KITD reported their Q2 earnings the other day and as promised, Money McBags is here to break it down for you with the good (EBITDA), the bad (share buyback talk? ugh), and the ugly (the actual video presentation where management talked in front of a wall of TVs, one of which was showing a hot chick model what looked like a wedding dress right above the CEO’s head in his initial overview, one of which looked like it was showing a snuff film during KITD’s CFO’s financial overview (check out the second TV from the bottom left of the screen), and one of which had someone doing the WWE suck it motion right above the President’s head on the right side of the screen about 2 to 3 minutes in to his company overview.  Seriously, Money McBags was more interested in what was playing in the background than management’s analysis, though he only laments that he didn’t have a remote control to put some of market mover Jodie Fisher’s greatest works on one of the TVs.  That said, it was much better than the video presentation from a couple of quarters ago that looked like it was shot in someone’s basement and was just missing management holding up a newspaper with the current date to make it look like a ransom video).

Anyway, here is the analysis:

The Numbers: KITD’s revenue was up 33% sequentially and 120% Y/Y to $23.1MM which was slightly above their pre-announced $22.7MM from the other week and was hurt by ~4% due to the decline of the Euro during the Q.  Gross margin was ~63% and operating costs were ~$12.3MM ex one-timers and non-cash stock comp charges which yielded ~$2.15MM in operating profit and since the company pays less in taxes than Wesley Snipes does, that would have equaled ~$.10 operating EPS for the quarter in contrast to the announced $(.02) GAAP EPS.  The company also had $4.2MM in EBITDA for an EBITDA margin >18% which was above their target though had ~1% help from the declining Euro as their costs in Euros are slightly more than revenues.  They now have $67MM cash on their balance sheet for an EV of ~$150MM.


The Good:

1.  Revenue continues to grow and they said even without acquisitions, they are on pace to beat full year guidance which Money McBags was delighted to hear, almost as delighted as he would be to hear “what time should I be over and can I bring some friends?” from Jenn Sterger.  Guidance was for at least $75MM in revenue with acquisitions to add another ~$20MM so that should get them to around $100M in revenue in 2010 which would be up 100% from last year and for those of you keeping score at home, 100% growth is good, unless we’re talking about sales of Chuck Klosterman books or anal warts.

2.  They added 23 new clients including a top ten pharma company, Delta Airlines intranet, and Vivid Video (ok, the last one is made up, especially as “I P video” likely has a much different connotation for Vivid Video fans, but whatever).  And the company isn’t just adding clients, but they are also able to grow with their current/acquired clients.  The CEO pointed to their ability to grow a relationship with GM which they initially got through an acquisition and how they were able to sell GM additional services so that account is now 3x what it was before they acquired them.  KITD’s ability to offer more integrated solutions by going “deeper into the stack” than competitors seems to be paying off (and “deeper in to the stack” also seems like a great title for a potential porn movie starring Peter North as a stern librarian).

3.  DSOs came back down.  DSOs were down from a ridonkulous 128 to a more manageable 89 as they focused on collections to some degree to show the street they have it under control after the company must have received some hella nasty phone calls from large investors wondering if they were going to need to call in Vinnie and Sal to collect for KITD.

4.   KITD is differentiated from most competition by being able to have technology that goes to all three screens and offering more enterprise type solutions.  In the best part of the phone call, CEO Tuzman essentially dropped his drawers and took a massive dump all over the Brightcoves of the world by calling that business a commodity that is really just selling storage and bandwidth.  Tuzman labeled that the OVP (online video platform) market and said it is ultimately unsuited for long term growth as all it really does is put video players on websites which is so AOL in the 2000s.  So a big fucking yawn to that business model.  Plus he said that since those companies are all private, they have been able to hide the sources of their revenues implying that if they were to open the books, there would be a lot of that commodity storage and bandwidth selling revenue and not a lot of value added revenue.  Tuzman then compared the current enterprise market, of which KITD is the biggest player, to the ERP market of the early 1990s where it was a land grab for market share and he said that in this current land grab, KITD will continue to be acquisitive to get in to new geographies as $1 spent today is worth $10 to $20 later to get rid of competition.

