM) so backing out the last 3 quarters ($17MM, $23MM, and now ~$27MM), that implies at least $33MM in Q4 revenue which will be another 100% growth Q and >10% sequential growth.  Not a huge surprise, but so far Money McBags likey (though not as much as he likey this).

3.  2011 will be fucking solid.  In Money McBags last analysis of KITD, he guessed that revenues would be ~$145MM on the low end for 2011 and today’s guidance is for $137.5MM to $152.5MM, so that seems about right since management of KITD likes to low ball as if they were Alan Greenspan going commando.  The range on revenue is because they are going to try to spin out their non-SAAS business which they deem non-essential, like proper spelling was to Teddy Roosevelt or morning after pills (or just having a fucking headache) are to Michelle Duggar.  They are also going to be recognizing all of their acquisition expenses in the next two Qs to try to start 2011 with a clean-ish income statement so investors can get a feel for numbers without having to adjust them like the B(L)S seasonally adjusts their made up data or Traci Lords adjusted her age.

EBITDA guidance is at least 21.5% margins for the $152.5MM scenario and at least 24% for the $137.5MM scenario which is ~$33MM in both scenarios.  This means that the $15MM tertiary business they want to sell is adding zero value to them and Money McBags is sure that will make a great selling point (KITD:  “We’ll sell you $15MM in revenues”  Buyer: “What’s it worth to you?”  KITD:  “Nothing.”  Buyer: “I’ll take two please.”).  Anyway, at ~$33MM EBITDA and with $46MM in cash and ~$320MM market cap, the company is trading at ~8X EV/EBITDA which isn’t that cheap anymore, but Money McBags is not sure that EV is correct because….

The Bad and The Ugly:

1.  Money McBags has always told his readers that he is no mathematician (though he knows the difference between anallgmatic curves and analjizztastic curves) but he is certain that A+B+C=Dilution.  And in KITD’s case, it is:

A = Allen and Company hired as strategic advisor.  Now for those of you who don’t know, Allen and Company is a boutiquey NY based investment bank that advises tiny little companies on when they should do some shit bigger than just factoring receivables or putting smiley faced cupcakes on everyone’s desks.  So KITD isn’t hiring these guys to deck out their Czech offices and make sure the curtains match the drapes or all copies of Startup.com have been burned.  They are there to pull off a fucking deal and the bigger the better because that is how these financial middle men (the Lucky Pierres of the finance world) get paid.

B = Buying share.  KITD has been doing this the whole time so to hear that they want to grow their market share through acquisitions is less surprising than learning that Christine O’Donnell’s dad played Bozo the Clown.  KITD is in a land grab market (whereas Money McBags is in an assgrab market) that could be huge so grabbing as much land as one can now is a way to go (as long as they can do it profitably and not fuck up integration worse than Andrew Johnson’s Presidential Reconstruction, and as an aside, fuck you for that Andy).

In the press release, CEO Tuzman said he wants to take their market share from 20%+ to 50% in the next 12-18 months.  No really, he said that.  And that is one or two steps beyond ambitious, like, perhaps, really fucking ambitious.  To get there, they would need to more than double the size of their business and organic growth and rinky dink acquisitions just won’t get them there.  So…

C = Changing the company.  To quote Mr. Tuzman “we are considering more ‘transformative’ opportunities, where we might be able to acquire a top competitor and significantly extend our market share.“  Boo-yahhhhhhhhhhh motherfuckers.  It is on like Donkey Kong, or rather, it is on like whoever bought Donkey Kong by diluting their shareholders first, but still managing to buy it at a reasonable price.  So when you add that all together you get..

A + B + C = D-fucking-lution.  And remember, they filed a shelf for $250MM the other week which is big enough to buy a fuckload of lap dances (12.5MM to be precise, or 2.5MM in the champagne room) or their biggest competitors.  With the shelf they could raise, this company could see a bigger transformation than when Chastity Bono started peeing standing up.

In the release, Mr. Tuzman also said:  “For this type of opportunity, we would potentially raise outside private or public equity capital. That said, we would not raise equity capital if we did not believe we could deploy it in an accretive manner and within a reasonable timeframe.“  Which is shorthand for, bend the fuck over shareholders because daddy is going to mimic uncle Benny Bernanke with the dollar and make your holdings worth less (at least in the short run).

