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EXHIBIT
99.1
KIT
digital
Company
Update Conference Call
October
6, 2009
Operator:
Good
morning and thank you for participating in today’s conference call to discuss
KIT digital’s acquisitions of Nunet and The FeedRoom. With us today are Kaleil
Isaza Tuzman, Chairman and Chief Executive Officer of KIT digital; Gavin
Campion, the company’s President; and Robin Smyth, the company’s CFO. Following
their remarks, we will have an open call for questions.
Before I
continue, I would like to take a moment to read the company’s Safe Harbor
Statement. Factors that could cause actual results to differ materially include
risks and uncertainties such as the inability to finance the company’s
operations or expansion and ability to hire and retain qualified personnel,
changes in the general economic climate, including rising interest rates, and
unanticipated events such as terrorism activities. Although the company believes
that the expectations reflected in this forward-looking statement are
reasonable, such statements could not be regarded as a representation by the
company or any other person that such forward-looking statements will be
achieved. The company undertakes no duty to update any forward-looking
statements, whether as a result of new information, future events, or otherwise.
For future risk factors, see the risk factors associated with the company’s
review in today’s SEC filings.
I would
like to remind everyone that this call will be available for replay through
November 6, 2009, starting this afternoon at 1 p.m. Eastern Time. A webcast
replay will be available via the link provided in yesterday’s press
release.
Now, I
would like to turn the call over to Chairman and CEO of KIT digital, Mr. Kaleil
Isaza Tuzman. Please proceed, sir.
Kaleil
Isaza Tuzman:
Good
morning, everyone. Good afternoon and good evening to those of you calling in
Eastern parts of the world. My name is Kaleil Isaza Tuzman. Thank you, Operator,
and thank you all for joining us today.
We are at
a very exciting inflection point in our business’s development. KIT digital
yesterday issued a press release announcing our acquisitions of Nunet, a German
based privately held subsidiary of IMG Worldwide engaged in the delivery of
mobile TV channels and mobile VOD, as well as the acquisition of The FeedRoom, a
pioneer in the IP video industry – based in New York City with offices in
Seattle and Boston - and a market leader in live video and video digital asset
management. A full text copy of our press release is available on our
freshly-designed website at www.kitd.com.
As
detailed in yesterday’s release, we acquired Nunet from IMG Worldwide. Nunet is
recognized as a premier global provider in the management and delivery of video
on mobile devices and increasingly, as well, in online frameworks. The FeedRoom
is a venture capital-backed, privately-held market leader in live video and, as
I said, video digital asset management. Their business is primarily focused on
corporations and government entities. Both acquisitions complement and
substantially expand our client base, our core capabilities, and our commitment
to serving video on all three screens; the browser environment, the mobile
handset, and the IP-enabled television set. It also includes the addition of
some very valuable distinct assets in the personnel area (managers that are
joining the senior management team), modules that are being added to our core VX
data layer, and the appointment of several Nunet and FeedRoom business
development executives in regions where we were not as strong
previously.
1
We expect
these acquisitions to be immediately accretive to our financial results and
provide substantial synergies in terms of business development, platform
technology, our geographical footprint, as mentioned, and our overall growth
potential as a business. We believe today we are the largest business measured
by revenues in our space, and we are pretty sure that we are the only business
that is truly profitable. We say “pretty sure” only because some of our
competitors are privately held and we do not have absolute access to the
information involved.
The
aggregate consideration we paid for Nunet and The FeedRoom was approximately
US$20.9 million. Of this amount, US$9.8 million was paid in stock, US$7.9
million was paid in cash, and US$3.3 million of debt was assumed in the form of
a convertible promissory note issued by our company. Again, that’s the aggregate
consideration paid for those assets. In total, as a function of the transaction
in its entirety, we issued 1.3 million shares as a result of the two
transactions, and this was comprised of 949,000 shares, approximately in
exchange for 100% of the outstanding shares of The FeedRoom, as well as
approximately 363,000 shares which were issued in exchange for US$4 million of
cash invested at the time of closing by The FeedRoom’s controlling shareholders.
These shares were purchased at a price of US$11 per share.
In
connection with the FeedRoom transaction, I agreed personally to an 18-month
lockup of 1.3 million of the shares I currently beneficially own as a sign of my
commitment to the company and to The FeedRoom’s shareholders investing at time
of closing. In fact, all of the shares issued in connection with the FeedRoom
transaction are subject to this agreement, restricting the sale for 18
months.
These two
acquisitions of Nunet and The FeedRoom are expected to add--on day one--US$17.5+
million of current annualized revenues from core IP video-based services and
contribute more than US$4.5 million in annualized EBITDA. As we’ve said before,
EBITDA is a good proxy for cash flow in our company, as we do not, as a
practice, capitalize R&D and we have minimal capex. In Gavin Campion’s
comments, he will refer to other potential operating synergies that will evolve,
as well as cross-selling revenue synergies that will evolve, in the context of
the integration of these assets over the next several quarters.
