A lot of things happened from what I could tell:
1.) The new CFO took the axe to their accounts receivable; VELT has previously said that clients always pay up, but new CFO said "I don't think so" and wrote down $7M or so
2.) New CFO said unless you play ball on the collection cycle, VELT will not do business with you any longer, which is what Wall Street wanted...
3.) ... however, what Wall Street (I have access to several analysts) and none of us (apart from the big institutional short) had realized was that most EBITDA from operations seems to have come from that high-margin, sketchy part of the business; the new CFO said that if you are comparing apples to apples with what of the business they kept, EBITDA would have been NEGATIVE in 2012, nowhere near the ~$50M peer-defined EBITDA or the $80M+ company projected number; seems fit that they are now trading at liquidation value
4.) Which means a couple of things:
--The people who were running the ship (Moukas?) pulled off one of the bankers' old-time favorite tricks--they loaded the company with highly profitable, but #$%$ (non cash-flowing) assets; showed tremendous revenue growth with decent profitability; it is similar to underwriting sub-prime- you show growth and profit, but pray you don't get stuck with the assets when the music stops; the bluff got called and it turned out they had a pretty weak hand
--I had assumed that they were profitable because of their new businesses in high quality locations like the UK, EZ, and US--it made sense; they were growing like mushrooms there; I was wrong; new CFO just told investors that these operations will be profitable THIS year, but did not make any money last year; which leads to the obvious conclusion that:
-- The entire 'profitability' of VELT was concentrated in the #$%$, high-DSO assets; now that they are finally making money in the high-quality markets they are completely getting rid of the old garbage
5.) The previous CFO has idiotically mismanaged cash
Chef: congratulations on such an astute and pithy summary. I think it's even worse than you say: the EBITDA-switching ("transitional") policy cannot have begun until after January 7th, the CFO's first day at work, so it cannot explain the Q4 results - unless we assume the entire thing can be palmed off on the Q3-divestiture, announced only on November 15th. The CFO announced his desire to concentrate on low-DSO, 1st-world-smartphone business, and cut off 2nd/3rd-world high-DSO business AT THE JAN-30 ANALYST DAY. So we should start seeing the results of that in Q1 and then in full swing in Q2.
In other words, the Q4 revenue shortfall seems to be because crucial US/UK/European, etc. business did not materialize as expected and/or the business model is simply not generating the kind of results that trigger sufficient contract payments. (This is almost exactly what MM said of their Q4, so it may not be a problem with mGage per se, more with getting mobile campaign-performance results ("monetization") in today’s climate).
So, it's not "just" that they've burned through the entire $50m HSBC credit line in 6-8 months, when Moukas/Cheung swore up and down, mid-November, that that could never be (because Q4 would be FCF-positive and Q1-Q3 2013 would be near-FCF-neutral); it's not just that revenue and cash-flow were bitter disappointments, and have been guided way down; it's not just that even with the divestitures, the DSOs are still targeted to be in the high 200s at the end of 2013; it's not even that a stock-dilution now looks odds-on; and it's not even that the vaunted $27m customer seems to have long-since canceled the contract, or that Velti’s well-publicized money troubles will put blue-chip companies off doing business with them (the scent of bankruptcy STINKS).
It IS that the basic business model does not look to be capable of producing a profit, not now, not ever.
Very good take Chef. I came to same conclusion about the cruddy business being a large portion as well but didn't quite get the EBITDA impact. Meanwhile, the founder cashes out at IPO. Maybe we can get a few million back from him?. I am really hoping we get a proxy contest to get a new board in this one. Unbelievable how much cash was raised, handed to previous owners and then wasted on to fund the retirements of the owners of the #$%$ businesses acquired.
Great analysis. Long term this company will do very well under the new CFO who has taken measures that are tough & hurtful right now but sets a great stage for stronger well managed fiscally responsible viable company.
I don't think it's illegal, just shady
It is our (investor) fault for not asking that question before, really; obviously somebody figured it out or else they would not have been shorting heavily a fast-growing, very 'profitable' business like VELT
If the new CFO is anywhere near right and that company returns to $40M of quality EBITDA by next year, they'll be valued at $500M, not at liquidation levels like now; if they show growth, the multiple will be even higher.
Those are some pretty big if's; furthermore, that scenario assumes that they don't go bankrupt first because of miserable cash management