KIT Digital: Mycket lovande rapport!

KIT digital, Inc. (NASDAQ: KITD), a premium cloud-based software solutions and services provider for multi-screen video management and delivery, reported second quarter results for the period ended June 30, 2011. All figures are listed in U.S. dollars.

Q2 2011 & Outlook Highlights
-- Revenue up 40% sequentially to record $48.2 million and up 109% over
same year-ago quarter;
-- Operating EBITDA up 35% sequentially to record $9.6 million and up
128% over same year-ago quarter;
-- Added more than 35 net new clients during the second quarter,
including, Channel 4, China United Television, a new
major business unit of The Walt Disney Company, and RAI;
-- Final phase implementation of 'Project Delta,' the major internal
reorganization and cost-reduction initiative related to the
integration of the acquisitions completed during the first half of
2011. Upon completion, Project Delta eliminates approximately $35
million of total costs from the business on an annualized basis;
-- Large majority of remaining M&A-related restructuring and
integration charges booked in Q2, with only $2 million expected to be
booked in Q3 2011 and none in Q4 2011;
-- Company is moving to a cash EPS reporting metric in the second half of
2011 and expects to be free cash-flow positive going forward --
reaching $2.5 million per month in cash-flow generation by the end of
-- Reaffirmation of $210 million revenue guidance for 2011 and 23%
operating EBITDA margin for full-year; Q3 2011 guidance of at least
$61 million in revenues, representing a 40% annualized organic growth
rate over Q2 2011;
-- Revenue guidance of at least $300 million in 2012;
-- Next generation KIT Video Platform to be unveiled at the International
Broadcasting Convention (IBC) September 9-11 in Amsterdam.

Q2 2011 Financial Results Revenue in the second quarter of 2011 increased to $48.2 million from $34.5 million in the first quarter of 2011, and from $23.1 million in the same quarter a year ago. The increase is attributed to both organic growth and the contribution of newly acquired companies.

The company's revenues are comprised of software-as-a-service (SaaS) license and usage fees, software set-up and maintenance fees, and professional services charges.

Revenue from the company's Europe, Middle East & Africa (EMEA) region constituted more than 50% of the total during the second quarter, with the remainder approximately split between the Americas and Asia-Pacific regions.

For the second quarter of 2011, GAAP net loss was $19.8 million or $(0.49) per basic and diluted share, compared to a net loss in the previous quarter of $12.5 million or $(0.34) per basic and diluted share, and a net loss in the second quarter of 2010 of $342,000 or $(0.02) per basic and diluted share.

GAAP net loss for the second quarter of 2011 included over $12 million in net non-cash charges, comprised of $4.4 million in stock-based compensation, $3.1 million of depreciation and amortization, $4.9 million in net adjustments to past acquisition earn-out accruals, and a non-cash derivative gain of $432,000.

GAAP net loss for the second quarter of 2011 also included $9.7 million in restructuring and integration expenses related to the reorganization and integration of recently acquired companies and $6.0 million in other merger and acquisitions expenses (including investment banking advisory fees, legal fees and taxes related to the ioko and Polymedia acquisitions completed during Q2).

"Although we have not yet formally introduced our cash-based, or 'adjusted' net income non-GAAP reporting metric -- which we will do in the last half of the year -- we expect we would have generated positive EPS on a cash basis in Q2 2011," noted Robin Smyth, KIT digital's chief financial officer.

Management expects to book approximately $2 million of remaining restructuring and integration charges related to the completion of 'Project Delta' in Q3 2011. "This will allow us to be completely clear of such charges in Q4 and report cash earnings in the back half of this year," continued Smyth.

For the second quarter of 2011, operating EBITDA, a non-GAAP metric which management has historically used as a proxy for operating cash-flow, increased to $9.6 million or $0.24 per basic and diluted share from $7.1 million or $0.19 per basic and diluted share in the previous quarter, and from $4.2 million in the second quarter of 2010 (see important discussion of operating EBITDA in "About the Presentation of Operating EBITDA," below).

Management estimates that research and development (R&D) expenses for the second quarter of 2011 were approximately 8% of total revenue. While the company will continue to expense rather than capitalize R&D as an accounting policy, it plans to formally break out R&D expenses in the reporting of overall general and administrative expenses starting in Q4 2011.

Cash and cash equivalents at June 30, 2011 totaled $37.8 million, as compared to $109.7 million at March 31, 2011. The decrease was due to the consideration paid for acquisitions completed during the quarter, as well as restructuring and integration expenses and advisory fees related to the acquisitions. Approximately $2.5 million of cash payments were made shortly after the quarter-end related to completion of certain M&A consideration components and payments to financial and legal advisors.

