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  • cooldoggie4 cooldoggie4 Jun 10, 2013 6:18 PM Flag

    velt future might not be that cloudy( article)

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    Velti's Future Might Not Be That Cloudy
    Jun 10 2013, 16:33 | about: VELT
    Disclosure: I am long VELT. (More...)

    With the mobile advertising market booming, the continued collapse of Velti (VELT) has remained perplexing. The company famously faced a cash crunch due to extremely long payment terms to only collapse after seeing the EBITDA and income plunge after cutting that business. The question still remains why cut a profitable business because of slow payments.

    The company is a global provider of mobile marketing and advertising technology and solutions that helps brands, advertising agencies, mobile operators and media to implement mobile campaigns.

    While the decision to cut the slow paying customers that would not agree to faster payment terms appeared correct, it hasn't helped the company or the stock yet. The irony continues to be that those customers also accounted for a decent part of EBITDA and earnings pushing the stock down further from above $10 in September to spending most of the last few months below $2. Clearly the market misunderstood slow paying customers for unprofitable ones. The market has taught Velti an important lesson that it doesn't always want what it claims. The question now is whether the clouds hanging over Velti will eventually disperse as the new plan comes to fruition later this year.

    Q1 2013 Operational Highlights

    The company reported the following operational highlights for Q113:

    Revenue of $41.0 million, a decrease of 21 percent from Q1 2012.
    Adjusted EBITDA of ($18.3) million, or ($16.1) million excluding bad debt provision compared with $4.6 million in Q1 2012.
    Adjusted net loss of $18.1 million and adjusted diluted EPS of ($0.27) compared with adjusted net loss of $1.1 million and adjusted diluted EPS of ($0.02) for Q1 2012.
    When the company first announced the divestiture of the Balkan and Greek business that included the vast majority of slow paying, capital intensive customers, the market clearly did not understand that it involved this dramatic of an impact to EBITDA. Of course, on top of those customers the company chose to avoid other business deals that weren't conducive to creating long-term value regardless of the short-term benefits.

    As an example, revenue in the Americas and Western Europe both dropped year-over-year in Q1 2013. With a revenue base of only $13.3 million in Q1 2012, the clear expectations were for that revenue to surge instead of declining to $11.8 million. The same scenario can be claimed for Western Europe where revenue dropped from $18.3 million to only $14.9 million. The only real bright spot in the last quarter was the rise of Asia and Africa revenue. As the slide from the earnings presentation shows, the net impact of the restructuring is that Asia revenue jumped to 23% of total revenue.

    (click to enlarge)

    Despite all of these issues, the most important news from the company is the ability to still maintain guidance for adjusted EBITDA and free cash flow for the full year in the $5 to $15 million range. A relatively impressive number for the year considering the company had a free cash flow loss of $34.3 million during Q1. Velti will have to report positive free cash flow in the $45 million range for the last three quarters. Those numbers will justify a much higher stock price and back up forecasts that the company will hit the target of $40 million in free cash flow for 2014.

    Mobile Advertising Future

    The disappointing aspect of the Velti collapse has been that the sector has dramatically improved over the last six months. While mobile ad rates continue to struggle versus desktop rates, the sector no longer faces concerns of ultimate failure. The fast adoption of tablets combined with advancements in monetization of smartphones has led researchers such as eMarketer to substantially increase the forecasts for mobile advertising.

    The most recent report shows US mobile ad spending to reach $7.3 billion in 2013 with the number expected to more than double to $16.2 billion by 2015. The forecast is for Google (GOOG) and Facebook (FB) to grab the lion share of that growth though it does present some opportunities for a marketing firm such as Velti.

    Another recent study shows that of 20 major US brands surveyed by the Association of National Advertisers that a majority expected to increase mobile ad spending. The focus placed mobile slightly ahead of the 55% expected to increase social ad spending.

    Just about every data point shows mobile ad spending exploding so the question is more whether Velti will participate in that growth. Helping brands such as Disney, Toyota, and Unilever migrate ad dollars to the mobile universe should be right in the wheelhouse for this company.

    Cash Crunch

    Due to extremely low cash balances, the company was forced to sell 16.5 million shares for $1.50 to raise gross proceeds of $24.8 million. Also, in order to satisfy an obligation for the MIG acquisition from November 2011 it was forced to issue 5.7 million shares to cover $14 million owed. Unfortunately the original deal took place when the stock was at significantly higher levels.

    Due to these transactions, the outstanding shares will be around 90 million at the end of Q2. Based on a stock price of $1.70, the stock is now valued at around $150 million. With revenue easily expected to exceed $230 million this year and approach $300 million next year, the stock offers a compelling valuation if the new CFO has the ship righted. The key will be hitting the cash flow targets for Q2 and keeping the Q3 guidance of $10 million in free cash flow generation intact. Without hitting those targets, investors will be keen to watch out for a cash crunch to force another equity raise.

    Analyst Estimates

    The vastly negative analyst estimates for 2013 and 2014 explain the relative cheap stock price. Based on a disastrous 2 years for Velti where the stock plunged from $20 to below $2 all while mobile advertising has taken off, analysts no longer have confidence in the company.

    The new executives in the CFO and COO positions could place the company back on solid footing where the current guidance would provide for much higher analyst estimates. The company has guided towards 30% revenue growth in 2014 yet analysts only forecast 18% growth. The company also expects to be significantly free cash flow positive in 2014 on top of generating an estimated $10 million in 2013 yet analysts expect a $0.15 loss for the year.

    As the table below shows, analysts are starting to warm up to the changes taking place at Velti. Analysts have dropped the 2014 loss 15 cents from the expectations 60 days ago for a $0.30 loss.

    (click to enlarge)

    * Data from Yahoo! Finance

    Oversold Stock

    The stock has been absolutely crushed over the last two years as wave after wave of disappointment hit the stock. Over the last three months the stock has hit support around the current price of $1.70. Investors should keep an eye on how the stock acts prior to the next earnings report in early August. If the company can escape the cash crunch in Q2 without another equity raise, the chart is likely to show major improvements prior to earnings. If not the stock will test new lows. Below is a 30-month chart on the stock showing the potential upside if the new executives can execute.

    (click to enlarge)

    Conclusion

    The biggest fear now has to be that the 20% headcount reduction will actually impact productivity of the remaining employees that could lead to a further downward spiral. Otherwise, if the company can get back onto the right track and hit the EBITDA and free cash flow guidance the stock will be a massive homerun. The ability to generate $40 million in free cash flow next year would place a valuation on the stock in the $600 million range easily. That level is 300% higher than the current price.

    As all the data suggests, mobile advertising and marketing will be homerun markets to the leaders in the sector. After a divestiture that was suppose to help the company, Velti has an even cloudier future. For a company that ultimately had limited non-paying accounts, the dropping of capital intensive, slow paying customers actually about destroyed the company. If Velti can survive the next few months, it might actually thrive with a stronger, faster paying customer base. Investors that keep an eye on this stocks progress might be awarded with outsized gains as the minute the clouds disappear the stock could soar.

    The risk remains high, but the reward can be substantially higher if the company can turn into a free cash flow machine in an exciting business such as mobile marketing. Investors might be willing to pay substantial multiples once convinced of the turnaround.

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