VELT - Velti

[yudeng2004]

The Good:

Velti(VELT) is a mobile advertising company in the hot growing Mobile Advertisement Industry which is projected to grow from the estimated 11 billion in 2013 to more than 24 billion by 2016.  We are using our tablets, smartphones more and more for all kinds of computing, and mobile advertising market is one of the fastest growing markets in the world.  I am sure this growth potential is not hard to see for most of us.

 

Velti(VELT) is one of the leaders in this space, with a customer list that includes the likes of Starbucks, Verizon, McDonalds, Macy's, and a boatload of other global famous brands.  It has a 90%+ customer retention rate and just scored the biggest single contract ever at 27 million in the mobile ad industry with a major US brand.

 

You may find presentations, investor meeting recordings here: http://investors.velti.com/events.cfm (I REALLY suggest you read the slides)

 

The Ugly:

If you look at Velti's 2 year chart, you notice that it way off the highs it reached in the past - due to management problems, a focus on the Balkan countries where receivable collection has been very problematic, pressure from wall street, not knowing how to communicate with wall street, and a favored target of aggressive shorting.

 

The main problem Velti had in the past was they took on terrible contracts in Eastern European/Balkan Region countries in order to aggressively grow their revenue, and those countries have VERY LONG cash collection cycles often numbering 270+ days.  So while VELT grew their revenue and earnings rapidly, their cash flow was negative and got in trouble.  Wall street constantly harped on their cash collection problem, and finally Velti management decided to start doing more business in the US and UK last year.  In fact, more than 70% of their revenue in 2013 is projected to come from US/UK, where collection cycle is around 90 days. 

 

To completely get rid of their past association with the Balkan region, Velti decided to sell their businesses in these troubled countries last year, but at a fairly low price - which Wall Street didn't like - and the stock got clobbered again since it will have a negative short-term impact on their revenue and EBITDA.

 

Then 2 weeks ago, something even more crazy happened - the new CFO they brought on board to fix the problems at Velti re-iterated the already-known fact that selling of the old businesses were going to negatively impact EBITDA, and Velti will use this as the year to reposition themselves in the better markets of US/UK. The result was Velti shares got clobbered again (so for the same reason twice).  It also doesn't help that you can barely understand the CEO when he talks with a heavy accent, and is of no help with regard to clear communications.  But despite all this - for the first time in years - Velti is now poised to be cash-flow positive.

 

The Future

You may wonder at the irony of Wall Street for punishing Velti for their bad contracts in the Balkans, and then punishing them again for getting rid of the very contracts they complained about, but that's where the opportunity to invest in Velti at a low price is created.

 

Analysts have aggressively slashed their revenue and EPS projections for Velti this year, and now consensus EPS stands at around 0.61.  Now if you dig a little deeper, you begin to see that Velti is actually doing the majority of their businesses now in the US/UK and also had acquired one of the top mobile ad companies in China.  It has gotten rid of its Balkan roots, and while earnings growth in 2013 will be small or non-existent due to selling the old business lines, it is now well-positioned for the massive growth that remains the mobile ad industry.  The way I look at this company is that it sits at the epicenter of this massive industry trend, as big a trend as search ads or the beginning stages of internet advertising. 

 

It trades at around 1x sales right now and likely will have EBITDA of 40-60 million in 2013. I think the worst case scenario is someone like Yahoo, Microsoft, Google, FB or whoever else that wants more turf the mobile advertising space (there are a ton of large players who will want to get in) to buy them out at a huge premium - like Google buying up DoubleClick.

 

So I would look at Velti more like a Netflix or Amazon type of investment from say a few years back, where they are a top player in this inevitable trend.  And as long as their revenue growth continues higher and their cash flow problems don't come back again, they are poised to rise dramatically.  Eventually, there will be a huge turf war in this space between the big players and Velti will be a prime takeover target. 

 

I am going against my value investing grain here by saying that for this particular company, as long as they can stay cash flow positive while growing the top line, earnings won't matter.  They will have the "paradigm shift" premium, and sooner or later some big player is going to start acquiring companies like Velti to gain market share in mobile advertising.