In
January of 2009, the beginning of this year, we said we expected to generate at
least US$40 million of revenue this year with approximately 10% operating margin
for the year. As you know from our results, we are well on track to exceed those
numbers. This guidance was reflective of our core business at the time and does
not take into account the effect of the acquisitions of Nunet and The FeedRoom.
From an accounting perspective, the effective date of both transactions is
expected to be October 1st, so
there will be impact for the quarter. And the new structuring and severance
costs for those - for both acquisitions, where applicable, will appear in the
fourth quarter, as well. It’s important to note as well that approximately 75%
of the revenues acquired through the acquisitions of Nunet and The FeedRoom are
recurring in nature and subject to long-term customer contracts.
Now,
let’s break it down per acquisition. On the Nunet side, we acquired Nunet for
approximately US$11 million. This was comprised of US$7.9 million in cash and
US$3.3 million in the assumption of a convertible promissory note issued by us.
At our sole election, the promissory note may be converted into stock or paid in
cash installments over 18 months starting in January of next year, at a 6.5%
interest rate. I personally acted as a guarantor of the promissory note in order
to facilitate the speed of the transaction. We’ll get back to that
shortly.
2
The
acquisition of Nunet is expected to be immediately accretive, as previously
mentioned, based on an annualized recurring revenue stream of at least US$11.5
million and over US$2.3 million of annualized EBITDA. And these numbers are
prior to most merger-related synergies.
The Nunet
acquisition adds a number of major international clients to our roster. A wide
range of global mobile network operators use Nunet’s mobile TV digital asset
management system, including Vodafone Group, Mobilkom, Proximus, SFR, and
Vodacom. Nunet has invested an estimated US$22 million in its technology
platform since its inception in the late 1990s. Nunet also works for some of the
world’s major broadcasters and content producers like Eurosport, IMG Worldwide,
MTV, the Discovery Channel, and Fashion TV.
Nunet’s
approximately 55 employees will remain based to Cologne, Germany, under our new
ownership. For those Nunet employees that may be listening, welcome to the team,
once again.
IMG has
said—and remember, Nunet is a wholly-owned, or was a wholly-owned subsidiary
of IMG Worldwide—that although it is focused at the moment under the ownership
of Forstmann Little on its core competencies and shedding assets that don’t fit
with its overall sports licensing strategy, selling Nunet was a difficult
decision for them. And we understand that, having gotten to know and become
friends with the IMG team over time. They truly believe in what Nunet is doing
and its future prospects and they’re very happy to have found a great home for
Nunet in KIT digital. And we are all looking forward as a team to continuing the
relationship with IMG. As previously mentioned—and as mentioned in the press
release—as part of the acquisition, IMG Worldwide and KIT digital will enter
into a long-term commercial contract under which KIT digital will continue to
provide IMG digital media services that were being provided by Nunet prior to
the acquisition.
Now,
let’s talk about the FeedRoom transaction. We paid 948,636 shares of KIT Digital
common stock for The FeedRoom. At the time of our stock closing on Friday,
October 2nd, this
would value the acquisition at US$9.8 million. We estimate The FeedRoom’s
annualized core revenue is more than US$6 million today, and we expect the
transaction to be cash flow-positive to us as of acquisition, as of day one, due
to the synergies and G&A expenses realized immediately prior to and upon
closing, and will contribute a projected annualized EBITDA of more than $2.2
million.
As part
of the transaction, The FeedRoom’s controlling shareholders, NewSpring Ventures,
BEV Capital, and Velocity Equity Partners, invested US$4 million into KIT
digital stock at US$11 per common share, through the conversion of FeedRoom
Series F Preferred Shares purchased at the time of closing.
The
FeedRoom significantly expands our presence in North America through the
addition of more than 80 enterprise customers. These include Barnes & Noble,
BestBuy, Boeing, Bristol-Myers Squibb, Business Week, General Motors, Hewlett
Packard, Honeywell, Intel, Metlife, US Department of Defense, and
others.
The
FeedRoom invested an estimated US$35 million in its technology platform since
its inception in 1999. And The FeedRoom technology enhances our KIT VX IP video
management platform through the integration of key features of The FeedRoom’s
‘Studio’ software, including an advanced management, reporting, and analytics
console. In turn, The FeedRoom clients will gain access to the advanced software
features of KIT VX, including delivery of IP video to mobile devices and
IP-enabled television sets through set-top-boxes, as well as enhanced
geographical targeting and search engine optimization tools.
3
Many of
The FeedRoom’s approximately 50 employees will join our New York City operations
in a common office, while The FeedRoom offices in Seattle and Boston will be
added to the KIT digital network.
Simultaneous
with the Nunet and FeedRoom acquisitions, we delivered on our promise and
reached separate agreements to extinguish all past--and the vast majority of
future—contingent earn-out obligations related to the May 2008 acquisition of
Kamera Content and the October 2008 acquisition of Visual Connection. This
leaves us with a clean balance sheet with respect to future earn-out
obligations, and the total amount paid in the context of these two earn-out
extinguishments were US$2 million US and the issuance of approximately 163,000
restricted shares to the former shareholders of Kamera and Visual. For the
avoidance of doubt, neither the Nunet nor The FeedRoom acquisitions involve any
earn-out or contingent liabilities or warrants.