Day sales outstanding (DSOs) at June 30, 2011, adjusted for the acquisitions completed during the quarter, were in the mid-90s. As of today, August 9, 2011, the company's DSOs are in the mid-80s, which is in line with both the company's usual DSO level of 75-90 days and with other SaaS companies providing software and services to large enterprises. The temporary increase in DSOs was an anticipated result of the transition in invoicing entities and associated bank accounts related to the ioko and Polymedia acquisitions completed during the quarter. The company expects DSOs to decline further from its current levels.

The company added more than 35 net new clients during the quarter, with an average revenue per month per customer (ARPU) of more than $30,000, which reflects the company's ongoing focus on higher-end opportunities in the market and large, multi-year contracts in emerging sectors and geographies. The company's client base totaled more than 2,300 customers at June 30, 2011.

Pursuant to the terms of its acquisition of Polymedia in May 2011, KIT digital was required to file an S-3 registration statement to register the KIT digital common shares received in the acquisition under SEC Rule 144 and held by TXT Group (the main shareholder of Polymedia). In filing this shelf registration, the company took the opportunity to register certain other Rule 144 shares, such as those received by the shareholders of Benchmark Broadcast Systems for past earn-out payments. This shelf registration did not involve any shares owned by management, directors or insiders, and was deemed effective by the SEC yesterday, August 8, 2011.

As of August 9, 2011, the company had 42.5 million shares outstanding. This is inclusive of recent earn-out settlements and payments made to the shareholders of Brickbox Digital Media and Benchmark Broadcast Systems, companies acquired by KIT digital in late 2010. As of today, the company has paid out or eliminated most outstanding earn-outs related to previous acquisitions. The company has a maximum probable exposure of an additional 2 million shares in performance earn-outs over the next several years -- primarily related to the recent acquisitions of ioko and Polymedia.

Selected Q2 2011 Client Wins
-- The Walt Disney Company, the world's largest media and entertainment
brand, engaged KIT to deliver a multi-screen over-the-top (OTT) system
for one of its major divisions;
-- China United Television, a nation-wide consortium of 19 leading
television stations in China, selected KIT to set up a full-scale IP
video network that will allow the consortium to distribute live TV
programs and catch-up TV via computers, connected TVs, Apple i-devices
and Android handsets to millions of users across China;
-- Channel 4 in the UK, one of Europe's leading television broadcasters,
chose KIT to extend its video-on-demand service to Microsoft's Xbox
-- RAI, the leading Italian broadcaster, selected KIT and Wave TV to
deliver its new user-generated video content and social TV channels;
-- UPC, a subsidiary of Liberty Global, chose KIT to deploy and manage
their over-the-top video platform;
-- Virgin Active, Virgin's primary health and fitness brand in the UK,
selected KIT to host and manage its rich media assets;
-- Ethiopian Radio and Television Agency (ERTA) chose KIT to provision
the first HD and IP-capable broadcast studio in the country;
-- Belgian national broadcaster VRT selected KIT to launch a
video-on-demand and live video service on the Web;
-- A leading global surf brand selected KIT to manage video-on-demand and
live video content to Microsoft Xbox consoles throughout the world;
-- TV5, one of the largest broadcasters in the Philippines, selected KIT
to update its broadcast center to be the first fully automated IP
capable and HD-enabled facility in the Philippines;
-- Pages Jaunes, a leader in Europe for local directories, selected the
KIT Platform to help manage and deliver customer video ads over both
online and mobile environments;
-- Evolution Gaming, the world's leading live video casino gaming
platform, chose KIT to broadcast live, studio-based casino action to
players in Asia.

Management Commentary "Our record second quarter results reflect our ability to sustain and grow our existing client base through software and services usage growth, divisional cross-selling and upselling," said Kaleil Isaza Tuzman, chairman and CEO of KIT digital. "And we continue to win new clients by harnessing the increasing demand for IP video solutions across all major global markets and client verticals."

"Our pace of internal growth strengthened during the quarter, driving annualized organic revenue growth within our 30-35% target range," continued Isaza Tuzman.

"KIT digital continues to operate in the 'sweet spot' of the global transformation of traditional broadcast television and one-way video communications to multi-screen, OTT and social video solutions."

Operational Update The recent regionalization of the company's business into Americas, EMEA and Asia-Pacific divisions has better aligned the company's sales, account management and client deployment teams, increasing proximity to customers and reducing overall SG&A expenses through a more efficient organizational structure.