5.  Organic growth is still 50%-55% and Money McBags loves him some organic growth (though sometimes inorganic growth is ok too).

6.  Management will continue to practice “aggressive humility” by not becoming complacent or cocky and continuing to try to acquire companies to improve geographies and technology.   Yeah, this management team is a bit weird and promotional and using cheesy terms like “aggressive humility” is a bit amateurish, but Money McBags likes this approach.  They’re basically saying, “we’ll do our best not to become a bunch of total dicks but that doesn’t mean we’re going to be a bunch of complete pussies either.”  So they are kind of like the hermaphrodites (a little dick, a little pussy) of the VAMS space.

7.  There are still a few more weeks of summer.  Ok, this doesn’t have much to do with KITD, but it is something good that Money McBags would like KITD to bring to any of his 3 screens.

8.  KITD is getting closer to reporting a clean fucking earnings number. About fucking time as putting up a deceivingly bad $.02 GAAP EPS loss doesn’t show up in portfolio manager screens and thus the company continues to be under institutional radars.  KITD said they front weighted acquisitions costs for the first half of the year and with most of their warrants expired, they should be close to a more traditional operating earnings number.  When KITD drops >$1 of EPS next year, people will notice.

The Bad:


1.  The CEO got wishy washy when a caller asked him if the company was going to look in to share buy backs now that they have $67MM in cash.  Look, Money McBags understands KITD is an undervalued stock and offers a terrific return and thus buying back shares is a winning proposition, but guys, you just raised a fuckload of cash through several DILUTIVE equity raises so a few months later to turn around and say “whoops, just kidding about that” and re-buy shares would make this management team look sketchier than Terri Horman or Roman Polanski at a junior high cheerleading competition and credibility is already a big concern with investors.  Yeah, sure you want to have “aggressive humility” and be able to say when you fucked up and right that wrong quickly, but after increasing the number of shares by ~4x over the last year and diluting shareholders worse than a virgin bloody mary, you sure as fuck better be using that cash to buy companies if as you say $1 spent today really is worth $10 to $20 in the future (unless you think KITD stock should be worth $90+ and even Money McBags, one of KITD’s most vocal supporters, won’t go that far).  When someone asks you about buy backs, just say “we raised the money for a reason and we continue to see great opportunities to put it to work to grow the business.”   Done, fini, end of story.

Using cash to buy back shares after the way you have raised most of that cash would indicate that you not only don’t see the great growth opportunities but you also misread the market.  Here’s the deal.  You’re a weird little fucking company with offices in Prague that moved from Dubai with stupid inconsequential shit flowing all through your income statement making institutional investors interested in this company about as much as Money McBags is interested in a Jane Austen anthology or anything on CNBC other than Amanda Drury’s reports.  So buying back stock now after your recent equity raise (even if some of the cash on the balance sheet was generated from operations) makes you look like a bunch of fucking amateurs and while it is pure optics, if you haven’t noticed, the market trades on optics as much as anything else.  So if you really don’t know what to do with the $67MM how about using ~$1k to put together a more professional set for your next video conference call or donating ~$5k to Money McBags for a night out at his local Rick’s Cabaret?  Work with me here guys.

