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Executives

Leslie Green – Investor Relations

Alexandros Moukas - Chief Executive Officer

Wilson W. Cheung - Chief Financial Officer

Analysts

Peter Misek - Jefferies & Company, Inc.

Andre Sequin - RBC Capital Markets

Shyam Patil - Raymond James

Ross Sandler- Deutsche Bank

Peter Stabler - Wells Fargo Securities

Ryan Bergan - Craig-Hallum Capital

Richard Ingrassia - Ross Capital Partners

Scott Zeller – Needham & Company

Richard Fetyko - Janney Capital

Velti Plc (VELT) Q3 2012 Earnings Conference Call November 15, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Velti 2012 Quarter Three Financial Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to Leslie Green. Please go ahead, ma'am.

Leslie Green

Thank you. Good afternoon everyone, and welcome to Velti's conference call to discuss the results of the third quarter ended September 30, 2012. With me today are Alex Moukas, Velti's Chief Executive Officer; and Wilson Cheung, Chief Financial Officer.

The company issued its press release reporting financial results for the third quarter of 2012 at 4:05 p.m. Eastern time today. The press release can be accessed from the Investor section of the company’s website at Velti.com. In addition, the company has made available it’s Q3 2012 earnings slide deck in the Events section of the Investor website, which is also referenced in this press release.

Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, the company will provide projections and make other forward-looking statements regarding, among other things, its future financial performance, its ability to control costs and improve efficiency, its success in qualifying additional opportunities, and its ability to continue to drive business in 2012, as well as other market conditions and trends.

Management wishes to caution you that such statements deal with future events and are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially. These uncertainties and risks include, but are not limited to, overall conditions in the market in which Velti competes, global financial conditions and uncertainties, market acceptance and demand for Velti's products, the impact of potential delays, including customer mandates, the potential liability resulting from pending or future litigation, the timing of marketing campaign execution and Velti's ability to integrate recently completed acquisitions, including Air2Web, Mobile Interactive Group and CASEE.

In addition to the factors that may be discussed in this call, management refers you to its annual report on Form 20-F and periodic reports filed with the Securities and Exchange Commission available online by link from the company's website for additional information on the factors that could cause actual results to differ materially from current expectations. A replay of this conference call will be available at velti.com for 3 months from today.

And with that, I'd like to turn the call over to Velti's Chief Executive Officer, Alex Moukas.

Alexandros Moukas

Thanks Leslie and welcome everyone to our Q3 2012 earnings call. Q3 was a solid revenue growth quarter for Velti with revenue reaching $62.4 million, growing 62% compared to the third quarter of 2011. On a constant currency basis to the third quarter of 2011, the revenues would have been $66.6 million, leading to a 74% apples to apples growth.

We continued to experience strong demand for our services as mobile continues to emerge as an increasing strategic and important channel for brands to establish, grow and manage customer relationships. As such, we had a tremendous quarter in terms of contracts signed with new and existing customers and are very pleased with the size and scope of the attendant campaigns as well as the geographic origin of the customers, reflecting our success in driving revenue from our target geographies.

This quarter we made three key decisions during the quarter that impacted our overall financial results that we believe will simplify our business and provide better clarity and more simplicity to our results going forward. Those include number one, the divestiture of certain assets associated with economically challenged geographies. Number two, the consolidation and simplification of our financing structure and winding down the remaining receivables and legacy factory arrangements. And number three, a reduction of the activities that led to capitalization software development and a corresponding increase in research and development costs.

We will go through each of these items in more details in this conference call, but I want to be very clear that while some of these changes, along with the foreign exchange headwinds cause us to underperform against our adjusted EBITDA guidance for the quarter. we believe that the benefits of the organization going forward are substantial. Furthermore, we believe now is the right time to make these changes as they would allow us to begin 2013 with a clear slate and provide certain transparency to our reporting.

Before we move into a discussion of these changes, I would like to take a few minutes to talk about the mobile market and advertising market and some of our key drivers and trends driving our growth now and into the future. As many of you know, Velti continually monitors the mobile market through our ad exchange which sits at the intersection of more than 33,000 apps and 45 mobile ad networks and we publish this trend data and information on customer behavior on a monthly basis.

The trend data from our exchange strongly support what we’re seeing in our sales activity in terms of healthy demand across all of geographies, but especially in the Americas, Western Europe and Asia. Despite microeconomic weakness, brands are increasingly leveraging mobile to drive business growth and we have never before been as excited about the business as we are now.

A comprehensive mobile strategy is no longer considered nice to have. It is becoming an essential component in brand advertising, marketing and customer relationship management. Furthermore, brands are recognizing that the mobile tunnel has completely different user dynamics and use cases from conventional or online marketing and advertising.

As such, during the quarter, our customer acquisition networks yielded strong results. We were very pleased to announce a $27 million contract with a major US brand for a multiyear loyalty campaign. This is Velti’s largest contract to date and we believe it is also the largest mobile marketing deal ever signed. It is also significant because it presents our successful penetration of the US market on a large scale basis for our mobile marketing solutions and lays the groundwork for additional opportunities with these and other customers.

In terms of our geographic performance, we continued to see strong growth in our revenues year over year across all segments. Revenues in the Americas grew 81% year over year and is on track for excellent growth across the remaining of the year compared to previous year. We’re collecting an increase in both our mobile advertising and mobile marketing sales.