 

I also think the huge short interest at over 30% of float, will be a huge catalyst for price-appreciation in the future.  The reasoning here is pretty simple - you do not short a top company operating in the EARLY stages of a massive, inevitable industry trend if you are not convinced it is going bankrupt soon.  You risk seeing the stock going vertical on you when people realize: it is not going bankrupt now that its business are primarily in the US/UK, is one of the leading companies in this huge growing space with huge brands customers and 90%+ customer retention, and is always a potential take-over target.

 

This sort of reminds me of Fairfax back in the days when it went under 100 and I was telling myself "the only catalyst necessary here as long as we don't get Katrina/Wilma again it's going to the sky".  We can't say Fairfax went from a troubled company to a great one when it went from 100 to 300.  But what happened was Fairfax went from being perceived as certainly bankrupt to being just OK - it's all about expectations.

 

I believe a similar opportunity exist for Velti right now - it is near the maximum point for negative sentiment, and a slight change in perception will be all it takes.

 

[constructive]

What are the comps? It appears there is a large valuation gap between VELT and MM. Not entirely explainable by the fact that MM may be closer to profitability.

 

Not really my kind of investment but it seems interesting.

[constructive]

Also, how significant is the Chinese subsidiary?  Given the widespread allegations of fraud in the Chinese ad space I would discount that heavily.

[yudeng2004]

What are the comps? It appears there is a large valuation gap between VELT and MM. Not entirely explainable by the fact that MM may be closer to profitability.

 

Not really my kind of investment but it seems interesting.

 

You can somewhat use Millennial Media as a comparison and the gap is not justified, thus I believe the opportunity exists in Velti since sentiment is at the absolute bottom. 

 

Velti acquired CASEE in China, which is the largest mobile ad network in the country - http://www.casee.cn/mm/Help.ad?_m=aboutEn

For conservative valuation purposes, you could discount this now.  They also acquired Air2Web, which is one of the largest mobile marketing companies in India, you could discount this also.  Just treat these acquisitions as free call options as Veltis current major markets are US/UK.  However China/India mobile ad market are entering years of hyper-growth so they'll be worth more later.

 

While Velti has all these subsidiaries in different countries, valuing them as sum-of-parts would be wrong way to look at this company.  The true value of Velti lies in the fact that that they integrated their global end users into a single platform for their advertising clients called mGage.  This allows a major global brand to run a truly global campaign, targeting any area of the world it wants to, with full and integrated analytic services for all these different countries.  Coca Cola, for example, can reach mobile audiences in US/Europe/China/India with a single, integrated campaign through Velti's platform, with full analytics and fine-tuning services.  Velti is very well positioned here because this is a network effect game.  More global end users => more brands => more money for application developers => more end users => more brands. 

 

Take a look at this announcement to see the value Velti adds to a global brand (in this case Subway):

http://www.velti.com/press_release/jul-28-11.html

 

As Velti's network effect increases, it becomes harder and harder for new competitors because this a chicken-and-egg problem for newcomers.

 

Major global brands are still in the beginning stages of doing mobile advertising, but imagine someone like Coca Cola: they are all about mind-share and with people spending more and more time on mobile devices, it is inevitable that Coca Cola will make sure people see them somehow on their mobile devices.  They could choose Velti to help them do this, as Ford, Macy's, Starbucks, Subway etc has already done.

 

But I want to go back to what I said earlier  - Velti will eventually be bought out by a big name like Microsoft, Google, FB or someone else.  Take a look at the Velti's board member David Rosenblatt - he was the CEO of DoubleClick before they got bought out by Google.  Velti has a huge global mobile audience all reachable under a single integrated technology platform, and mobile advertising is the biggest market tidal wave since the beginning of web advertising.  Microsoft/Google/Yahoo/FB etc all wants a turf in this area - they have no choice because this is where their growth will come from.  I am sure David Rosenblatt can help Velti out here.  This acquisition is gonna be at more than 1x sales, that I am certain about.

 

[constructive]

MM down 37% today, VELT down 7% in sympathy. Ouch.