2. Something about the DSO explanation seemed a bit odd. Last Q, KITD got hammered after their receivables spiked which three months later they now say was due to poor communication about what caused the spike.  Now look, Money McBags has no idea what they have been privately telling investors over the past three months, but they have made several public statements (including a recent quarterly pre-release) and not once did they mention that the A/R issue was a statistical anomaly until this earnings call.  Money McBags gets it, you acquired Benchmark at the end of the Q and their A/R hit your balance sheet before the associated revenues did and thus A/R spiked.  Simple, easy to explain answer, that mostly makes sense.  So why the fuck is this the first we have heard of that?  And if that was the only issue, why did you tell everyone you clearly focused on A/R collections this Q?  If it was just an accounting timing issue, why change your focus?  Money McBags is going to believe management here that everything is ok, but next time you have a fucking “statistical aberration” that causes your stock to sell off as it did, how about not waiting 3 months to better explain it?  You don’t want to manage your company to the market, but fixing a poor job of explaining a basic fucking accounting issue would be much appreciated.

3.  Not much more leverage in model, at least in the short term. Gross margins of ~63% were said to be pretty static now, which is totally fine with Money McBags but it is worth noting that EPS growth is now going to be driven by revenue growth.  Management did indicate that there is still some operational leverage, but is seems like for the short term we’ve reached a bit of a steady state.

Forecast: Well the market is growing ~40% a year and KITD is the market leader and has an assload of cash to be acquisitive, so what growth rate do you want to put on this company?  For 2010, they are likely going to have ~$95MM-$100MM of revenue and depending on how they manage their operating costs, they should have ~$18MM to $20MM of EBITDA.

So to try to put a floor on 2011, lets assume they grow slower than the market at only 35% (though why the market leader with only 15% market share in a land grab and quickly growing market would experience subpar market growth would be more confusing to Money McBags than the popularity of country music or the value of sell side research, but lets make that assumption).  So that would make KITD’s 2011 revenue ~$135MM and at ~63% gross margins that gets them to ~$82MM gross profit.  If we grow operating expenses from the current $7.4MM a Q to ~$9MM a Q and marketing expenses from ~$2.3MM a Q to ~$3MM a Q giving them some benefit to scale and then keep legal expenses and depreciation about the same, we get to ~$22MM of operating income and with no taxes, that works out to be ~$.96 eps or ~$31MM EBITDA.

The company currently has a $150MM EV so it is trading at ~5x 2011 EV/EBITDA or ~10x operating EPS using BELOW MARKET GROWTH ASSUMPTIONS and assuming no new acquisitions.  Seriously, either this company is a total fraud (3% chance) or it is more undervalued than Roberto Bolano’s writing, side boob, and cauliflower (trust me on this one, chop it in to florets, throw some olive oil and salt on it, and roast the shit out of it in the oven and you will come around).  So even at a below market growth rate of 35%, this company should trade at at least 15x that for ~$15 per share or at least 8x EBITDA for ~$14 per share depending on which made up metric you want to use.  If KITD can grow 50% (it grew 100% this year, but yes, there is something called the law of large numbers which also explains why Paris Hilton will eventually get hepatitis) and can get some moderate operating leverage, $40MM of EBITDA can be achieved on the high end and in that case it’s lobster tails and blow jobs for everyone.

Conclusion: Money McBags has pimped this stock here so much that he feels like it should start giving him freebies as all it has done is go down but he looks at the numbers and the potential upside is still there.  Sure the stock has dropped faster than LeBron James’ popularity in Cleveland, but the company keeps putting up numbers.  Money McBags has made a lot of you money on When Genius Prevailed.  He’s made you aware of DFZ, QCOR, CRUS, and short WGO, just to name a few.  And don’t forget how he called the top of RICK earning us all nice returns (look where it is today and thank him later).  So he has a decent enough track record and he believes his analysis above is fair and reasonable and as unbiased as he can be (He owns KITD shares, so obviously he has some bias).  This company has big upside with relatively little current downside so do more analysis if you want, point out anything you see wrong with Money McBags’ analysis, or simply spend the rest of the day guessing muffs, but there is longterm value with this company and while it is speculative, at $9 the risk reward is in your favor as long as you don’t get jittery about short term market moves, a preponderance of shorts, or the 3% chance that something about this story doesn’t quite make sense.

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