Strong growth in this area should make the US market our largest single market for 2012 and we believe that it will continue to be that in 2013 and beyond. This is particularly good for Velti, not only for the opportunity it represents, but also because this region supports more favorable customer payment terms which we believe will contribute to our improved cash flow objectives.

In the UK, we continue to be very pleased with our performance, with revenue in this region growing 224% year over year assisted obviously by our acquisition of MIG. This is otherwise primarily being driven by our success in high growth areas such as real time mobile and social interactions, mobile to TV interaction, another unique means of monetizing the mobile channel. The UK is another significant focused geography for us and we’re seeing exciting growth opportunities further strengthened by acquisition of MIG and we can request payment terms that are more favorable than other parts of Europe and actually very similar to the ones in the US.

In the rest of Europe, despite economic challenges, our sales increased by 22% year over year. We’re pleased with our results, especially given the local environment and expect strong continued growth out of the region as a whole, but particularly in the UK and western Europe.

Now, in support of our strong focus in the new geography we have made significant investments in our sales infrastructure. In particular, we have been very pleased to announce this quarter the appointment of Harry Patz as our Chief Revenue Officer for North America. Harry is a 20 year veteran of Microsoft where he successfully managed the Microsoft communications business sector which he helped grow to $1 billion of revenue. We believe Harry will play an integral role as we continue to grow our presence in the US.

In addition, we have also brought on additional high caliber sales people in the US and Asia that are focused on key vertical markets, including among others, auto retail, telcos, packaged good, financial services, pharma and media, either directly or through the major global and veritable agencies.

These investments in our sales team, coupled with our existing sales force and those we’ve added through business acquisitions, are allowing us to further expand our footprint worldwide into geographies in which we’re seeing excellent opportunities for growth and support our business model objectives.

As I mentioned earlier, during the quarter we made some important changes to our financial structure. I would like to spend a few minutes discussing the divestiture of certain assets in challenged geographic areas and then Wilson will discuss the elimination of factory receivables and the impact that changing the focus of select brother related personnel. I would like to note that you can find all this incremental information in our Q3 earnings deck from our website.

With regards to divestiture, in keeping with our strategy to align our business focus with the geographic regions that can support our accelerated growth objectives as well as our strong commitment to improving our cash flow, we have made the decision to divest certain assets and customers in the Greek, Balkan and select North African and Middle Eastern geographies. Fundamentally, we’re following up on our commitment not to continue in customers and contracts that don’t convert to the right payment terms and to focus our efforts on more advantageous geographies.

The contract channel line we started results in very high DSOs, approximately 450 days and also have very heavy capital requirements. Furthermore, the revenue streams associated with these contracts are deteriorating primarily as a function of the economic conditions within geographies.

Our structuring this deal as a divestiture as opposed to simply walking away from these customers accomplishes five goals. First, we are able to monetize these assets as opposed to shutting of these customers. Second, we’re able to maintain upside if the region recovers. Third, we’ll be able to focus our business and cast investments on service and regions such as the Americas and the United Kingdom that are best suited to our long term business model. Four, we’re able to ensure continuity of customer service. And finally, we’re able to eliminate any future severance or downsizing liabilities associated with these assets.

This transaction is expected to help facilitate and accelerate 2013 free cash flow generation, a further reduction in DSOs and accelerated growth profile. We believe that this is simply the right thing to do for our business as it supports the objectives that we share with our shareholders, including lower CapEx, lower DSOs, improved cash flow and sustainable higher growth.

As we have continually iterated, Veltis’ current geographic and product focus is on stable high growth markets with significant better market dynamics, in particular the US, the UK, Western Europe and Asia. The objective of this transaction is to help facilitate more focus on those markets, enabling sustainable free cash flow generation, a significant reduction of DSOs and accelerated growth profile.

In terms of financial impact, we’re adjusting our 2012 revenue and EBITDA guidance to reflect the exclusion of the divested assets for the period first closed, which we anticipate to be early December. Wilson will go into more detail on the financial impact and you can also refer to our investor deck for specifics at the high level.

With all that talk about the divestiture, let me briefly address our cash and cash flows as there has been some concern in the marketplace about our cash position and our ability to generate cash. We have ended the quarter with approximately $29.5 million of cash or at the apples to apples comparison, approximately $27.5 million after draw downs, exceeding our target cash flow of $25 million. We did see an immediate cash outflow as a result of our decision to eliminate and terminate our factory arrangement, but we believe that the long term benefits far outweigh the cost. We have extinguished a very high interest means of financing, approximately 10% and taken another step in simplifying and streamlining our financing structure.

In Q4, excluding the effect of the divestiture, would be free cash flow positive. Including the effect of the divestiture which we estimate to be around $2 million to $3 million, we expect to be operating cash flow positive and are positively free cash flow neutral. Effectively, with the divestiture in descent, we attempted to achieve an optimal balance between our 2012 fiscal year results and our long term interests and those of our clients and we’re making the decision to continue to invest across the fourth quarter.

While we’re highly confident of our ability to generate cash, even in the immediate term, we’re managing our business for the long term and continuing investment in particular across our product platform is the most important constraint right now. That said, we remain intensely focused on the convergence of our adjusted EBITDA with our cash flow and we’ll be providing more color on how we will be forging convergence of these two metrics going forward at our analyst day scheduled for January 30 in New York City.

