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Small Company Update: DGIT DGIstroyed iT

|Includes: Digital Generation, Inc. (DGIT)

With the market shooting up to whatever number is just above infinity (we'll call it Bernankity) thanks to the Fed's strategy that somehow revolves around making rich people feel richer on paper so they will hire poor people, Money McBags is going to focus today on DGIT who just put up a spanktastic Q.  He will be back tomorrow with his usual daily market report.


Money McBags first mentioned DGIT on 8/30/10 when it had a ridonkulous sell off due to lowering guidance which was only perceived as lower because some dickbag on the Street just had numbers way too fucking high as his model either had an unnoticed circular reference or a desire to see if Excel could handle transfinite cardinal numbers.   Either way, the supposed lowered guidance caused all kinds of models to trip (and luckily not these models, but algorithmic models) and gave this already decently shorted stock a cause for negative headlines.


Shorts pointed to the "lowered" guidance on the heels of DGIT's deal with Ascent Media ending as fodder to yell about DGIT's near monopoly coming to an end (though if it were coming to this end, Money McBags could understand) and to continue to highlight the emergence of sort of competitor Extreme Reach and the aforementioned Ascent Media.  The story of those two competitors coming in to take share away from DGIT is a story older than "boy meets girl" or "girl has a fucking headache so boy goes to rub one off in the bathroom" (and Money McBags highly recommends chapter six of that story), but the noise with the Ascent Media relationship last Q was certainly enough to warrant some rethinking of DGIT's business, but not enough for the 40% collapse that DGIT saw after a decent earnings number.


Since then, Money McBags has written about DGIT several times saying a return to the mid $20s is pretty much a no brainer (or as it's known on the award winning When Genius Prevailed a "Carrie Prejean") and after today's Q, the stock is now back up to ~$28 so hopefully you all got in ~$16 and have made >50% in two short months.  That said, let's take a look at some of the highlights from the Q:


1.  Revenue was up 18% to ~$57MM which was ahead of their $51M to $53MM guidance last Q. They said the outperformance was driven by a stronger August and September which perhaps was driven by the election season but they never quite gave a good reason for this on the call (though to be honest, Money McBags was multitasking during the call and had to turn his head many times so he may have missed their explanation).


2.  HD revenue was up 54%.  This is the growth driver of the company and it was driven by increasing demand by marketers who want their customers to see products in HD because one really needs to see the Shake Weight in HD to understand its awesomeness.  The growth was also driven by a 10% sequential increase in HD adoption by broadcast networks as more channels move to HD because America demands clearer pictures of Katie Couric's colonoscopy and Olivia Munn.  HD is going to continue to grow so this is still a multi year growth market as HD is only 8.5% of all ad deliveries ad volume was up 95% for DGIT.


3.  Unicast revenue was up 31% to $4.1MM. Money McBags doesn't quite know what to make of Unicast as it is more of a headscratcher than psychics in California bitching that people on welfare can longer use welfare cards for their services (because really, shouldn't psychics have seen that one coming?).  At the time, it was considered a pretty crappy acquisition for DGIT seeing as how it is a competitive market and people like GOOG (whom you may have heard of before) can offer similar solutions.  That said, they are growing this business, the purchase price is a sunk cost, so maybe there is a bit of upside here.


4.  EPS was up 55% to $.34 and non-gaap net income was up to $.44 per share as they not only grew topline but also had nice operating leverage.


5.  Match Point, their most recent acquisition for which they paid $26MM (or 1.3MM lap dances to make it easier for everyone to understand) a couple of months ago, was forecast to add ~$5MM in revenue in Q4.  That said, management did a poor job of explaining their guidance for this on the call as their full year guidance was raised by ~$6MM-$8MM from $230MM-$234MM to $238MM-$240MM, but they beat their previous guidance for Q3 by ~$4MM so adding in Match Point to the $4MM beat should have raised guidance by ~$9MM (though the low end of previous guidance to the high end of new guidance is $10MM, but that is kind of a jackholed way of looking at it).  This is definitely something that needs to be better understood.


6.  The company's balance sheet remains hella strong with ~$66MM in cash after the Match Point acquisition, no debt, and FCF of $23MM during the Q.  Now most of you readers may remember someone tried to call Money McBags out on this company on the award winning When Genius Prevailed's message board (read here and here) by trying to show that DGIT does not earn returns above their cost of capital (though this was done using old numbers on current invested capital) and was not growing (despite every metric growing including number of shorts).  As Money McBags opined to this misguided and yet vociferous commenter, "he has chunks of investors like you in his stool" and Money McBags has proven to be correct here because the company now has generated ~$52MM in FCF for the first 9 months of the year which is an 11% ROIC and on pace for a 16% ROIC both of which are greater than DGIT's ~10% cost of capital.  Anyway, you should all read the comments section to see how shorts act by using old information to try to kill a stock.  That said, Money McBags always enjoys the back and forth with people who are too busy highlighting every singe footnote of Securities Analysis to see the growth through the ROICs.



Disclosure: No Position

Disclosure: No position