And this is followed up with the greatest line in the history of company financial releases: “We continue to be a very dilution-sensitive management team, having invested significant personal capital alongside outside investors.”  Blahhhhhhhhhhhhh.  Calling themselves a dilution sensitive management team is like Gabourey Sidibe calling herself a picky eater or the Jackson County Sheriff’s Department calling October 22nd an “average day.”  Just the other week Money McBags nicknamed CEO Tuzman “The Great Diluter” and here it comes so shareholders (and Money McBags is one of them) better hope the acquisition is accretive otherwise we’ve all been hoodwinked.

Now to step back for a second, Money McBags, whether foolish or not, thinks Mr. Tuzman has done a fine job with running and growing KITD so he has no reason to believe KITD management will fuck this transformation up.  That said shit happens and the company finally started to gain momentum again before they went and did this (and judging by the company’s 5% sell off today, investors aren’t happy).  The questions become:  1.  Who the fuck are they going to buy?  2.  At what price are they going to issue shares?   3.  Why didn’t Money McBags go to a Pac-10 school?

As for those answers, only Brightcove and The Platform seem to big enough to be transformational and there is absolutely zero way Brightcove sells after having recently raised money and being closer to coming out public than Ricky Martin was in 2003.  Plus Mr. Tuzman often takes shots at Brightcove’s inferior solutions so not sure why he would want to buy them (that said, Money McBags is also unsure why people listen to country music or think Drew Barrymore is hot, so whatever).  That leaves The Platform and all Money McBags knows about them is that they are or were a subsidiary of Comcast and that they have never been in his kitchen (and Money McBags knows he used that line last week, but so it goes),  So is KITD targeting The Platform or is there some other big player out there?

As for question 2, Money McBags will guess in the low $12s (completely taking a wild guess, so flip a dong for a better one) and as for question 3, it is because he is an idiot.

2.  DSOs jump again.  Remember, a few quarters ago KITD got absolutely shellacked when DSOs spiked and they explained it more poorly than Antonio Cromartie’s family explained to him how to use protection.  Shorts have always pointed to KITD’s accounting as somehow being more irregular than a metorrhagiac sufferer given the noise in the numbers with integration costs and warrants etc..  That said, this is all noise and nothing has ever been proven to be untoward about KITD’s numbers.  In the release today they said DSOs will spike in Q3 due to acquisitions made at the end of the Q where they won’t be able to realize the revenues associated with the receivables right away which was most of the issue last time.  It makes sense, Money McBags believes them, and they say DSOs will be back down in Q3 to a normalized 85 to 90 days.  So look, Money McBags is unconcerned about this, but it is something shorts may use for fodder just because it is one more thing that looks weird with this goofy little company.

Summary:

So there you have it.  Other than mentioning that KITD signed up 45 new clients and added to their leadership team by bringing in Steve Chung “is King” as their new EVP of strategic initiatives and some guy named Richard Craig-McFeely (who promises not to get too McTouchy) as their new SVP of corporate sales, Money McBags pretty much hit it all.

So what the fuck are we supposed to do here.  Well, valuation seems totally irrelevant because they are going to raise a fuckload of equity and dilute the shit out of shareholders, though they should be reinvesting that in an accretive deal.  Absent the transformational deal, the company is trading ~8x 2011 EV/EBIDTA but closer to 10x what their clean EPS could look like next year, so it isn’t too expensive for their growth.  That said, valuing this company and disregarding a huge strategic move makes less sense than the guys from Netscape trying to get back in to the browser market or any of the girls on this site.

KITD remains a bizarre little company that has a chance to be a huge fucking company so Money McBags is going turn his head and forget where the bad men are touching his shares and simply hold.  After the huge run up, you should probably be trimming in to this because when the equity raise is announced, it probably won’t be pretty, but Money McBags strangely believes in this little company (though that doesn’t mean he can’t be critical of them).  Absent the strategic transformation, their guidance for next year is spanktastic, they have continued to perform and grow, and they are looking at a huge market potential (though not as big as the market potential for taint tickles from the lovely Amanda Seyfried).

This is one of those times where you are going to have to decide for yourselves here.  Money McBags sure as fuck wouldn’t be buying in to this, but he is going to hold for a bit as he considers this a long-term investment and he finds that timing the market usually works out about as well as spitting in to the wind or dry humping a porcupine (that is if the porcupine agreed to it because Money McBags firmly believes “no” means “no”).

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