In closing, we believe this is an exciting time for our company. Mobile is one of the most dynamic and high growth areas today and early leaders in this space have tremendous opportunity to harvest this potential and to influence its evolution. Velti is in a unique market position as no other single competitive offering can address the breadth of our offerings or rates and scalabity of our platform to mobile consumers, combining mobile advertising with mobile marketing and mobile customer life cycle management.

We continue to invest in our technology platform, particularly in the areas of data, audience management, media attribution optimization predictive analytics and we believe we offer the most advanced, most comprehensive advertising solution portfolio in the market. To that extent, Jason Hoffman recently joined Veltic from Microsoft as Senior Vice President for Product. Jason previously led the Analytics, Yield management and Optimization efforts for both Display and Search advertising at Microsoft.

Now, with our focus on growth geographies, we’re leveraging all these investments in the areas which we can maximize our results. We remain strongly committed to structuring our customer agreements and our financial model to support positive free cash flow and we look forward to reporting to you on the progress.

With that, I will turn the call over to Wilson to provide more color on our Q3 results and our Q4 quarter and fiscal year guidance. Wilson?

Wilson W. Cheung

Thank you, Alex. And again, welcome to our Q3 earnings call. Let me review for you our third quarter revenue and then get into more detail on the operating expense side as well as the impact of our asset divestitures, the SOs and factored receivables and cash flows. Total revenue for the third quarter of 2012 was $62.4 million, an increase of $24.2 million, or 62% compared with $38.2 million in revenue recorded in the third quarter of 2011.

SaaS revenue for the third quarter of 2012 was $48.5 million, an increase of 90% compared with $25.5 million in the third quarter of 2011. SaaS comprised 78% of total revenue in the third quarter of 2012 compared with 67% in Q3 of 2011.

License and software revenue for the third quarter of 2012 was $5.2 million, a decrease of 48% compared with the third quarter of 2011. License and software comprised 8% of total revenue in the third quarter, down from 26% in Q3 of 2011, which is consistent with our expectations that license revenue to continue to comprise only a small portion of our total revenue going forward.

Managed services revenue for the third quarter of 2012 was $8.6 million, an increase of 238% compared with $2.6 million in the third quarter of 2011. Managed services comprised 14% of total revenue for the third quarter of 2012, compared with 75 in Q3 of 2011. On a trailing 12 month basis, total revenue for the third quarter of 2012 was $260 million, an increase of $100.4 million or 63% compared with $159.6 million of revenue recorded in the prior year period.

In terms of breakdown between our advertising and marketing businesses for the third quarter of 2012, advertising revenues comprised approximately 22% of total revenues while marketing revenues comprised the remaining 78% with gross margins of 25% and 75% respectively. In terms of geographic breakdown, we generated $16.2 million or 26% of our Q3 2012 revenue in the Americas compared with $9 million or 24% in the prior year period. While in the UK, we generated $17.1 million or 27% of our Q3 2012 revenues compared with $5.3 million or 14% in the prior year period.

Now onto our operating expenses and adjusted EBITDA. As usual, as we review the operating expenses on this call, since most of you view our business exclusive or share based compensation, I will be referring to non-GAAP figures which exclude share based comp expense as well as non-recurring expenses which we’ll call out specifically. A breakdown of our share based compensation can be found in our earnings release under the header reconciliation to adjusted EBITDA. For additional information, I would direct you to our earnings presentation.

I’ll start with third party cost here which totaled $22.7 million for the third quarter of 2012 compared with $13.7 million in the third quarter of 2011. As a percentage of revenue for Q3 2012, third party costs were 36% or flat when compared with the same period in the prior year despite our rapid acceleration in our advertising business relative to our marketing business which reflects our continuous improvements in margins particularly on the advertising side. Accordingly, our revenue less third party cost, a proxy for gross profit reached $39.7 million, an increase of 62% relative to the third quarter of 2011 and was driven by gains across all business units. Consolidated revenue less third party cost margins were 64% for Q3 2012 and flat when compared with the same period in the prior year.

Our total operating expenses for the third quarter, excluding nonrecurring expenses, share based compensation, depreciation and amortization, acquisition-related and other charges were $33 million. Included in our operating expenses this quarter was a $9.6 million non-cash charge on the expected loss on assets held for sale as a result of our asset divestiture which I will provide more details shortly. This $9.6 million non-cash charge was determined based on the difference between the net consideration of $18.4 million and the carrying value of assets on our books plus estimated closing costs in the aggregate of $28 million. We expect to recoup $7.8 million out of the $9.6 million as interest income over time. Also included in our operating expenses was a $5.3 million charge associated with the re-measurement of MIG’s final deferred consideration.

Adjusted EBITDA for the third quarter of 2012 came in at $6.7 million, compared with $5.6 million in the third quarter of 2011 of 19% year over year. If you recall from last quarter, we guided Q3 adjusted EBITDA between $8.5 million to $10.5 million. The shortfall is primarily the result of approximately $1.2 million higher R&D expenses from a reduction of capitalized software development costs and to a lesser extent, our continued investments in sales and marketing of about $900,000 primarily for the US market as well as approximately $800,000 negative impact of our foreign exchange during the quarter.

As Alex has mentioned earlier, we are reducing our capitalization of internal software development due to our accelerated software development cycles and focus. Going forward, we expect to see less internal capitalized software development investments and more R&D, although we will continue to see some meaningful investments in purchased software.