Following
these two acquisitions and the settlement of the earn-out payments mentioned, we
have approximately 10.3 million common shares outstanding and, including all
forward restructuring and severance charges and deal-related expenses,
approximately US$7 million of cash.
It is
important to note that during our recent registered public stock offering and
NASDAQ listing process, we made it clear that the net proceeds of that offering
would be used for accretive acquisitions and that we had pre-identified those
acquisitions, were engaged in dialogue, and we felt those acquisitions would
expand our geographical and customer reach and further establish our leadership
position in IP video management for the enterprise. We have followed through on
that promise, and we choreographed the negotiation process so we could close on
both transactions at the same time—which made our integration process, from
selection of management to technology integration to office planning, etcetera,
more efficient. We believe we have, therefore, fulfilled the promise made to
investors by completing these acquisitions quickly and efficiently and have
already identified further operational synergies, our combined leadership team,
and immediate plans for platform technology integration—all of which Gavin
Campion, my partner, will touch on.
All of
this forms the basis for very strong growth, both organic and super-charged
through these acquisitions, while we continue to deliver the best IP video
experience for enterprise customers around the world.
Now, I’d
like to turn the call over to our CFO, Robin Smyth, who has been our CFO most of
the time that I’ve been in the job, with a slight hiatus to spend more time with
family and the golf course. Robin, we’re so happy to have you back on the job,
and we welcome your additional comments at this time. Robin?
Robin
Smyth:
Well
thank you, Kaleil. It’s very good to be back and it’s an exciting period for the
company.
I’d like
to just add that in addition to concluding the Nunet and FeedRoom acquisitions,
we have used this post-funding and NASDAQ listing period to fulfill our promise
to eliminate contingent earn-out liabilities and select an international
auditing firm which can grow along with our global business. Particularly in
light of these two acquisitions that have dramatically expanded our global
footprint, we recognized the need for an international auditing firm with local
practice capabilities in all our core markets. And the best candidate for this
position was Grant Thornton LLP, who as of last Friday, become our new
independent auditors, replacing MSPC.
4
The
company has filed a Form S-3 shelf registration yesterday to provide flexibility
with future strategic development activity. However, we do not anticipate making
any further material acquisitions in the near future and plan to focus on
integrating these firms and growing our core business.
I would
add there that there have been some questions and perhaps even concern about the
S-3 shelf registration which we announced yesterday. We understand that. But we
want to take the opportunity today to be very clear that we elected to do this
as an administrative matter. Most listed companies take the opportunity to file
shelf registration statements, but this often is overlooked because they are
frequently automatically renewed or go unnoticed if an investor came into a
company after the original S-3 filing. Also, because we have a current
outstanding S-1, completing this S-3 filing now as opposed to later was
considerably cheaper. It is, of course, designed to give us flexibility in the
future. But as Kaleil has already expressed, we have no current plans for
near-term, significant M&A activity that will require equity
fundraising.
It is, of
course, very common for a company to have an S-3 out there, but I suppose we’re
aware that with our recent NASDAQ listing and also yesterday’s announcement,
we’re out front and center a little more than usual. So we wanted to continue
our approach of being absolutely transparent about these things, which is why we
included it in yesterday’s release. Of course, we’re happy to field any
questions in the Q&A session.
We now
have a strong balance sheet, with US$7 million in cash and highly capable
administrative supports in place. The US$7 million covers everything which we
needed to spend on the acquisitions to this stage. We believe this provides us a
strong foundation to take the company to the next level of growth and market
expansion.
Now, I’d
like to turn the call over to our President, Gavin Campion, to talk a little
more about the acquisitions we made. Gavin?
Gavin
Campion:
Thanks,
Robin, and hi to everybody on the call. Terrifically exciting times, as you’ve
heard, for us at KIT Digital. We’ve been working on this for quite some time.
We’re now really entering a relatively short period of integration to quickly
capitalize on the financial and operational synergies available to us. I think
it’s fair to say that we’re well into that integration. Though the press
release, obviously, was only just released, it has been something we’ve been
working on for some time and was obviously preplanned. In fact, I think I can
say we’re already extracting the value here at MIPCOM in Cannes with members of
our extended team and new members of our family already extending our pitch in
presenting to clients and to potential new business alike.
So as
Kaleil mentioned, we executed a registered stock offering for this purpose, and
we’ve acquired two companies off the back of that offering. From an operational
point of view, we are well-planned. From a staffing point of view, from a
technical integration point of view—it’s really one of the keys behind the
acquisitions we made: to further our super-set of technology in the VX platform.
From an operational point of view, a financial point of view, from a sales and
business development point of view, HR, indeed, down to the details of things
you'd expect like client calls and visits are all well-executed at this point.
And obviously, we’ve got a great deal of experience with doing this
with acquisitions we made last year.
