Practicaly every corporation, non-profit and government agency needs to distribute video over the web and increasing amounts. At the same time the number and kinds of devices to which the video must be delivered is increasing, too. However, formatting and optimizing this video for the growing number of devices – personal computers, iphones, androids, other smartphones, ipads, other tablets, IP-tv – is not a core competency of the entity sending the video. They need help with this formatting function and KITD provides this service via their software which is delivered mostly software as a service style.

The above discription is my layman’s explanation of KITD’s services. The company’s description of what it does is something more like this: KIT digital (KITD) is a leading global provider of video asset management (VAM), publishing, and social engagement solutions for multi-screen IP-based delivery. KIT’s full suite of solutions enables enterprise clients to acquire, manage and distribute video assets across the screens of today's world: PC, mobile device, IP-enabled television set, tablet, digital signage, and the like.

As far as tech goes, not only am I a layman, but more often than not, I am also not an investor due to it being priced beyond the reach of a traditional value investor. However, because KIT operates in a new niche, lacks of publically traded competitors and is digesting a spate of acquisitions, it trades at roughly 7.0x 2012 EV/EBITDA in spite of organic growth in excess of 30%. The company states organic growth in Q1 was 35% and I’m not disputing that, however, due to the acquisitions it is difficult to prove or disprove with precision. In any case growth is strong and the exact degree will become clearer as the acquisitions are rolled in. Using a modest tech multiple of 10x 2012 EV/EBITDA yields a ~$17 stock, or 40% upside.

KIT is the largest player in the space with roughly 40% market share and the only publicly traded competitor. The number two and three players are deltatre and thePlatform (partially owned by Comcast). KIT has more than 2000 customers across 30+ countries, various client verticals, including media and entertainment companies like ABC News, Associated Press, BBC, CNN, ESPN Star, News Corporation and Universal, network operators such as AT&T, BskyB, Foxtel, Telecom Argentina, Telefonica, Singtel, Verizon and Vodafone, and non-media enterprises like Airbus, Best Buy, Bristol Myers-Squibb, GM, NASDAQ, NATO, SAP and Volkswagen. The company has a global presence and low customer concentration risk (largest client is under 5% of KITD revenues).

As noted, KIT has completed a number of acquisitions in the past year+. Management argues that given the infancy of the niche and the low churn nature of the service (KIT churn <2%), it made sense to roll up a number of competitors in different verticals so as to stake the ground. I’m comfortable with the strategy. Acquisitions include:

·         KickApps – Unified integration framework based on OSMF co-developed with Adobe, as well as application based deployment of web-based engagement tools

·         Kewego - Strong, behind the firewall enterprise deployment capabilities, as well as an IP-based digital signage product

·         Kyte - Industry leading OTT streaming platform with more than a dozen integrated ad networks; sophisticated mobile-based production and consumption applications

·         TXT Polymedia - Core expertise in delivering complex, customized managed services to large broadcaster & network operators requiring new deployments & ongoing service. Acquired in mid march 2011 for EUR 24.7Mn, including 50% cash and 50% shares of KITD. Additional EUR 3Mn in shares of KITD may be issued upon reaching certain operating targets.

·         Ioko - Global leader in deployment and management of tier-one carrier-grade OTT video systems, powering such deployments as AT&T’s U-Verse & Sky Player. GBP 42 Mn revenues in FY2010(Sep), up 26%, operating margin increased significantly hitting 17% in FY2010. Revenues for Q1 2011 were $19.4Mn and operating margin at 19%. UK sales almost ¾ of total revenues in FY2010. Acquired in April 2011 for $90Mn of which $74Mn cash, $12.7Mn in shares of KITD and $3.3Mn earn outs.

As noted, I believe the market wants to see that the company can integrate all these acquisitions as do I. However, there is a little more to the acquisition portion of the story. Back in December the company raised equity with a plan to make a large acquisition. The Street assumed it was going to be either thePlatform or deltatre. Well, it took until April to announce the acquisition. Though the company did guide that it would take a while to complete the acquisition, the gap between raising the money and getting the job done was making everyone a little antsy. The stock sold down in dribs and drabs from ~$16 at year-end 2010 to ~$12 in April as investors become impatient. Finally they announced the long-awaited glorious acquisition and it turns out to be ioko and not the anticipate deltatre or thePlatform. The stock sells off on the disappointment (athough quickly bounces back into the tradeing range it is in.)

As a practical matter, management never said the acquisition was going to be thePlatform or deltatre and cautioned investors not to assume it would be. However, the street took that notice as as mere disclaimer and continued to assume that one of those two companies would be the target. However, it is worth noting that management was also careful not do anything to identify ioko as a target or even a competitor in all their materials because they didn’t want someone else to buy them before they did. In any case, ioko, appears to be a smart acquisition as it brings them deeper into large deployments to cable companies, deployments which provide higher ARPU.

Management guidance for 2011 is as follows:

·         Revenues $210 Mn and EBITDA of $48.3Mn (adjusted EBITDA).

·         EBITDA margin guidance around 23% for 2011, which represents an approximately 500 basis point improvement in EBITDA margin over 2010, with long term target of 30%.

Segments are broken down as follows:

·         65-70% software fees, 30-35% professional services fees

·         50% revenues EMEA, 25% Americas, 25% Asia-Pacific.

Growth profile:

·   KITD more than doubled its revenues in the past 2 years while expanding the margins, and is expected to more than double revenues in 2011, this growth includes acquisitons.

·   Organic growth was reported as 38% in Q1 2011 and they’re guiding to organic growth of 30-35% for FY2011.

FORECAST

Assuming 30% yoy 2012 revenue growth (guidance of 30-35% organic in 2011), we estimate revenues to reach ~$275M in 2012. At a margin assumption of 25% for 2012 (above 2011 guidance but below management’s 30% ultimate target) the expected EBTIDA in 2012 is $68. Using a 10x EV/EBITDA for 2012 fair value is ~ $17. We are using 42Mn shares, net cash of $28 Mn (cash/equity payments subsequent to Q1 related to acquisitions were considered).  Our estimates could also be made if revenue was slightly lower than our estimate, but they come closer to their margin goals.

Forecast

Catalysts
- successful end of restructuring/integration, evidence expected in Q3 and Q4 2011 numbers.

- major client wins

Risks

- Integration problems

- Street expectations for 2012 may be too aggressive

- successful end of restructuring/integration, evidence expected in Q3 and Q4 2011 numbers.

- organic growth becomes clearer

- major client wins