 

http://seekingalpha.com/article/1205211-millennial-media-s-ceo-discusses-q4-2012-results-earnings-call-transcript

[muscleman]

I looked at this one but doesn't seem to pass my rudimentary tests.

Share count spiked a lot during the past few years.

They use non-GAAP earnings, which is GAAP earnings exclude acquisition expense, D&A, non-cash share based compensation etc.

However, these items look to be recurring year after year.

Also the top management's compensation is huge for a company of this size. I feel like management here is quite similar to CRM's management. The only question is whether Wall Street will one day suddenly start to like VELT and make it a hot stock.

 

What is the margin of safety? I don't see any here.

Is management shareholder friendly? Do not look like so.

 

I am not an expert on growth stocks, but I think if I want to buy a growth stock and count on Wall Street being hot on it, I would rather buy a company that trades at 5-8x revenue, than buying this one that trades at 1x revenue. Because:

1. For those trading at 5-8x revenue, they are already hot on Wall Street. As long as they continue to grow revenue at 40-50% a year, the stock will go up at least 20-30% a year.

2. These companies issue shares to fund acquisitions. If the shares trade at a hefty value, there is less shareholder value being destroyed, or it actually increases shareholder value. But for a company trading at 1x revenue, there is a lot of shareholder value destruction for each acquisition.

3. I can't see why and when the sentiment will turnaround from Wall Street. They are not regional banks that will suddenly report big profits and start big dividends. They will continue to burn cash and report net losses for a long time. Why would Wall Street suddenly turn the sentiment around for it?

[Philip Morris IV]

Bump for possible renewed interest in Velti.

 

Price is down significantly from this writeup.  It looks like a falling knife, but currently selling for 70-80% of Q1 working capital - could be cheap with a decent MoS and huge upside.

 

Value manager Cale Smith spoke about it for a few minutes in a recent presentation to his investors (see Part 3 - 17min in).  This was brought up in the General forum.  He is optimistic and considers this within his circle of competence.  His avg cost basis is around $3 implying 3-bagger status from current prices for him to just break even.

https://www.islainvest.com/2013/07/17/annual-investor-meeting-presentation/

 

Little debt outside their $50M credit facility and receivables are growing at a great clip.  There will likely be more share issuances in the near future though, as it's an early-stage growth company in a tailwind.  Management is highly compensated but many including CEO, COO, CMO are taking all-stock compensation/$1 salaries.  It's definitely hairy but Mr. Market may be overreacting here.

[17thstcapital]

Thanks for bumping this.  Been following this company for a few months.  Don't own it yet but its intriguing.  Definitely outside my circle of competence but at these prices, the risk/reward is interesting.  The CFOs model for growth, in particular FCF growth, is impressive and even if they do half of what they think they can in FY14, the stock will move.  For me, its a 'show me' stock and so haven't pulled the trigger yet.

[xtreeq]

Philip,

 

Thanks for reviving the thread!

 

They filed a 6-K for the AGM to be held on 7/31, where the company intends to increase its odinary shares by 50% (!) that is some dilution!

 

http://google.brand.edgar-online.com/displayfilinginfo.aspx?filingid=9367921&tabindex=2&type=html

 

Do you see any specific catalysts that will take the stock up -and if so, when?  ;D

 

Thanks!

[Philip Morris IV]

17thstreet - that was my thinking too, slash guidance in half just to be conservative.  They need to keep raising capital, so they're going to promote the business heavily to try and max proceeds of share issuances.  The growth in receivables looks good though.

 

xtreeq - as far as I can tell, that just increases authorized shares.  Right now it's 90,701,360 outstanding/100 million authorized.  Obviously they will do more offerings, but based on their history they will probably do a few million shares at a time over the next year with hopes the price goes up and they get more money per offering.

 

Their financials are out of whack from the acquisitions and they are trying to sort that out.  They totally wrote off $70M in goodwill and another $71M in intangibles, which together was half of last year's book value and accounts for most of the Q1 reduction in BV.  They also paid $16.5M to former MIG shareholders in April.