5
And I
feel we're well placed here and from an operational point of view and driving
our strategy and furthering our position as the global leader in the provision
of IP video-enabled technologies specifically with the enterprise-level client.
So I want to pick out a few things just to explain in our integration process,
and some of the benefits that we are immediately extracting.
As Kaleil
mentioned, scale has its own benefit, and these acquisitions are immediately
accretive, adding approximately US$17.5 million on an annualized basis to our
revenue and US$4.5 million in annualized EBITDA. Our total staff jumps to 290 in
14 locations in 11 countries around the world. The FeedRoom very nicely builds
out our North American presence and North America will now be approximately 14%
of our global revenue. And we do have now a further 80 enterprise level clients
from FeedRoom, some of which Kaleil mentioned earlier on the call.
Nunet
will remain in Cologne and the EMEA region will continue to be incredibly strong
for us—and perhaps 65% of our total revenue. We have four members of The
FeedRoom and Nunet management team immediately joining our senior management
team in the Company. Historically, we've always been very conscious to take
senior members of any company that was acquired and fully integrate them into
our executive management team. It's really capitalizing upon the value that
created the asset in the first instance.
From a
technology point of view, and this is probably the most important point with
regard to the operations of the business, both these acquisitions significantly
strengthen our VX platform with features in what we are calling our “super-set”.
Both businesses previously ran on software-as-a-service model and a pretty
similar business model to ours and, obviously, we'll continue on that model:
feature-rich, robust and scalable. I really think the KIT VX system is the only
truly end-to-end IP video enablement technology that's robust and industrial
grade, for targeting the end-client on a global basis.
Nunet
obviously offers significant mobile technology. I really believe it’s the
premier technology in management and delivery of video on mobile devices. And in
fact, as a result of that, mobile-related revenues will jump to around 25% of
our global revenue immediately.
And The
FeedRoom—just picking out a couple of examples—with the Studio management
console: it’s a terrific video management tool, has great reporting and
analytics that will be immediately integrated into our VX software suite. And
also, The FeedRoom’s incredibly strong in management and delivery of live video,
an area we are engaged in but we’ll now strengthen our technology in this
area.
From a
new business point of view—I mean I just mentioned that we’re in Cannes and
having tremendous success attracting new business and potential clients to our
stand here at the MIPCOM conference. And this has been incredibly important for
us over previous years in generating new business and it appears to be
generating the same results this year.
We have
three members here from the companies that we have acquired and obviously we are
using this for cross training, for education and to generate immediate business.
So I think the synergies and the skills and the experiences and, indeed, in the
proven commercial formulas provide immediate opportunity to strengthen our
offer. Certainly there is immediate opportunity to up-sell and cross-sell to
further add value to our clients' businesses and, therefore, to us.
6
I really
think the combined skill sets will be fierce and powerful when driving our new
business activity to the enterprise on a global basis.
A couple
of examples here from The FeedRoom team. We've mentioned before on these calls
that we are targeting the vertical of corporate communications—what we sometimes
call “back-end” corporate use of video—but you might characterize it as HR,
business operations, training, merchandising, etcetera. The FeedRoom is very
strong in that area. We are immediately using those skill sets to build out that
vertical out in our business.
The Nunet
team obviously are global experts in the management and delivery of video over
mobile, something that's incredibly important to our future and, indeed, proving
important right now in the video that we are putting forward today.
So that's
what I really just wanted to cover: obviously, we have known this was coming for
a while. We are right on strategy. We have a relatively short period of
integration. It's well planned. We are already capitalizing on the benefits of
our new team members and our technology. Thank you.
Kaleil
Isaza Tuzman:
Thanks,
Gavin. It’s Kaleil on again. And thank you, Robin. Operator, we’d now like to
open the call to any questions from our listeners.
Operator:
Thank
you, sir. If you would like to ask a question, simply press *1 on your touchtone
phone. And we’ll take our first question from Richard Genao at First Midwestern.
Go ahead.
Richard
Genao:
Hey, good
acquisitions. A quick two questions. Are you guys done with the acquisitions at
this point? Are you still looking?
Kaleil
Isaza Tuzman:
Richard,
as mentioned earlier, we are not engaged in material new acquisiton discussions
at this time. These were the two we went out to the market to finance for, and
we’ve completed them. We are heads-down on integration and building the business
organically at this juncture. We still see consolidation opportunities in the
space, but we will always apply a very disciplined buy-versus-build analysis to
any M&A activity… [AUDIO ISSUES, INAUDIBLE]
Operator:
We’ll go
next to Steve Emerson at Emerson Investment.
7
Steve
Emerson:
First of
all, congratulations on executing on your strategy. I would like to perhaps go
into what’s happening in the industry now that the economy seems to be getting a
little bit better visibility and corporations seem to be executing on forward
plans. Perhaps give us a feel for how much upside possible in the industry for
you. You mentioned in your comments that the previous guidance looks low. If you
could flesh that out a little bit better. Basically, how’s business? Has
business accelerated? Growth rate of business? Hit rate? Just give us a feel for
how the industry is doing and are you seeing an unlocking of corporate
commitments and acceleration possibly? Thank you.