The company now has strong regional hubs in New York, London and Beijing, supported by the operational headquarters in Prague, where centralized product management, quality assurance, network management and monitoring, marketing and communications and strategic account management groups are located.

Gavin Campion, president of KIT digital, commented: "Our regionalized approach has allowed us to deploy a lean leadership team across the globe that operates as close as possible to our clients and has encouraged rapid customer-centric innovation in areas like connected device delivery and social TV. This regionalization marks the essence of 'Project Delta' -- our major internal reorganization initiative aimed at integrating resources and reducing costs coming out of the acquisitions we completed in the first half of the year."

Management estimates that approximately $35 million of annual costs are eliminated through Project Delta, including personnel cost reductions of over $20 million on a global basis (after factoring in staffing levels from recently acquired companies), real estate, data center and network infrastructure, and global vendor agreement consolidation. Project Delta also involved the consolidation of office space locations globally from 32 to under 20.

The company plans to release the next generation of its cloud-based platform technology, in phases, over the next five months. The company will unveil this new and improved KIT Video Platform in early September at the International Broadcasting Convention in Amsterdam.

Alex Blum, chief operating officer of KIT digital, commented, "The upcoming next-generation platform release is the most significant in the company's history, and will solidify KIT digital as a force in the global transformation of traditional broadcast TV to multi-screen broadband TV."

"As part of our improved KIT Video Platform," continued Blum, "our integrated product development team has leveraged 'best-of-breed' technology and workflow from companies we have acquired, along with numerous internal innovations developed over the past year. We have achieved our latest product development milestones ahead of schedule due to our application of a service oriented architecture that employs modular, extensible subcomponents and exposes functionality via standards-based APIs."

The company employs a flexible deployment model that includes traditional cloud, private cloud (remotely managed but hosted on-premise), and 'hybrid cloud' hosting options.

The next generation platform will be made available in two editions and includes a range of industry-wide innovations in the areas of social TV and multi-platform connected device delivery. The higher-end edition of the KIT Platform will address the needs of more complex, broadcast-grade OTT implementations, while the other edition will provide a turnkey, more self-service but highly advanced solution to address the broader video management market at a lower initial cost entry point.

"During the quarter, we also made substantial progress transitioning clients currently on legacy technology to the core data layer of our KIT Platform," added Blum. "The large majority of our clients have now upgraded to our integrated suite of video technology, with the remainder scheduled to be completed before year end."

Growth Outlook KIT digital expects revenues in Q3 2011 to exceed $61 million. This expected revenue growth for the third quarter, which is typically a seasonally slow period, would imply an organic growth rate of approximately 40% annually relative to Q2 2011, after back-dating acquisitions completed in Q2 to the beginning of the quarter.

The company also expects to report a new non-GAAP metric of adjusted net income in the second half of 2011. Management defines adjusted EPS as GAAP EPS after adding back non-cash charges and direct costs related to completing acquisitions or capital markets activities (such as investment banker success fees), but will not subtract acquisition-related restructuring and integration expenses. The company believes this adjusted EPS metric is appropriate to its current stage of organically-focused development and will provide a more transparent measure of its performance entering 2012 and beyond.

For the full year of 2011, management reaffirms its revenue guidance of approximately $210 million, which would represent an increase over 2010 of more than 95% overall and more than 30% organically. Consistent with the company's previously stated goal of over 30% organic revenue growth per year and back-dating acquisitions completed during the first half of 2011 to the beginning of the year, management expects to generate at least $300 million of revenues in 2012.

Management also continues to expect an operating EBITDA margin target of 23% for the full year of 2011, with the goal of achieving in the vicinity of a 30% EBITDA margin on a monthly basis by the end of 2012. The company also remains on track to generate approximately $2.5 million in monthly free cash-flow by the end of Q4 2011.

"Our software-as-a-service, or as we are increasingly calling it, platform-as-a-service, business model -- because certain clients associate the word 'SaaS' with light-weight solutions -- involves 70%+ recurring revenue under long-term client contracts with extremely low client attrition," explained Isaza Tuzman. "This offers us with very good medium and long-term visibility. In fact, increased usage from our existing client base generates around 20% overall corporate growth per annum, even before any new clients are added to the base."

Isaza Tuzman, continued: "We are experiencing an accelerated pace of new client sales going into the back half of 2011, despite the general macroeconomic turbulence and anxiety in the financial markets. We are confident in achieving the financial targets and product release schedule that we have set out for this year and believe we are poised for a strong 2012."
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