I would like to point you at this time to our Q3 earnings deck which Alex referenced where we have detailed our operating expenses quarterly for 2011 and Q3 2012 adjusted to exclude share based compensation and non-recurring items. On an adjusted basis, excluding the impact of foreign exchange, non-cash share based compensation, non-recurring and acquisition related expenses, loss from equity method investments and acquisition related depreciation and amortization, we recorded a third quarter adjusted net loss of $1.8 million or $0.03 per diluted share versus an adjusted net loss of $1.1 million or $0.02 per diluted share in the third quarter of 2011.

Turning to shares outstanding, we ended Q3 with 65 million shares outstanding and 66.2 million weighted average shares on a fully diluted basis.

Before we move on the balance sheet, let me give you some details on our asset divestiture. The divestiture is being made for a minimum consideration of $23.5 million with potential upside to 3XP assets 2014 adjusted EBITDA. The consideration is all cash with $3 million payable on December 31, 2012, $5.2 million payable on December 31, 2013 and the remaining $15.3 million payable on December 31, 2014. We expect to close this transaction in December.

Now to the balance sheet. We ended the third quarter with cash and cash equivalents of $29.5 million, compared with $44.7 million in Q2. During the third quarter, long term debt, including the current portion was approximately $15.5 million. Our Q2 debt of $8.3 million plus the legacy factoring arrangement termination of $5.1 million, totaled $13.4 million. So on an apples to apples basis, our cash balance would have been approximately $27.5 million with a net drawdown of $5.3 million from our HSBC credit facility.

However, the majority of this drawdown was used to eliminate the remaining factored receivables, which is a onetime event. So let me explain here. In order to simplify our financial structure and reduce our cash interest expense, we strategically repurchased legacy factoring arrangements. While this negatively impacted our operating cash flows by $5.1 million, this exercise simplified our finance activities going forward. If not for this one time operating cash outflow, we would have been operating cash flow positive in the third quarter.

Trade receivables net of reserves and accrued receivables were $109 million and $72 million, respectively as of September 30, 2012, compared with $108.1 million and $75.1 million, respectively as of June 30, 2012. The combined receivables balances were roughly flat quarter over quarter. However, this took into account AO collections of $90 million during the third quarter plus taking back the $5.1 million receivables from the legacy factoring arrangement.

In terms of DSOs, you can see the exact calculation of our comprehensive DSOs in our earnings deck which was 242 days at the end of Q3. Excluding the elimination of factored receivables and considering the effect of our asset divestitures. This was an improved of 20 plus days from Q2. Now we continued to see collection challenges in Europe over the next few quarters and we are targeting Q4 comprehensive DSOs to be approximately 230 days and be positive operating cash flow and approximately neutral free cash flow. We are also targeting comprehensive DSOs below 180 days by the end of 2013.

Now let’s talk about cash. We ended the third quarter at approximately $29.5 million from $44.7 million in Q2 of 2012. So let me break down for you the movement in cash, which you can also see illustrated in Slide 15 of our earnings deck. We used $4.9 million in operating activities. However, this was the result of our eliminating our factoring of receivables in the amount of $5.1 million as explained. In the absence of this transaction, we would have generated approximately $1.4 million positive operating cash flows. We also used $17.2 million in CapEx, which is simply investments in PP&E of $1.6 million and investments in software development and purchase software of $15.6 million.

After deducting non-acquisition related investing expenses activities, we then simply add or subtract the effect of changes in the FX rates to complete our free cash flow calculation. Although we will continue aggressive investment in our platform in the form of capital expenditures, we are reiterating our intention and our ability to remain operating cash flow positive.

Finally, let's go to our guidance for the fourth quarter and full year 2012 before I turn it back to Alex for his closing remarks. Starting with the fourth quarter, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal developed software capitalization will be in the range of $97.1 million to $113.1 million and adjusted EBITDA of $50.8 million to $59.8 million.

From a full year perspective, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal software development capitalization will be in the range of $270 million to $286 million and adjusted EBITDA of $68.3 million and $77.3 million.

And with that, I’ll pass it back to Alex before we open it up for Q&A. Alex?

Alexandros Moukas

Thanks, Wilson. Before we open it up, let me quickly summarize what we’d like you to take away from today’s call. Number one, we obviously see tremendous opportunity in our margin with ever increasing demand for our technology from our existing customers and new customers, primarily in the US, UK, Western Europe and Asia.

Number two, continuing to investing ourselves in marketing efforts to drive significant 2013 revenue growth and in our R&D in our platform, especially on data audience management, media attribution, optimization and predictive analytics.

We’re focused on maximizing our growth rates within the higher constraint of generating free cash flows. To that effect, we expect growth rates to increase compared to consensus to the mid 30s% range both between 2012 to 2013 through the effect of divested assets and as importantly, between 2013 to 2014.

Finally, we’ve been taking further steps simplifying the business operations in our reporting, getting away from areas that consume cash through the divestment of assets, increase of R&D spending and fastest cash conversion.

Now let me put close by putting a stake on the ground for 2013. Number one, DSOs will drop below 180 days. Low DSO areas like the US and the UK will be making up 65% of our revenues while Greece and other high DSO areas will drop to 23% of revenues while our seasonality will decrease. Finally, our revenue grade will accelerate compared to consensus will generate free cash while CapEx spending will decrease.

Thank you very much. I’d like to open it up to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Peter Misek with Jefferies.

Peter Misek - Jefferies & Company, Inc.

Thank you. First off Alex and Wilson, just to reiterate and be very clear, do you feel you need to do an equity offering to raise the cash balance? Or do you feel that the lines of credit and the cash on hand is sufficient for your current needs? We’ll start there.