Kaleil
Isaza Tuzman:
[AUDIO
ISSUES, INAUDIBLE]
Yes.
We’ve been seeing - and I’ll pass off the follow-up on this to Gavin - but with
respect to how the industry or the business is doing in general, we have been
seeing through the course of 2009 an unlocking of corporate commitments or
cap-ex decisions. You know our customers are large and conservative. Part of the
good aspect there is that, you know, they pay their bills and they stay in
long-term contracts and you can really grow with them. Obviously on the negative
side, sale cycles are long; and we’ve talked about that previously on
calls.
But at
the same time, our pipeline is big enough and our scale is big enough at this
point as an organization that we continue to have strong growth
quarter-over-quarter, for all the quarters that we’ve been in the management
role since the beginning of 2008. I would say that 2009—the back half of 2009—is
definitely starting to feel a little bit more normalized, closer to, you know,
the way things were kind of the first half or first quarter of 2008 with respect
to buying decisions. You know we managed to grow through the recessionary period
at a healthy clip. But I think, as we get into 2010, we’re quite excited about
business activity, given already what we’re seeing in the back half of 2009. And
I can say that sitting here, next to Gavin at a commercial conference in France,
where a lot of our clients come to and there’s a lot of openness around cap ex
decisions at this time.
Gavin, I
don’t know if you have anything to add on that thought…No, we’re okay,
Steve.
Operator:
Our next
question comes from Steve Maiden at Maiden Capital.
Steve
Maiden:
Yes hi,
guys. Just a couple questions. Look like terrific acquisitions, particularly
getting the VCs from FeedRoom and to pay US$11 a share is going to work out well
for them. But it’s a great deal in that it’s above the stock price. A couple
questions. One is, could you maybe talk about the growth rate a bit of the two
acquisitions, FeedRoom and Nunet, just historical or any comments you could give
going forward and maybe any other sort of - I don’t know if you can quantify any
of the synergy opportunities you see going forward that are not in the numbers
you gave.
Kaleil
Isaza Tuzman:
Yes.
Steve, let me just clarify. A couple investors have asked offline what the
rationale was for The FeedRoom shareholders—NewSpring, BEV, and Velocity—coming
into the deal concomitantly at US$11 a share. The rationale was it was important
that the level of ownership by The FeedRoom group was of sufficient size to be
able to contribute to the organization and to meet the objectives of those
investors involved. And we respected that. And we understood also that the
underlying kind of value that we were applying to the asset without that
investment involved wasn’t probably going to get them to that ownership level.
And so as we looked each other in the eye around the table, we all agreed given
there was going to be some restructuring and severance costs involved and given
their desire to have a certain position of ownership, that that was the best way
to achieve it.
8
Now,
naturally ,when we negotiated that second tranche of shares being purchased, the
stock had moved in the meantime and so forth, but you know that – so it waso
actually a higher delta to the stock price at the time it was negotiated. I
don’t watch the stock every day. I’m not sure where it is at this very moment.
But I can say that at the time it was negotiated, it was obviously even higher
above the then-trading price.
With
respect to your other question, we haven’t gone back historically to look at the
compounded annual growth rate of both assets in the way you’re asking, in part
because there are certain activities or revenue streams in both assets that we
have seen as non-core and decided either to not acquire or were jettisoned.
That’s why we were careful in the language that we used in the press release, to
talk about the revenues from the core activities. And so, you know, I would—and
this would be a ‘guesstimate’, so would be certainly subject to further review
and filings—but I would say that The FeedRoom business was probably around flat
on a trailing annual basis. And I think there are a whole bunch of reasons we
can talk to about it. We’re pretty familiar with the asset and we have a ton of
respect for the team. I think they were going through some significant
technology upgrades that probably required a lot of corporate resources. And I
think that one of the great things about this acquisition is that we really
accelerate that as a team: the combined capability with the undergirding VX
platform will allow for, I think, the focus to go back to additional sales.
They’ve got terrific clients, and I think there’s a lot that we can do
together.
On the
Nunet side, I think in terms of the core business, you’d probably be talking
about something like 25 to 30% trailing growth in terms of that core IP-video
business, as I’ve said, that there’s a piece of it that we didn’t acquire that
had to do with a services component that was different and we really want to
stay pure-play as much as possible on IP-video. So hopefully, that hits your
question, Steve.
Steve
Maiden:
Yes, that
helps. And then just a couple other housekeeping questions: Can you remind me?
The decline in the dollar, that’s a positive for you, right?
Kaleil
Isaza Tuzman:
If you’re
talking about the US dollar movement, a strong dollar is negative for us and a
weaker dollar is stronger for us, in terms of revenue reporting. We’ve said this
on almost every one of our investor calls: for avoidance of doubt, once again,
dollar movement doesn’t affect our EBITDA, our cash flow line, because we use
natural hedging (applying our resources against our revenues in the same
respective currencies). So client payment versus the checks that you’re cutting
for salaries, for example. But obviously with respect to revenues, dollar
movement does move around revenues a little bit.
