Money McBags promised he would get to KITD’s quarter on Tuesday but then he sat down to do his taxes and well, shit got a little hairy (though not as hairy as Paul Volcker’s taint).  Now Money McBags isn’t saying the AMT is convoluted, he is saying the AMT is fucking convoluted.  Money McBags has an degree in economics (and he graduated magna cum laude, though nowhere near as impressive as making Magda cum loudly), an MBA in finance, a CFA charter, and he not only used to know how to wind up with one peg in the center hole at the end of a game of Hi-Q, but he also is a world champion NSFW muff guesser, and even with all of that, he has absolutely no fucking idea what the AMT is calculating or even why it is calculating.  Shit, Money McBags has seen episodes of the Dukes of Hazzard that make more sense than the AMT (and note to Sheriff P. Coltrane:  Umm, you know where the Duke boys live, so why not just wait for them there and then arrest them?) but alas, he must digress because we are here to talk about KITD whose business strategy is starting to make the AMT look simpler than a one color Rubik’s Cube.

Now loyal readers know Money McBags has been all over KITD like white on rice or sperm on Faye Reagan since he launched the award winning When Genius Prevailed and all it has done is disappoint more than Frederick Exley after A Fan’s Notes or Claire Mcckaskill after her campaign promises. That said, they haven’t missed any numbers, they’ve grown revenue and EBITDA >100%, they’ve become the market share leader in a market growing ~30% to ~35%, they use a newer and cheaper technology that is <10% of the total market and will eventually be 75%-100% of it (and just repeat that sentence fragment and you’ll see why this company makes Money McBags’ nuts tickly), and yet the stock is basically flatter than Megan Fox’s ass over the past year despite trading at only 7x to 8x next year’s EBITDA (depending on what you do about the potential upcoming dilution).

So what the fuck?  No really, what the fuck is going on here?  Simple.  A set of investors trusts KITD’s CEO to execute on his plan less than Libyan rebels trust Qadaffi or sentient beings should trust the work of Frederic Mishkin (or any witch doctor for that matter) as he has been so aggressive in making acquisitions that you would think he was acquiring the rights to Sofia Vergara‘s left tit for a year.  Plus, to make the acquisitions he has constantly diluted equity holders to the point where the SEC is thinking of renaming the form S3, a KITD.

That said, Money McBags still believes in this company as the most important part is that they have 30% (going on 50%) market share, they provide the back end asset management needs for companies who want to employ IP video which is not just a cheaper form of video than digital but still <10% of the market, and they are just too fucking cheap.  Anyway, Money McBags takes a look at their Q below:

1.  Revenue continues to grow faster than the stress levels of Masataka Shimizu as it was up 40% sequentially and 138% from last year, though that is mostly from their strategy of buying anything that moves (which is a shame for Christopher Reeve, and not because he was paralyzed, but because he is dead).  See, this nice little organic growth story somehow morphed in to the mother of all roll ups (narrowly beating out Pina Conti‘s mom) and that just makes things a bit fucked up for now.  That said, they did sign 58 new contracts including Getty Images, Sony Pictures, and Diageo, so they are organically signing deals and signing them with companies of which people have actually heard, so that is good news.

2.  Earnings continue to grow or tread water, depending on if you just like seeing numbers go up or as a shareholder if you actually care about your fucking share of the earnings (and as a shareholder, this is the thorn in Money McBags’ side, the turd in his punchbowl, and the finger in his salad about this company).  Operating EBITDA was up 114% to $6.7MM and up 114% is obviously titriffic (and not regular titriffic, but Salma Hayak titriffic), but operating EBITDA per share was down from $.30 to $.25 because they issued more shares during the year than Alan Greenspan issued excuses or Camille Crimson issued moments of joy.  And this is what drives investors nuttier than a Peter North cock sandwich (well this and KITD’s constant denial that they will issue more shares, only to actually issue more shares, but hey, trust is a one way street, right?).  Money McBags has said this before, but the only time he knows KITD is about to dilute is when Kaleil Tuzman’s lips are moving.