Alexandros Moukas

No, absolutely not. We see no need to do any equity raising. Remember we have HSBC that we have only partially drawn of $50 million and we are forecasting free cash neutral for the year. So that sort a – the worst is behind us I would say.

Peter Misek – Jefferies

And in terms of just summarizing this divestiture and putting a cap on it. So in your mind there’s been no change to your guidance for Q4 and for the full year in terms of revenue. And as far as EBITDA guidance is concerned, you don’t feel that the factor that occurred this quarter are going to occur next quarter in terms of guidance. Correct?

Wilson W. Cheung

We definitely don’t – we definitely feel very confident on the guidance that we are putting out for the fourth quarter. The impact on the passive divestiture, basically we are already taking that expected loss on sale in Q3, there might be some additional inventory movements in the fourth quarter but that should not impact our growth rates for 2013.

Peter Misek – Jefferies

And in terms of puts and takes of free cash flow usage going forward. Do you envision any other significant acquisitions or we’ve done that and then on the factoring side, is there any other receivable that affected us or is there any other hits that we should expect or could expect?

Wilson W. Cheung

Let address the receivables factors first. We basically took the pain if I may say that to basically eliminate the entire factoring program, which means that we don’t really have anything that we actually need to factor nor anything in the pipeline that we are going to factor and the additional good news is that we are also no longer paying any type of interest expense so that we can help generate the free cash flows. And that’s why you actually see on an Apples-to-Apples basis we have to take those out when we calculate the comprehensive DSO.

Alexandros Moukas

And obviously I am going to reiterate what we have said in the past, in previous of earnings announcements that we don’t foresee in the acquisition this year. So the answer is no.

Peter Misek – Jefferies

And in terms of the guidance in your mind, barring the continued operations of a sale, you feel that the guidance is being reiterated for Q4 and for the full year?

Alexandros Moukas

Correct. Exactly and that’s why if you look at the press release end year earnings that we have provided with the full bridge that shows that we are absolutely reiterating guidance.

Peter Misek – Jefferies

Okay. I’ll turn it over to others and get back in the queue. Thank you.

Operator

The next question comes from Andre Sequin, from RBC Capital.

Andre Sequin - RBC Capital Markets

Thank you. I had two questions. First around the divestiture, I wonder if you can give us a little more color around how exactly are you deciding where to draw the line and what to split out? Is this geographical or particular clients? Is there an overlap with other projects that might overlap into these geographies? Basically how easy is it to separate out this piece? And then on the maintenance of the guidance on the full year, particularly on the EBITDA side since we did see a bit of a shortfall this quarter. Are you – raising guidance to 4Q if am understanding that right? Is there something that you are seeing more confident going into the fourth quarter that you would actually be raising on account? Thank you.

Alexandros Moukas

So, in terms of the divesture the focus there was to go to customers that were not either able or willing to essentially drop their – decrease their payment terms, and accelerate their payments terms. We had some of top discussions with them and the idea was to go to these customers in some areas that we know are affected by sort of the macroeconomic sort of deteriorating sort of conditions. So based on that we selected these customers, we had a discussion with them and rather than sort of shutting them down, we had the opportunity to essentially sell these assets that were divesting to the existing management in the local region. So it’s a very clean separation and we have already separated these 75 people along with the local management that was already managing these activities and these customers and they are already...

Andre Sequin - RBC Capital Markets

Okay, if I might jump in and I guess follow on to that just quickly. If there were other customers in that region, so within Greece that were operating on a shorter billing cycle in a more beneficial cycle for Velti. Were those retained under developing umbrella or do those go along with the other customers being peeled off?

Alexandros Moukas

No. these are absolutely the importance for maintaining for instance for the Greece.

Andre Sequin - RBC Capital Markets

Okay. Thank you.

Operator

The next question comes from Shyam Patil, from Raymond James.

Shyam Patil - Raymond James

Hi, thank. Alex, to sort of follow up on your comment on 2013 free cash flow. Should we expect it to be free cash flow positive every quarter next year or is there a kind of seasonality we should take into account?

Wilson W. Cheung

Definitely we will provide more details on a quarterly basis. But that is definitely solely our goal and we would definitely not do anything to detrimental long term growth of the company. So we have to be neutral in a quarter or two because of seasonality. It will be neutral but we will provide more guidance during the analyst day.

Shyam Patil - Raymond James

Great. And then in terms of the – a large deal you signed during the quarter. Can you talk about your pipeline for other similar size deals and should we expect other deals similar to that to be announced in 2013?

Alexandros Moukas

The quick answer is yes. I mean we have advanced sort of large deals that are coming down the pipeline. Obviously not all of them are of that size but you are looking at sort of several deals that are multimillion dollar deals that we expect to hit some of them actually in Q4 of this and obviously Q1 of next year as well. So yes, this was not a single thing or a once off things, I think this particular deal signified the trend which is number one. A lot of people, a lot of CMOs were saying we cannot spend money or a lot of money at the mobile and had that sort of spending very measurable. We actually have a deal here from a major U.S. brand doing exactly that. They are spending sort of material amount of money on the mobile and we are also seeing other CMOs both in the same verticals but other verticals following suite.

Shyam Patil - Raymond James

Great. Thank you.

Operator

Your next question comes from Ross Sandler, from Deutsche Bank.

Ross Sandler- Deutsche Bank

Can you hear me? I am on a pretty bad connection but can you guys hear me?