9
Steve
Maiden:
Okay. And
I guess the final question, I know you’ve already said you don’t watch the stock
closely, but I personally was a little surprised by the reaction yesterday. I
felt the announcement was very positive on many counts. And perhaps it was
mostly because of the shelf, but any comment you can make on that?
Kaleil
Isaza Tuzman:
Yes. I
think we’ll probably split this into two, because from a market perspective,
Steve, we were surprised. Maybe not top much, because we know that statistically
speaking when people hear an M&A announcement, the immediate concerns are
what I call the “D&D” concern: dilution and distraction. We knew that we
needed to address and explain that and explain why we’re so excited about what
we’re doing.
So, to
hit the “D&D”: on the dilution side, this is a clearly accretive deal. I
mean I can’t emphasize that enough, with respect to its higher margins. That
doesn’t even build in the revenue synergies that can evolve, as Gavin referred
to, and the operating synergies that come out of working together over a few
quarters that naturally arise consolidating variable costs at the vendor - you
know from vendors, and that type of thing. So we feel very excited about it. I
think from a geographic perspective, it really puts us in a position to look any
Fortune 2000 or Global 2000 corporate executive in the eye and say we operate
across every territory you’re in and we work with other similar, large
companies. If we’re pitching a Johnson & Johnson, you can say listen, we’re
working already with, AstraZeneca, we’re working with Bristol-Meyer Squibb, and
so forth. You just get the scale that comes from working with the largest
corporations. They give you “CYA” concerns, but they give you credit for working
with similar companies and we’ve faced issues they might’ve faced before. So we
feel operationally and financially these are really no-brainer
acquisitions.
They’ve
also been planned for a long time, and I think that hits the other concern with
respect to the distraction side of the coin. This is a long-term plan. We have
been engaged in integration planning for months and have proved before that we
know how to carry this through successfully. These acquisitions manifested in
the form of press release yesterday, but in terms of internal planning in one
case went back nearly a year. So we pre-identified the team, pre-identified the
platform integration, pre-identified the way that customers would be served pro
forma, pre-identified how it figured into corporate marketing and planning,
etcetera.
We think
that we’ve proven over time that we can integrate assets. We do so in a
patterned way. And by doing both of the acquisitions at the same time (and we
thank the counterparties involved because they were flexible with us and
understood that would be helpful to the forward entity), we were able to make
joint decisions around staffing and around resource planning and around
integration that were much more efficient than would be otherwise.
I guess,
I'm being long-winded here, but the punch line would be that we understand that
in the context of an announcement like this there is concern about those
“D&D” factors.
We really
don't think it's merited and we're hoping in this call to clearly convey that.
We think that it really enhances what we are doing tactically and from a
financial and valuation perspective it should be very welcome.
I don't
know, Gavin, if you have anything to add here? I've taken up a lot of airtime
here.
10
Gavin
Campion:
I think
you're right. The key point from a business operations point of view is that we
were planned out and that we did have mutual operating plans developed in
conjunction with our new teammates prior to the acquisitions going
through.
I think
increasingly we are being seen as the market leader from a business operations
point of view. Our culture is strengthening. Our team wants to come to work. Our
clients are enjoying working with us and seeing us as a leading operator in
driving their business or saving them costs through the deliver of
video-over-IP.
The great
thing with the acquisitions is that we have a very similar operating philosophy.
We're positioned in similar ways of being a value-add provider and the market
leader position with the services around the technology, so we can drive the
clients' businesses. I think from a business point of view, it's incredibly
positive. We keep doing what we say we are going to do and people believe
us.
Steve
Maiden:
No, I
think you guys are doing a great job. And just one last thing and I’ll turn it
over. I thought I heard you say to the previous caller’s question while you were
muffled something about—it was related to not doing any more acquisitions. And I
thought I heard you say that you were rumored to do an Onstream acquisition
which you’re not going to do. Or did I miss hear?
Kaleil
Isaza Tuzman:
Yes, I
apologize for the audio issues on this call. We know that there had been some
noise on the Onstream dialogue, and obviously, it’s our policy not to comment on
rumors. In this particular case, there have been so many questions that we just
feel it’s important to be clear. We do not have an offer out to Onstream. We do
not at this time intend to or have plans to acquire Onstream. We have respect
for that management team. We see them occasionally in the market. We like Randy
[Selman] and what he’s doing, and we just wanted to hopefully do a service to
our respective shareholders by just being clear about where we are in our
planning. You heard correctly on that. You also heard correctly that we do not
have any other material M&A activity in the pipeline at this time. That
could change in the future obviously.
Steve
Maiden:
Great.
Keep it up, guys. Thank you.
Operator:
And once
again just as a reminder, if you would like to ask a question, just press
*1.
We’ll
take our next question from Jon Baker at Red Comb LLC.
