Small Company Update: KITD Rolls Up a Joint Acquisition
One of Money McBags’ favorite little companies, KITD, got their acquisition on again yesterday and bought a pu pu platter of video asset management technology companies in a flurry of transactions that surprised Money McBags more than protesters surprised the Egyptian government or this answer surprised the game show world (and Money McBags was surprised because he was expecting one big acquisition, not three separate ones). KITD announced that for ~$77M they acquired Kyte, Kewego, and Kick Apps in their new strategy of buying only companies that start with the letter K (which means Kara’s Adult Playground is likely eagerly waiting by their phone, and google that one for yourself).
But before Money McBags gets to the analysis, he has to give the company props for finally shoehorning the term “cloud” into their business description by calling themselves “a leading global provider of cloud-based video asset management solutions” (and seriously, Money McBags believes it is the first time they have used the word “cloud” in their business description based on his due diligence of looking at their last two releases). Like the term “internet” in the 1990s, “LBO” in the 1980s, or “Key Party” in the 1970s, adding the word “cloud” to your business plan is worth at least 3 multiple points, so well fucking done. With just the flick of a pen, KITD has increased their value by ~$120MM.
Anyway, since their transcript is not yet up, Money McBags did what he vowed never to do again (and he doesn’t mean a fat chick, because he can make no such promises, you hear that Crystal Renn?) and that was to listen to the conference call, so you all should thank him for wasting 70 minutes and 2 seconds of his life so you won’t have to do it yourselves (and Kaleil, you know Money McBags loves you and everything in the most heterosexual of ways, but dude, you bought three dinky little companies to fold in to what you do, you didn’t create cold fusion or figure out how to get a money shot in to lesbian porn, so really, no need to be so fucking garrulous. Seriously, after 10 minutes of a conference call most investors are so engrossed in Spider Solitaire that they are more tuned out than Jonathan Knight at a Rick’s Cabaret, so can you think about the kids next time? Jeesh, it looks like Money McBags picked the wrong week to quit sniffing glue).
Anyway, without further ado (and as always, Money McBags has no idea what “ado” is, but he is glad there will be no further of it), here are Money McBags thoughts on the acquisition/call:
1. This isn’t even the transformative transaction: That’s right, KITD raised ~$100MM in equity a couple of months ago for a big transaction, and this isn’t it, so holy fucking shit. A ~$520MM market cap company ($13.75 share price x 38MM shares now) dropping $77MM on an acquisition that isn’t transformative is quite an interesting thing (though not as interesting as this thing). So Money McBags guesses this is just a slight transformation, like moving to a gaff, whereas the “transformative” acquisition to come will be like going for the full on nut slicing.
2. The deal seems kind of expensive: ~$77MM (plus $4MM in earnouts) for ~$25MM in revenues (growing between 20% and 35%) so ~3x trailing revenues and with 24% EBITDA margins, that equates to ~13x revenue to EBITDA (and at 13x revenue to EBITDA, KITD would be worth somewhere between a lot and a fucking lot, but yes, revenue/EV is a more full of shit way to value a company than a DCF model, but whatever). After the last equity raise, CEO Kaleil Tuzman said he hoped to buy ~$50MM to $60MM of revenue with the ~$100MM they raised (and they still have the cash for that deal), but based on the multiples here, Money McBags wonders if that is still possible (he also wonders if it is still possible to fix his flux capacitor to go back in time and switch himself at birth with Andy Roddick, so take it for what it is worth).
3. As always, you can’t spell “dilution” without KITD: Ok, you can, but lets pretend it is a silent K. In the deal, they are paying ~$14MM in cash and ~$62MM in stock which equates to 4.6MM more shares coming on to the market (there will now be ~37.9MM total shares), so yippe ki-yay, shareholders now own 10% less of the company. Sure the deals are supposed to be accretive, so we can take some solace in that, but there is just something that Money McBags finds a bit off-putting in CEO Tuzman promising they won’t add more shares again after every time KITD raises equity, and then before the 8K has had time to get hidden deep in the bowels of Free Edgar, KITD is issuing more shares. Money McBags now has one easy way to figure out if KITD will raise shares, if Kaleil Tuzman’s lips are moving, he’s diluting.
4. They are getting some more management talent by appointing Alex Blum, the CEO of Kick Apps, as their new global COO. It was a bit hard to hear Mr. Tuzman’s ballwashing of his former AOL and JumpTV crony Alex Blum over the hum of the Xerox machine in the background as Thomas Wittig furiously ran off copies of his reusme, but it sounds like Mr. Blum will tap in to his experience of having led some kind of product strategy at AOL (and we all know how successful AOL was with the products they developed, like dial-up internet, and um, they had that dial-up internet thing too) to help guide KITD’s operations.