3.  They have redefined their marketing pitch once again from something like “enterprise solution to video asset management” to “a leading global provider of cloud-based video asset management solutions” to delivering a “lens to lens” solution.  Yep, lens to fucking lens.  In the immortal words of Marlee Matlin, “huh?”  This is straight from the press release: “Our full suite of platform solutions with wrap-around professional services uniquely positions us to deliver truly complete video solutions, from the lens of the camera to the eye of the audience, or ‘lens to lens.“”  Now look, Money McBags is glad they have positioned themselves for a professional reach around service (or whatever) and are exploring ways to make what they do sound like something other than “we take a bunch of video files, convert them to our IP code, and then give customers a usable front end (and hopefully as usable as this front end) to essentially access our giant fucking boring database and use their files.”  Good on them, but “lens to lens” as a way to describe people watching video seems like they are trying a bit harder than Elizabeth Taylor’s heart was, so it’s just a bit goofy (which does lead to one of Money McBags’ favorite jokes: “Why did Mickey Mouse leave Minny?  She was fucking Goofy.”).  But next time you want to take your lady friend to the movies, just tell her you want to go “lens to lens,” and let her know all the cool kids are doing it.

4.  It wouldn’t be a KITD conference call without an unexpected acquisition. Remember a few short months ago they raised ~$100MM to make a big acquisition and since then they dropped $77MM on buying KickApps, Kowego, and Kyte and now have dropped another $34MM to buy an Italian company named Polymedia (and Polly can buy a shitload of crackers for that) which does a bunch of IP video shit in Europe that apparently KITD couldn’t already do (or more likely, KITD just wanted to buy customers).  KITD is paying $34.4MM for Polymedia’s $19MM in revenues, so the deal is a much lower valuation than the most recent deals, but as always, half of that acquisition price is being paid with equity.  Blahhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh.  So while the deal should be accretive (though the upfront will knock ~100bps from EBITDA margins), as shareholders, we once again own less of the company.  After the transaction KITD will have $90MM in cash and 39.3MM shares outstanding and to keep track of the rising share count, Money McBags suggests someone adds KITD’s share count to the US debt clock site.  But remember, KITD is trying to dominate this space early and they claim $1 spent today is worth ~$20 spent down the road trying to dislodge a competitor and who wouldn’t want to buy a $1 lap dance?

5.  They want to start focusing on marketing.  And Money McBags has two words for this “ugh” and “ugh.”  They have 30% market share and will have 50% after their big acquisition, so um, why the fuck waste money on brand building and marketing when you are basically the only fucking brand?  Sure you need to give Gannon Hall something to do (and to be honest, Money McBags doesn’t trust anyone named Gannon, especially wanna be hipsters) but can’t you have him install the new foosball table or let him “lens to lens” some TV?  On the call, KITD said “the team will rollout a new visual and verbal branding campaign to support our current go to market strategy around solution selling” and Money McBags will offer up his services to KITD to help with this as if anyone can visually or verbally brand something, it is clearly Money McBags.

6.  Along with wasting money on marketing, KITD’s goals for the year are to penetrate the BRIC market (and Money McBags hopes they don’t sprain their VAMS while trying to penetrate a brick) and to add more telecom operators, MSOs, and sports associations (and may Money McBags suggest they go after all water sports associations because that is a widespread and fast flowing video market).

7.  Kacey Barnfield deserves another mention on the award winning When Genius Prevailed.  This has nothing to do with KITD, but you can all see the importance of it.

8.  The big one is still coming (and Money McBags isn’t talking about Whitezilla on the set of his last movie), rather he is talking about the deal for which KITD raised ~$100MM (with the promises of not raising anymore equity, though giving 6MM shares away in their last set of transactions might be seen as raising equity, but why quibble about exact definitions?).  On the call, Kaleil said the reason the big deal has been pushed back is “It was important to do the smaller acquisitions first, because if we had announced the larger acquisition first, we almost certainly would have triggered Hart-Scott-Rodino or HSR review and European Commission competitive review as well,” and he still anticipates the deal will be for ~$50MM in revenue and will involve no further equity raises, so um, ok.

9.  Guidance is still coctacuklarly good.  By reading the above, you may get the feeling that Money McBags isn’t a fan of KITD, which obviously couldn’t be further from the truth (though not as far from the truth as a Scott McClellan press conference).  Money McBags is a shareholder and this is why:  KITD is going to enter 2012 with a revenue run rate of $137.5MM + $44MM from the unfortunately named KKK deals (KickApps, Kyte, and Kowego) and Polymedia which gets them to ~$181.5MM.  Add in the potential big deal of ~$50MM, and they are at $230MM for 2012 and with 30% growth, that is ~$300MM in revenue.  If you slap on a 23% EBITDA margin, that is a delicious $69MM of EBITDA and they are trading at, um, well, something x that.  See, it all depends on how much cash they need to raise to complete the $50MM acquisition because surely they aren’t going to buy this big company for $90MM or 1.8x revenue (and the company they are buying supposedly rhymes with “The Snatform” in one of the worst kept secrets since Tom Cruise emerged from the closet.  He did come out of the closet, right?).  And even if they did get the company for $90MM, they are not going to take cash down to zero, so while management has promised not to raise more equity, you see they are going to have to raise cash of some sort to be able to complete this deal.