Jon
Baker:
Hello,
thank you. Hey great news, Kaleil. It’s very exciting about those acquisitions.
I just had a question for you. I want to know if you might have gathered any
more information or heard anything further about the rumor of Google purchasing
Brightcove for US$500 to 700 million. I guess that rumor broke a few weeks ago.
I’m just curious what the implications, if any, might be for KIT digital and the
industry in general if that combination were to occur.
11
Kaleil
Isaza Tuzman:
Sure. You
know we wouldn’t comment on that even if we had heard anything, Jon, so I just
want to be, you know, open on that point. It’s a small industry and we obviously
all have friends at the different firms involved. I think the industry is much
more collegial and collaborative, given it’s largely a green field space, that
it can sometimes appear in the investor context or in the “blogosphere”. So we
actually root for Brightcove. We know they’re doing some things that are
competitive with us. Most of what they do, frankly, is not competitive. We
believe we’re deeper in the data layer with the organizations that we serve. We
even have cases where we’re publishing to the Brightcove players. We wish them a
lot of success. And maybe with the FeedRoom acquisition we’ll have more direct
competition, but we think there’s a lot of room in the market for different
players, different parts of the ecosystem.
You know
we’re focused on really being a video ERP service company. We allow you as a
corporate customer, to manage the data layer and everything you’re doing on
video across different screens. What we do not do is the advertising side. We
integrate, obviously, with advertising networks. We don’t do the storage. We
integrate instead with companies that do that. We’re not even—you know we have,
obviously, our own players—but you don’t even need to use video players from our
organization for us to work with you. So we try not to do too much. We know what
we’re about; we know what we’re focused on. Our key is to have enterprise-level,
great customers under long-term contracts with recurring revenues that we are
delighting with great services and proprietary technology. If we do that and we
generate cash flow by doing it, we’ll be fine.
So you
know what, we try to stay out of that kind of rumor mill as much as possible. To
give you the respect of a direct answer, I would just say that we know there’s
strategic dialogue and activity in the sector. We know that because we’re in the
sector and we get inbound calls. And I think that’s picked up a lot over the
last month. Whether one of those dialogues is Google and Brightcove, we can’t
comment on and don’t know.
Jon
Baker:
Okay. I
think regardless, the space in general seems to be getting more attention from
investors, which is a good thing. And congratulations again on your
acquisitions. I think these look very exciting.
Kaleil
Isaza Tuzman:
Thanks.
We’re here any time to answer follow-up questions off-line.
Operator:
We’ll
take our next question from Richard Fetyko with Merriman.
Richard
Fetyko:
Good
morning, guys. A couple of questions on FeedRoom and Nunet with respect to the
typical contract size on each. If I do the math right on FeedRoom with 6 million
revenues and 80 customers or so, it’s about $6,000 per month per customer, which
is below your average. Just curious if that’s right and what is it for Nunet and
do you feel that their pricing is appropriate in the marketplace.
12
Kaleil
Isaza Tuzman:
Yes, I
think there are two components to that question. I’ll field the first part. (Hi,
Richard, by the way, it’s nice to hear your voice.) I think that we will be
bringing to The FeedRoom cross-selling capability and an overall discipline
around the way we approach business that I think over the course of some time -
hopefully not too much time – that will raise the ARPU. Now to be fair, it’s not
that big of a difference. It’s not like our ARPU’s U$20,000 per month per client
and The FeedRoom is US$6,000. I think our average probably today is closer to
US$8,000 per month or something on an average basis. Obviously on the new
clients we’ve been adding over the last year, it’s been higher. But, you know,
we’re talking about averages here.
I think
the other part of the question will be kind of how is that cross-selling taking
place and where does it start from the sector perspective. I’ll hand over to
Gavin for that.
Gavin
Campion:
I think
certainly taking FeedRoom as the first example, there’s huge opportunity to
cross-sell our broader capability into those clients and drive those clients’
businesses and therefore drive our business and grow much deeper relationships
than largely browser-based solutions within FeedRoom. Currently, as I mentioned
earlier on the call, the technology I’m really excited about from FeedRoom is
the management console and the reporting and the analytics. As a
result of these tools we are able to build much deeper technology and software
relationships with these clients.
We’ve
actually been through this process, Richard, with The FeedRoom client list.
We’ve identified the priority clients where we believe there are immediate
opportunities to cross-sell, and we’ve developed the materials and the
propositions you would expect to go and cross-sell. And our sales team are
integrating as we speak physically and actually scheduling to go and meet those
clients and to up-sell and cross-sell the capabilities. So that might be mobile,
it might be set-box solution; it might be advertising integration, whatever it
might be.
From the
Nunet point of view, Richard, it’s slightly different. Nunet has a deeper
technology stack, more closely mirrored to ours, you might say, with an
obviously heavy focus on mobile and as such, a higher average account value.