5. Kick Apps was the the kick ass part of this transaction: From what Money McBags understood, and again, he had to listen to the call as he had no transcript so he spent minutes 20 through 40 oscillating between deep sleep and wondering why Bristol Palin was uninvited to sex week (because if Money McBags were having a sex week, the first thing he would do is invite every girl who put out at age 16), Kick Apps is basically a cool as shit mobile platform that helps combine video with social networking so all of your friends can enjoy your dickflashing. Kick Apps somehow allows social reaction to video, including commenting, sharing, embedding, and other built in social features (perhaps pointing and laughing and constructive criticism). KITD paid ~$45MM for this piece which had only $12MM trailing 12 month revenue but this sounds like more of a technology acquisition than KITD’s usual geographic or customer-based acquisition. Social media video is apparently growing a shit ton faster than regular video (duh) and what they called the enterprise social software industry is supposed to be ~$1B next year, so KITD management seemed pretty jazzed up by this company. That said, it wasn’t clear that Kick Apps will be accretive day one, which is rare for a KITD acquisition, so Money McBags hopes Kick Apps’ platform can form the peanut butter to KITD’s chocolate (or the brazilian wax to KITD’s vagina) and thus enhance the overall offering.
6. Kewego and Kyte do something too. To be honest, this is where Money McBags was 100% focused on wondering why he never tried out for the swim team, so he caught like every fifth word, but these two companies seem like the typical KITD acquisitions. Paying a little under 3x revenue for companies that show johnson rods or whatever it is one does in the VAMs space. Honestly, it’s not hella important for Money McBags to know what these companies do other than extend some of the technology and add customers to KITD’s platform. They’re accretive, growing 25%+, and have something to do with all the current fads such as cloud computing, social media, and Justin Beiber.
7. In aggregate, the deals are accretive out of the box (though hopefully it is not Lacey Banghard‘s box of which they will be getting out): $25MM revenue with at least 24% margin gets $6MM EBITDA. That said, $25MM is trailing 12 months so if they are growing 20% to 35% a year, then we’re closer to $7.5MM in EBIDTA. Plus apparently it is easier to integrate them all at once rather than spreading out the acquisition and the deals speed up R&D by 18 months, so there are long term cost savings here too.
8. They get a new board member who seems to know what the fuck he is doing (not to imply that the other board members don’t). Santo Politi, the founder of Spark Capital, who was an investor in Kick Apps is joining the board and not only was he an early investor in Twitter, but also in the Platform (which is of course the likely transformative acquisition by KITD), so it is a very interesting addition to the board. Not only that, but the Kick Apps deal was all stock which means Politi and his cronies likely think there is a fuckton of upside in the shares and these guys must know what they are doing since in addition to Twitter, they invested in companies like Tashtego, Triggit, and a bunch of other shit with goofy names of which no one has ever heard. In all seriousness, this guy has to know the space and his agreement to take stock is a positive sign (though not as positive as this sign). KITD is also adding a guy named Paul Ostergaard to the board who runs an SAAS maritime e-Marketplace, so he may be helpful with ideas on their business model or at least get them a good rate on shipping.
9. KITD is the fucking shit in the video asset management space, and not just because they defined and named the space themselves (and Money McBags has always appreciated that about this company). KITD is the only company to offer broadcast quality video to all four screens and they think in ten years much of the $15B spent today on hardware and firmware will be going to video IP. Shit, by 2012 their goal is to have 50% market share.
10. They are not going to raise equity again (wink wink). They have ~$105MM net cash for their transformative acquisition so nothing to see here (though plenty to see here).
So awesome, now what the fuck do we do with this company? Pre-acquisitions, guidance was for $137.5MM revenue with at least 24% margins. So if we add the $25MM trailing 12 month revenue and grow it at 20% we get ~$167.5MM revenue and using 24% EBITDA margins, KITD should earn ~$40MM in EBITDA. The company is trading at ~$13.75, will have 38MM shares, and $105MM net cash so an EV of ~$415MM. That leaves KITD with a fairly reasonable 10x EV/EBITDA valuation and this doesn’t include the upcoming transformative acquisition. But lets say they add $60MM in this big acquisition, get the same margins, and then grow 20% top line next year (which is likely low). Shit, that gives them ~$65MM of EBITDA in 2012 and they are trading at ~6.5x that which is wayyyyyyyyyyyyy fucking cheap (though once they make the acquisition, they won’t have so much net cash, so are trading at more like 8x that).
So as long as they don’t fuck up integration like the Boston School system in the 1970s, and as long as they don’t raise a shit ton more equity and further dilute the company, KITD is set up for nice appreciation. Put a 10x on the $65MM EBITDA guess for next year and you get ~30% to 50% upside from here depending on how much cash they spend on the acquisition. The point is, these guys are buying shit quickly to lock up the space and sell the company and Money McBags can guarantee you if they sell it for less than $25 a share, his name isn’t Money McBags. So you can buy some here or wait and hope it keeps dropping, but in a year or two, KITD should be worth about twice what it is today as long as they don’t fuck anything up.
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