Rising Star Buy: KIT digital

This article is part of our Rising Star Portfolios series. Sean is co-manager of the Dada Portfolio.

A few months back, I read a great article about the increasing incidence of hacking attacks originating from Romania. Ever clever, I immediately realized that once our retail apparel thesis played out, Eastern European telecom was going to be the next big macro area to follow. I ran a screen using our uber-data source, Capital IQ, to filter down to all the U.S.-listed information technology companies with headquarters in Eastern Europe.

And that's how I ended up stumbling across the fantastical turnaround and now high-growth story of video asset management system titan, KIT digital (Nasdaq: KITD  ) -- by searching for ex-Soviet telecoms.

KIT digital is the kind of company that you expect to find headquartered in New York, Los Angeles, or at the very least, Paris. Instead, the company and its namesake, the entrepreneur-cum-turnaround artist, Kaleil Isaza Tuzman, can instead by found in Prague, the capital of the Czech Republic. From there, Tuzman has transformed the company from a headless chicken into what might become the salesforce.com (NYSE: CRM  ) of the burgeoning video asset management software (VAMS) industry.

As its name suggests, KIT digital's particular expertise in this $10 billion-$15 billion market is in dealing with digital and Internet video. The company's solutions allow customers like MTV, Verizon, and CNN to create, manage, and distribute the increasing number of videos that are now popping up all over the Internet.

It's a simple thesis, really. Video content is going to increase: everything from more handheld electronic "access points" (tablets and smartphones, for instance) to cheaper and faster bandwidth point to this upward trend in video volume. As it increases, it will become increasingly less efficient for companies to handle all the necessary functions in-house.

Outsourcing like it's your job
Similar to our belief in the need for companies to outsource their specialized printing needs to companies like InnerWorkings (Nasdaq: INWK  ) , we think it will only be a matter of time before most if not all companies outsource their video asset management to guys like KIT digital. The company's pedigreed client list already includes tech and media giants like the BBC and Disney-ABC, among many others.

Like salesforce.com, KIT digital benefits from highly efficient economies of scale by offering its products and services in a "software as a service" model that locks in clients for an average contract length of 24 months --  that also gives the company two years to get its solutions entrenched in a customer's operations, increasing the switching costs and deterring existing clients from jumping ship. No wonder customer cancellations have historically been less than 2% per year. That's not bad at all for a company that already has what we estimate to be upward of 40% of the total VAMS market and has plans to hit a full 50% by the end of 2012.

KIT stands for what again?
No KIT digital write-up would be complete without a quick take on its helmsman though. Just over 10 years ago, Kaleil Isaza Tuzman was co-founding an Internet start-up govWorks. Although that company never really went anywhere, it and its founders did become the stars of the 2001 documentary Start-up.com, which follows the company's rise and fall and provides a glimpse at a younger Kaleil.

For what it's worth, I found him to be an energetic, accessible, and relatively down-to-earth character, continuing to maintain a personal website, an active Twitter feed, and entertain interviews with eccentric analysts that other CEOs might not want on the public record. Myself, I like seeing these more personal glimpses of the managers that control and operate the companies I invest in. The Dada Portfolio is going to put $500 into an initial stake in KIT digital and watching to see if the video revolution is for real.

Would you buy KIT digital? Leave us a comment on our discussion boards, and add the company to My Watchlist. You can also follow the Dada Portfolio on Twitter @TMFDada.

The Dada Portfolio is a part of the Rising Star series of real money portfolios. It is co-managed by Sean Sun and Ilan Moscovitz.

Sean Sun owns shares of KIT digital and InnerWorkings. Salesforce.com is a Motley Fool Big Short short-sale selection. Salesforce.com is a Motley Fool Rule Breakers pick. The Fool owns shares of InnerWorkings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (14)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2011, at 5:25 PM, ybnvsbu wrote:

    People just don't get KIT Digital, but after the Royal Wedding's success, they will see what KIT it is all about. Thanks to you and others like you for bringing some life into this amazing stock. A little more PR is all we need.

    cheers!

  • Report this Comment On April 28, 2011, at 6:22 PM, dinamoxx wrote:

    Finally, someone who gets it, and yet, the story is not full. KIT digital understands the Internet as the next big, ubiquitous, pervasive, infinite systems operator (I just came up with that one, as opposed to MSOs or Multiple - Cable - Systems Operators). The company looks at video on the Internet from the capturing lens (the camera) to the receiving lens (the human eye).

    In that sense, Kaleil has been buying the companies that deal with the cameras, the studios, the contribution trucks and also the companies that deal with the user experience, either via a SaaS model or installing full "Netflixes" for customers all over the world.

    Yes, I am an employee; yes, excited about it. The possibilities are endless, just like the Internet we deal upon everyday.

    Cheers,

    Charlie

  • Report this Comment On April 29, 2011, at 6:53 AM, PJ37 wrote:

    I've worked at MTV for 14 years and have no knowledge of Kit Digital. MTV Networks Europe are using Signiant and FCP and Final Cut Server to manage our video assests and transfer them around the world.

  • Report this Comment On April 29, 2011, at 10:27 AM, DanRayburn wrote:

    What market are you refering to when you say "$10 billion-$15 billion market"?

  • Report this Comment On April 29, 2011, at 10:40 AM, timc1981 wrote:

    I'm a bit skeptical of the hype after looking at their numbers. They do not have a track record of profitability. Earnings come out May 10, and their expected to lose 7.5 cents per share. My guess is that this has a real potential to be a shirt-losing endeavor

  • Report this Comment On April 29, 2011, at 12:18 PM, TMFSun wrote:

    "They do not have a track record of profitability."

    Neither did Amazon, Baidu, Netflix, etc., that doesn't mean that it's not glaringly obvious that they very easily could become profitable.

    That said, "My guess is that this has a real potential to be a shirt-losing endeavor" -- is very true as well. But the risk-reward seems to favor reward if we treat it appropriately in our portfolio.

  • Report this Comment On April 29, 2011, at 3:38 PM, TMFDitty wrote:

    Psst! Sean! Netflix wasn't profitable when it went public, true. But it *was* already generating free cash flow, and it became GAAP-profitable almost immediately post-IPO.

    TMFDitty

  • Report this Comment On July 25, 2013, at 11:27 AM, timc1981 wrote:

    Hmm. Restumbled upon this article a couple years later. I stated at the time "My guess is that this has a real potential to be a shirt-losing endeavor."

    I didn't understand the elation about the company at the time, and I still don't.

  • Report this Comment On September 14, 2013, at 1:53 AM, TMFWillSommers wrote:
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