They’ve been through a period of really focusing on developing excellence in
that technology. So I think the immediate opportunity there for us is to quickly
replicate that out on a global basis—benefit of scale I was talking about
earlier—to take what is a world-class mobile management and delivery platform
and take that out to our 14 offices around the world. And I believe we’ll have
immediate success with that. We’re already doing that. We’re already prickling
ears. We’re already holding meetings. So that is different for each acquisition,
but gives you a sense of our top-line strategy for each.
Richard
Fetyko:
On the
Nunet side, if I may follow up, do you see the opportunities to replicate their
success on a global basis? Do you see more opportunity with the network carriers
out there or the content owners with respect to using their technology for new
account acquisitions?
13
Gavin
Campion:
Well
excitingly, I’d say it was both. But the major network carriers we’re already
making great presentations to, and that kind of strategic vision, strategic
direction, commercial formula are well-templated. And as you know, I always like
to tell the cost-reduction story to clients, or an increase in profit; either
way an increase in profit – through either a revenue increase or a cost
reduction. And we can do that immediately with a proven formula there. Equally
from a content producer point of view, obviously we’re strong in that area
already and we have that in common with Nunet. And I see us continuing to do
that. But the low-hanging fruit is with the carriers—this is a world-class
carrier solution, undoubtedly.
Richard
Fetyko:
Thanks.
And then also on the -- can you tell us about the gross margin profile of these
two companies currently and perhaps what it could be?
Kaleil
Isaza Tuzman:
Richard,
I don't think we are prepared to do that yet because we have different
accounting categories. We’ve had this approach since Q4 of last year to put in
our reports to variabalize as much the cost of goods and services related to our
services business. We think that gives the right discipline to our management of
costs.
We
obviously want to integrate the numbers here in these acquisitions in the same
reporting framework. So what we can do is we can talk about cash flow and
EBITDA, which is what we're going to do very shortly. Obviously, we're going to
have to report on it by Q4. But what we've done historically is at the beginning
of each year,within a week or two after the end of the year, we’ve given a
preview on Q4 results.
And I
think we will be in a position to do that. We are more conservative, as you
know, than other SAAS, or other software –as-a-service companies, with respect
to how we portray our margins because we don't capitalize R&D as a policy
and we variabalize as much as possible the cost of goods and services against
the services part of our business.
That
optically has the effect of having a lower gross margin, whereas in reality if
we just moved around the category, you'd end up obviously at gross margins that
are similar to other software and services companies. The proof in the pudding,
of course, is EBITDA margin—the cash flow margins—where we've got good
results.
I think
that certainly in the way that both acquired companies currently report they
have higher gross margin, whether how that feeds through in doing what we do
around variabalizing cost of goods and services and whether it ends up in common
reporting framework and enhances gross margin I don't know yet.
I think
it's a pretty safe bet to say that it would be an “upside risk”. In other words,
it would probably, if anything, raise the way we currently report our gross
margins. We don't know the exact numbers at this time.
14
Richard
Fetyko:
Okay,
that’s very helpful. And then one last question, with respect to the annualized
run-rate of revenue and EBITDA that you mentioned, those are annualized off of
the June quarter numbers?
Kaleil
Isaza Tuzman:
Yes. We
just took the trailing three months and multiplied by four.
Richard
Fetyko:
Trailing
three month as of September?
Kaleil
Isaza Tuzman:
I think
actually we did that based on the trailing three months leading up to August
31st,
Richard.
Richard
Fetyko:
Gotcha.
All right. Thanks, guys. Congrats.
Operator:
And we’ll
go next to Peter Okin at Stifel Nicholas.
Peter
Okin:
Congratulations,
Kaleil. Prior to these two acquisitions, you were looking at 70% revenue growth.
What type of revenue do you project for 2010?
Kaleil
Isaza Tuzman:
Hi,
Peter. We haven’t completed our 2010 budget yet. Obviously, you know Richard
Fetyko (of Merriman) who was on the line and just spoke has projections out in
the market. In the past, it was done once at the beginning of the year. We’ve
articulated what our target was for the year. I can’t tell you for certain that
we’ll do that again this coming year, but that’s been our policy the last couple
of years. So I don’t think I’m going to be able to, unfortunately, answer that
question. I can tell you that we’re extremely excited about where we are in this
business today, both on the assets that we’ve acquired and the asset that we
owned prior to those acquisitions. As you’re steering a larger ship on a
percentage basis, it becomes harder to hit the same percentage numbers in
growth, but overall growth in our business is very strong. So unfortunately, I’m
going to kind of give you that type of hedged response. But I hope you’re
hearing the positivity in our voices at this time.
Peter
Okin:
We do.
Thanks.
Operator:
And at
this time, this concludes our question-and-answer session. I would like to turn
the call back over to Mr. Isaza Tuzman. Please proceed, sir.
15
Kaleil
Isaza Tuzman:
I’m
sorry. We know there were a few questions in queue we did not answer. This call
was scheduled to last an hour, so in the future maybe we’ll speak for a little
bit less upfront. Thank you. We are eminently available separately to speak
off-line. My email is kaleil@kitd.com; and you’ve got robin@kitd.com and
gavin@kitd.com. Thank you.
Operator:
Thank
you.
16