Alexandros Moukas

Yeah, absolutely.

Ross Sandler- Deutsche Bank

Okay. So the stock firmly at 20%. I want to get on the record and clarify because it seems to be that there is some confusion out there. A couple of things; So, there’s $15 million of net cash on the balance sheet and you have around $45 million or $44 million remaining on the HSBC credit facility. Is that correct?

Alexandros Moukas

So, I would point you to – first to Wilson, but I will point you to slides 15 and 16 on our slide deck as you can see them online. So we are having net cash position of 29.5 million, that includes $15.5 million of debt and we have another $35 million, $36 million of – in our HSBC credit line.

Ross Sandler- Deutsche Bank

Okay. And can you remind us of the …

Alexandros Moukas

So it’s $29 million – let’s call it $30 million plus $35 million.

Ross Sandler- Deutsche Bank

Okay. Can you remind us on the earn out side, MIG I think still gets an earn out next year, at the beginning of the year. Can you remind us for the next four quarters what the earn out pipeline looks like?

Alexandros Moukas

Yes, absolutely. We have essentially two things that remaining. One, is I need to in the next two months we have CASEE, a $3.5 million payment and MIG, the second quarter of next year we have a $28 million payment, that is cash or shares at – there’s a mix of cash or shares at our discretion.

Ross Sandler- Deutsche Bank

Okay. So worst case scenario you said you have about $70 million in total liquidly. Sounds like there’s like about $30 of earn out remaining. So you are talking – if you are running free cash flow breakeven, do we still have $30 million of buffer in case anything were to change in terms of your forecast. Is that a …?

Alexandros Moukas

Yes, absolutely. That is right. We believe we have a lot of runway even post the acquisition payments, even if we elect to make all the acquisition payments in cash.

Ross Sandler- Deutsche Bank

Okay. And then the one last question is just the clarification too. You guys terminated your factoring – the way I understand it, factoring would be something that you would benefit from in terms of cash collections. What was the rationale there? Can you just clarify what was going on of the $5 million in free cash flow hit from the factoring termination…?

Alexandros Moukas

Yes, off course. Let me give you the business rationale then Wilson will talk about the specifics but in my mind this is -- we are trying to consolidate all our finance activities through HSBC. This is a legacy line that we had, it had some receivables from prior periods in there and we are paying 10% interest. So I would rather move all of that to our HSBC line where we are paying almost a quarter of that, a bit more. So…

Wilson W. Cheung

So, Alex is absolutely correct. Basically to make the long story short, we have only about $5.1 million of receivables that we have already collected cash on from the factoring facility. However, that factoring, those receivables since they have not yet been collected by the factoring facility, we have to pay interest on that balance until it’s fully collected. And given the fact that we are paying very high interest, it’s only $5.1 million and we really wanted to close down the factoring arrangement. We decided to take basically a one-time hit. Take that receivables back on our books, put it in trade receivables, collect it on our side and then basically move on.

Ross Sandler- Deutsche Bank

Okay. And the $27 million new account. Can you just remind us that had much better payments terms and how much in free cash flow could that bring in for you guys on that one-time track alone next year do you think?

Alexandros Moukas

So, yes absolutely. If you look at the payment terms there, you are looking at net 30 payment terms and you are also looking at monthly invoicing over the next three years, $27 million and our gross profit margin there is sort of 60%, 65% plus. So you are talking about sort of very material sort of numbers in terms of free cash. … double digits is $12 million.

Ross Sandler- Deutsche Bank

The worst case scenario we are looking at probably $30 to $35 million will be kind of the trough in terms of your total liquidity…?

Alexandros Moukas

If we did, exactly. So acquisition – excluding acquisition payments we are where we are. This is our lowest point. If you include acquisition payments provided we are going to pay everything in cash, you are absolutely right. We are still left with $30 million.

Ross Sandler- Deutsche Bank

Okay. Thank you very much guys.

Alexandros Moukas

And remember we are also – the other element that you need to keep in mind there is that this $30 million from one-third of acquisition payment, we are going to be receiving $23.5 million from the divestments. So actually if we elect to pay everything in cash, the real delta there is really not sort of the $30 million but the actual cash is going to be closer to $50 million because you are essentially offsetting one with the other.

Ross Sandler- Deutsche Bank

Okay. Thank you very much.

Alexandros Moukas

Thanks Ross and good trip.

Operator

The next question comes from Peter Stabler, from Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities

Good afternoon. Some clarification on CapEx if you could. So I understand you are shifting some of this expense from your – you are taking down the capitalized expense, transferring it to the P&L. Can you help us a little bit more color here on why you doing that and then a couple of other questions. One, I think you mentioned with regard to the divestiture that was a particularly CapEx heavy dynamic on that unit being divested. Can you help us understand why that is? And then on the guidance for next year Alex, I am not sure if I heard you clearly, there was mention made of a $6 million reduction. Is that in its entirety the kind of savings that you are expecting in 2013 on purchase offer plus PPE? Thank you.

Alexandros Moukas

Okay. So let me start from the last point. So the answer is no, it’s $6 million just from the effect of the divestiture. So above and beyond that obviously we are going to have the reduced capitalized. So I am going to let Wilson discuss that a bit more in detail. Now, the other thing I wanted to mention is returns from the divested business. There is really no rollout between the divested business and the business that we are keeping. So there is a very clear separation there.