Anyway, let’s say they can raise funds in the debt market and The Snatform will cost 2.5x revenue so ~$125MM and KITD is going to want to keep ~$40MM on their balance sheet for a rainy day or for when Jenna Haze comes to their local Rick’s Cabaret.  So hypothetically (and remember Money McBags is pulling all of this so far out of his ass that he is shitting out his tongue), they would need to raise ~$75MM of debt and that would leave them with 39.3MM shares and $40MM cash on the balance sheet.  At $12, that would give them a $471MM market cap, and a ~$505MM EV ($35MM net debt), so they are trading at only 7x that, and remember, their market is growing 35% and they are the fucking market.  So um, as long as they don’t fuck shit up, Money McBags is not only going to remain an owner, but he is thinking about doubling down here once the market sells off a bit again.

That said, there are still a fuckload of unanswered questions and as CEO Kaleil Tuzman has hinted that he would be willing to come back to the award winning When Genius Prevailed for a follow-up Q&A (that is once his fantasy baseball draft is done and he has time), Money McBags wanted to lay out his question for Mr. Tuzman:

1.  Lets get serious about this acquisition.  While you obviously can’t give financial details, how are we supposed to think about your capital structure given the scenario Money McBags laid out above?  Even if the $50MM in revenue only costs $90MM, you’re not going to use all of your cash, so from where is the rest of the cash going to come (and hopefully you are not banking on funding the acquisition from the proceeds you will get if you find the afikomen in this upcoming Passover season) especially as you explicitly said “It is our belief that we can deliver on this plan without raising any additional equity capital in the public markets?” More importantly, do you consider giving the company you buy shares of KITD as part of the acquisition “not raising capital in the public markets,” because either way, it is dilutive to current shareholders?

2.  You have talked so much about the big deal that it seems like all that is left is to dot the Is and cross the Ts (and Money McBags would like to dot these eyes and cross these Tees, even if he is not entirely sure what that means), but on the call you said “in the event that Cisco or pick your huge company name were to swoop in and be a disruptor and say, we’ll pay two or three times that price, or whatever, I think it’s very clear internally and to the counter-party that we would not be chasing any type of deal.That is the first time Money McBags has heard you kind of hedge at all on the deal getting done and while your hedge was to point out that you won’t chase the deal if this delay causes competition to come in, do you have a plan B if the deal doesn’t go through?

3.  Why are you fucking around and trying to build a brand?  No really, what is the fucking 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.

4.  Shortly after earnings, KITD’s stock cratered and you sent out an email to investors saying the short story was unfounded and to paraphrase, “a bunch of poppycock.”  Now shorts have been circling KITD for months and their basic thesis is that you are going too fast and are going to fuck up the integrations, so what caused you to finally try to address them?  Also, can Money McBags reprint your email and his response to it (which by the way you have still not answered, but he understands you are terribly busy) as Money McBags believes his readers will find it both poignant and touching as they are not all privy to the machinations of the Street?

5.  What do you make of the rumors that Money McBags and the award winning When Genius Prevailed may soon be closing down?  Will that send ripples through Wall Street and how will people spend those extra 10 minutes of the day and where will they find such hidden assets as KITD and Heather Vandeven, if in fact the rumor is true?

6.  On the call you talked about how your IP solution is making the current digital video hardware and firmware (and yes, you said hard.  Huhuhuhuh) almost obsolete.  So why is the market growing only 30%?  What is causing the adoption rate not to accelerate as online video grows and your solution is cheaper?

7.  “Lens to lens?”  Really?

Anyway, Money McBags remains a shareholder of KITD and looks forward to Mr. Tuzman’s answers and to seeing how much cash they raise for their soon to be announced acquisition.  Money McBags is going with $75MM, anyone want to take the under?

Scott mcclellan
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