 

CEO and COO each own 6% as of 2012.  It's unclear to me if they have sold any shares, but most of upper management has deferred options at strike prices much higher than today.  Park West and Discovery Group own 8% and 5% respectively, but they are not concentrated positions for either of them.

 

Basically Mr. Market is uncertain and pessimistic, and possibly discounting growth potential.  Even with dilution the upside looks good.  Of course it's a tech company though.

[xtreeq]

Appreciate the insight - I have some reading and digging to do on this one, though it seems to have bottomed out around the 1 dollar mark ...

[17thstcapital]

Not really sure what to make of this:

 

http://www.iphoneincanada.ca/news/developers-missing-payments-velti-mobclix-network/

[locatevalue]

I took a full 3% position today , I like the upside pottential of this stock but i am breaking my value investing rule and doing a specultaion understanding either it can be 0 or 5 bagger in next 2 years. I like what i hear from managment and they are doing what i would do in their shoes. They are leader in their field and i see lot of pottential in mobile adspace but hard to predict who wins this game finally!(I hope some company comes and buys it for nice permium)

[Carvel46]

17thstcapital: They have discussed trying to improve DSO. Maybe they are also fiddling with Accounts Payables to help the cash cycle.

 

locatevalue: How do you get comfortable with the rate of industry change? I have a hard time understanding the industry (fast growing, fragmented...). It does seem that a lot of their problems are self-made.

[Philip Morris IV]

I dipped my toes in @ $1.10 the other week.  I'm tempted to add more today but this isn't my wheelhouse.  Latest short interest is 32% so Velti is squarely under attack.

 

The jury is still out but if you're familiar with Velti you'll notice some cracks in the media reports... i.e. high DSOs are discussed without mention that all new clients (like Toyota) are on 90 days or less; Q1 GAAP loss is mentioned without the $133M impairment charge (which was 77% of opex); layoffs are discussed without mention that they were acquisition-related.  There's no context or balance.

 

BTW, the 6K notes that the increase in authorized shares is for their compensation plans, not planned further issuances as I speculated before, although I'm not ruling out the possibility.

[locatevalue]

17thstcapital: They have discussed trying to improve DSO. Maybe they are also fiddling with Accounts Payables to help the cash cycle.

 

locatevalue: How do you get comfortable with the rate of industry change? I have a hard time understanding the industry (fast growing, fragmented...). It does seem that a lot of their problems are self-made.

 

 

As a developer myself its not that easy to migrate from one platform to another platform so this might provide some recurring cash flows but you are correct its a very fast changing industry and its very to hard to judge them but looking at other players like MM this is at very low valuation and these guys have better customers like Toyota, Coke and others if they dont do any stupid acquitions and keep organic growth and survive next 2 quarters then it will turn around. if you look at this industry 3rd and 4th quarters are better , Hence i am thinking this will survive and i like what new COO is doing.

Finally this is  one speculation i am doing in my portfolio currently and i am capping it at 3% and wont add even touch if it goes to 25cents so my losses will be this possition itself and i have compiled 3 other 3% postions in past 3months ALSK, OIBR, TI.A so to that bunch i added this one. I am sure one will go to 0 and probably the chance of this be the one is more or this might be biggest winner time will tell.

I am always very concentrated investor around 90 in my top 3 ideas this is first time i am taking route of bucket approach with small positions as this market is different i am not finding any high conviction bets so spreading it evenly but will know the results of these approach after 2 or 3 years.

[siddharth18]

If reputation is a factor in their business, they are losing it very fast:

 

http://www.imgrind.com/app-developers-using-mobclix-mobile-ad-exchange-being-screwed-for-30-million/

 

http://www.imgrind.com/mobclix-not-paying-app-developers-allegedly/

[locatevalue]

If reputation is a factor in their business, they are losing it very fast:

 

http://www.imgrind.com/app-developers-using-mobclix-mobile-ad-exchange-being-screwed-for-30-million/

 

http://www.imgrind.com/mobclix-not-paying-app-developers-allegedly/

 

These back log payments should get better as they recently sold eastern europe that has a cash cycle of more than 200days and concentrating more on US and Western europse with cash cycle less than 90 days and they currently stand at 65% of these 2 and planning to go upto 70-75% in next year. so lets see how they handle these issues but short sellers are definetly using these news to their advantage!