Wilson W. Cheung

Yeah. So Peter, we are basically on the R&D side, we are allocating more resources for our engineers to actually work on R&D projects and at the same time when you actually look at our product development cycles they are actually getting shorter and shorter, and that’s really the main driver that actually allows us to capitalize less going forward and again that’s really good news to us and as you can see in Q4 guidance we’ve basically baked in sort of what we believe is the range of R&D addition of expenses that would help Q4 in going forward.

Peter Stabler - Wells Fargo Securities

Okay, that’s helpful and then with regards to 2013 given that the cash and cash burn is such a significant concern among investor base. Could you outline for us a level of expectation on total CapEx for 2013 at this point even if you have the ball packed?

Wilson W. Cheung

We don’t really have a specific number for you at this point. As I said earlier was due to include the budget. I would tell you though directionally your internal developed software is going to come down I would say gradually, and then you will still have some meaningful purchase software obviously would not be in the same magnitude as 2012, it would be less and if you do it as a percentage of revenue is obviously even less material.

Alexandros Moukas

And that’s the important thing in my mind. As a percentage of revenue and as a percentage of EBITDA is going to be significantly less.

Peter Stabler - Wells Fargo Securities

Thank you.

Operator

The next question comes from Ryan Bergan, from Craig-Hallum.

Ryan Bergan - Craig-Hallum Capital

Thanks. Just to be clear you are free cash flow positive in 2013, you expect mid 30% growth. Is this – do you feel you are able to accomplish this without – I just want to be clear, you feel like you are not – you are able to accomplish this without even having to tap in to that credit facility any further for the needs to fund the growth?

Alexandros Moukas

So, again if you look at our models and if you look at the numbers we absolutely expect to be operating cash flow positive every quarter and free cash flow positive for the year. You might have some neutral quarter there but so, my definite answer is yes.

Ryan Bergan - Craig-Hallum Capital

And why not – it’s going to wind down from software development cost and as such expense R&D. How do you decide where to draw the line and how much you want to decrease the software development cost by and sort of expensing. Seems like there has been some optic issues with that and how much could you wind that down and include in the costs?

Alexandros Moukas

I am going to let Wilson answer that but I like don’t we’ll have an election, it’s GAAP, we just follow the rules.

Wilson W. Cheung

Yeah, I mean it all depends on the nature of the projects that we are doing and we are obviously following GAAP and we won’t be able to capitalize anything unless it has already reached technological feasibility but before it comes commercially available. And we actually don’t have the choice or make any type of election. It’s just that the phase of the growth of company where we are actually allocating more resources right now to work on R&D versus capitalizable projects.

Alexandros Moukas

And if we are reaching general availability and we have sort of shorter development cycles and that dictate by our productions and our engineering folks, accounting is going to follow the nature of projects that we are doing.

Ryan Bergan - Craig-Hallum Capital

Thank you.

Operator

The next question comes from Richard Ingrassia, from Ross Capital Partners.

Richard Ingrassia - Ross Capital Partners

Thanks. Good evening everybody. Just to get off the subject of how R&D is being accounted for, and maybe more to talk about what specific areas of product development. Again, we focus these days in the bulk of your investment over the next 6 to 12 months?

Alexandros Moukas

Absolutely. It’s a – as I mentioned before we are really focusing on data optimization and predictive analytics. So building this database of unique consumers in a non-personal identifiable way. So stripping out all person, the entire data and actually use that to optimize better the outcomes of the campaigns for our customers. So data is number one. Number two, is the predictive analytics and the optimization areas and we are hiring aggressively there in terms of both data scientists but also engineers who implement our new data centers and our new models, and finally I would say it – on audience management and media attribution. So starting from an outcome that we deliver to a customer and then understanding what in the lifecycle of the consumer in past let’s say few months made them make that decision. How do you go back and attribute value to every single touch phone with consumer through let’s say a mobile lab or a TV campaign or an ACLM 5 site or a coupon or whatever have you. So predictive analytics, media attribution, audience management and data.

Richard Ingrassia - Ross Capital Partners

Okay. Thanks Alex. And if you will…

Alexandros Moukas

Thank you for the non-financial question.

Richard Ingrassia - Ross Capital Partners

I’ll give you another one then. The $27 million contract won in the quarter. We know it’s a loyalty campaign but can you say a little bit more about what specific products and service that are going to be used to utilizing that project?

Alexandros Moukas

Of course it’s going to be the engaged mobile customer lifecycle management, our data, our analytics and also the reporting capabilities of them gauged. And I am really hoping to be able to issue a press release, audio press conference with the customer sometime in the near future. So…

Richard Ingrassia - Ross Capital Partners

With the name of that brand client?

Alexandros Moukas

Correct, yes absolutely.

Richard Ingrassia - Ross Capital Partners

That will be great. Thank you very much.

Operator

The next question comes for Scott Zeller, from Needham & Company.

Scott Zeller – Needham & Company

Hi, good afternoon. Just to clarify again, I think we heard your comments Alex for calendar ’13 that you are looking for 30% growth. Is that correct?

Alexandros Moukas

I said mid-30s. So meaning 35%.

Scott Zeller – Needham & Company

Mid-thirties. And is that the actual surviving entity or is that the consolidated company excluding divestitures?

Wilson W. Cheung

That is obviously the surviving company because after the sale, we will no longer consolidate those divested assets.

Scott Zeller - Needham & Company

Okay. Just to be clear. And can you give us a sense of today of what your DSO would like if you were to separate today the DSOs from the divested assets? What would your DSO count look like today?