[siddharth18]

If reputation is a factor in their business, they are losing it very fast:

 

http://www.imgrind.com/app-developers-using-mobclix-mobile-ad-exchange-being-screwed-for-30-million/

 

http://www.imgrind.com/mobclix-not-paying-app-developers-allegedly/

 

These back log payments should get better as they recently sold eastern europe that has a cash cycle of more than 200days and concentrating more on US and Western europse with cash cycle less than 90 days and they currently stand at 65% of these 2 and planning to go upto 70-75% in next year. so lets see how they handle these issues but short sellers are definetly using these news to their advantage!

 

Well I am no short seller (in fact I didn't even know about Velti until I read about Mobclix first). I actually follow the internet advertising industry quite a bit and I know that reputation matters a lot especially for small-mid sized ad networks. No publisher or developer would ever think about doing business with Mobclix if there were any payment issues or even rumors. It's a tight-knit community where news spreads pretty fast and there are no second chances. In this case it seems they are not only holding the payment, but actively preventing anyone from contacting them.

 

Regardless, I have no opinion on Velti as an investment as I understand Mobclix is only its subsidiary. As always Caveat Emptor!

[alertmeipp]

wow, down 65 percent, time for some homework.

[xtreeq]

Appreciate the insight - I have some reading and digging to do on this one, though it seems to have bottomed out around the 1 dollar mark ...

 

Well, I am happy I turned out to be wrong about this but today's massive drop probably means we should take a good long look again although management probably needs to go home at this point as they have not performed

[locatevalue]

17thstcapital: They have discussed trying to improve DSO. Maybe they are also fiddling with Accounts Payables to help the cash cycle.

 

locatevalue: How do you get comfortable with the rate of industry change? I have a hard time understanding the industry (fast growing, fragmented...). It does seem that a lot of their problems are self-made.

 

 

As a developer myself its not that easy to migrate from one platform to another platform so this might provide some recurring cash flows but you are correct its a very fast changing industry and its very to hard to judge them but looking at other players like MM this is at very low valuation and these guys have better customers like Toyota, Coke and others if they dont do any stupid acquitions and keep organic growth and survive next 2 quarters then it will turn around. if you look at this industry 3rd and 4th quarters are better , Hence i am thinking this will survive and i like what new COO is doing.

Finally this is  one speculation i am doing in my portfolio currently and i am capping it at 3% and wont add even touch if it goes to 25cents so my losses will be this possition itself and i have compiled 3 other 3% postions in past 3months ALSK, OIBR, TI.A so to that bunch i added this one. I am sure one will go to 0 and probably the chance of this be the one is more or this might be biggest winner time will tell.

I am always very concentrated investor around 90 in my top 3 ideas this is first time i am taking route of bucket approach with small positions as this market is different i am not finding any high conviction bets so spreading it evenly but will know the results of these approach after 2 or 3 years.

 

 

Lesson learnt! Its kind of very stupid to go into things knowing the probability of losing is more even their is huge upside. Even losing 3% of portfolio hurts by breaking basic value investing principals and specultaing. I hope i wont repeat it again.

[bskptkl]

Anybody like this now?

13 million market cap

Deal in place to sell an asset. 300 million revenue.

 

I know it's in BK...

 

Bought  some between 13-15 cents...speculative I know.

Nothing informative yet on bk docket...

[bskptkl]

Anybody like this now?

13 million market cap

Deal in place to sell an asset. 300 million revenue.

 

I know it's in BK...

 

Bought  some between 13-15 cents...speculative I know.

Nothing informative yet on bk docket...

 

Well that didn't work! Docket 427 says equity to be wiped out on effective date. Closed the position at 2.2 cents.

[Kraven]

Just a clarification.  The bankruptcy covers certain of the US entities.  Velti PLC (VELTF) was not a debtor in the bankruptcy proceeding and retained 2 business units (Performance Marketing and Advertising).