Alexandros Moukas

I mean you can take a look at the DSO Bridge and DSO calculation on our deck, there’s a lot of details there. If you look at sort of DSOs in general by geographies, again U.K. you are looking at way below sort of 100 days, if you look at U.S. you are looking at 100 and something days. So that’s going to be 65% in personal revenue. And next year, and that’s really going to drive our comprehensive DSOs down. And these are actual comprehensive DSOs and this are whether they are this quarter. Obviously the comprehensive DSOs from the divested assets are around 450 days.

Scott Zeller - Needham & Company

Okay. And when you look at the performance of the divested assets. Would you say that you are – you talked about the macro, things are getting more difficult Alex but would you say that the revenue growth picture was also becoming more challenging or is just the collection side of these relationships?

Alexandros Moukas

No. these were also declining assets. You look at the customers that were mainly focused around sort of feature phones; some of these were feature phone SMS content management things as opposed to smartphone.

Scott Zeller - Needham & Company

Okay. Thank you.

Operator

The next question comes from Richard Fetyko, from Janney Capital

Richard Fetyko - Janney Capital

Hi, thanks guys, good evening. On the – sort of going back to your projected 30% plus of 35% plus growth in 2013. You are trying to figure out the base of that. Could you give us an idea of what the revenue and EBITDA were from the divested assets in 2012 or otherwise get to the 2012 base revenues and base EBITDA that we can project our models into 2013 and ’14?

Alexandros Moukas

So, we would rather do that as soon as we close the transaction in the next few weeks then we’ll have a specific baseline then we will give you the exact guidance. I wish we will have all the information by January 30 when we have our investor day in New York City but we’ll hope to achieve that before that.

Richard Fetyko - Janney Capital

Okay. And then I guess another way of attacking that just to make sure those assets have similar seasonality as the rest of the business. Correct?

Alexandros Moukas

No, they are actually much more seasonal. If you look at our seasonality post divestiture, it’s going to drop from Q4 seasonality from forty something percent to the mid-thirties. So next year you should be looking at a much less seasonal improvement.

Richard Fetyko - Janney Capital

Okay. And secondly in Americas the revenue of $60.2 million. It looks like majority of that is still advertising, they had exchange business if I think of it correctly the advertising business was about $14 million in the quarter. So $14 million out of the $16.2 million. I think that – do you expect the marketing revenues within the Americas region to grow over time? Obviously the big multiyear deal that you announced will be part of that but outside of that do you expect the marketing activities and projects and contract to sort of accelerate in Americas beyond just the advertising.

Alexandros Moukas

So the answer is yes, absolutely. So first of all we don’t really breakdown advertising versus marketing in different geographies but besides that, yes absolutely we expect that the marketing business will accelerate but remember the $27 million contract that we have is 100% marketing and 100% U.S.

Richard Fetyko - Janney Capital

Right. Okay and then MIG in U.K. Could you give us some update, some color on how that business is doing, what kind of growth rates perhaps they are having or the type of contract signing, the pipeline looks like?

Alexandros Moukas

Of course. So the business first of all is fully consolidated into ours. So we don’t really break it down separately but I can absolutely give you some color. It has been an interesting quarter for the U.K. primarily before – because of the Olympics in August where essentially the whole place was shut down for a month, but other than that we are seeing sort of a significant sort of growth and acceleration in the customers there. Again, what we are trying to do is we are combining our product offering in terms of technology, and we are going after existing MIG customers with our product offering and vice versa. So we go after Velti customers with some of MIG’s sort of products and we are actually seeing very significant growth rates coming out of the U.K. And the great surprise is that our lowest DSOs globally are actually out of our U.K. operations. You are talking about let’s call it 80 days.

Richard Fetyko - Janney Capital

And do expect to see more success cross-selling into MIG’s customer base or vice versa?

Alexandros Moukas

It depends on the product offering. So I would say both but if you look at the new customers who are penetrating, it’s really on Velti’s customer lifecycle management products that exist as MIG customers.

Richard Fetyko - Janney Capital

Okay. Thank you.

Operator

And I am showing no further questions at this time, I would like to turn the call over to Alex Moukas.

Alexandros Moukas

To everybody, I would like to thank you for joining our third quarter call. Again, I want to reiterate that number one, we believe that we are making the right sort of moves here to number one, simplify the business through the divestment of assets out of which we are going to be receiving $23.5 million in cash. And I remind you that we are divesting assets in Greece, Balkans, Middle East, and Northern Africa regions. We are single mindedly focusing on our cash flow. Now the divesture will be in free cash flow positive, we are still guiding to approximately free cash flow neutral for the end of the year. We are absolutely going to be operating cash flow positive. Our DSOs have been dropping significantly, remember they dropped by more than 20 days quarter-over-quarter and we are guiding to a further drop down to 180 days by the end of next year.

For next year again, the vast majority of our revenue 65% to 70% is going to be coming from the U.S. and the U.K. market where we are enjoying let’s say combined DSOs to the order of – let’s say the mix is less than 90 days right now. And while we are expecting our exposure to higher risk, big countries and other high DSO areas to drop to just 2% to 3% of revenue. We also our seasonality to decrease. And then finally compared to where consensus is right now we are expecting our growth rate to increase to the mid 30% both for 2013 and 2014. So with that I would like to thank you for joining our call. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation, you may all disconnect. Have a good day.

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