The drama never seems to end for the mobile marketing firm Velti (VELT). It might be one of the few fast growing companies that took the time to invite investors to a slaughter. The stock plunged 25% within hours after CFO comments at the Analyst Day presentation.
Though the company continues to grow fast as demand for mobile marketing soars, it has been unable to translate that growth into stock gains. No matter the situation, the company speaks and the market dumps the stock. Originally it was due to cash flow issues, then lower growth from cutting the questionable cash flow customers in Eastern Europe via a sale of that customer base. Now the CFO comments added to the carnage.
As mentioned in previous articles, eMarketer continues to upgrade the mobile advertising market. It still hasn't translated to stock gains for Velti as the stock plunged to recent lows near $3.60 on the comments about 2013 being a pivot year.
At the 4:47:30 mark of the presentation oddly after the Q&A, the CFO Jeff Ross introduced himself to the shareholders by providing comments that apparently disappointed the investor base. The stock didn't initially move, but eventually it lead to a nearly 35% loss over two days.
The main comments by the CFO were the intention to pivot away from revenue that generates EBITDA, but not positive cash flow mainly in Eastern Europe. A primary impact will be less EBITDA in 2013 though it wasn't clear if he meant before or after the deal to sell the Greece and Bakken assets.
The CFO was clear that the company would have significant growth opportunities in 2013 and beyond along with positive cash flow generation.
The confusing aspect to all the news is that the company already expected up to 70% of revenue from the Americas and the U.K. and limited exposure to the PIIGS and the Middle East at only 2 to 3 percent of total revenue.
The news with Velti continues to be one of strong potential and extremely cheap valuation. Originally, the fears of cash flow problems lead investors to justify the low valuation levels. Fearing the company might run out of cash meant the stock might not have any value. Now though, the company has shed the cash flow questionable customers and transitioned the customer base mostly to US and UK customers that pay within 90 days.
The odd part about the stock continues to be that no matter how negative the market reads the news about the company, it continues to report strong EBITDA and earnings. The numbers are especially compelling considering the stock price.
As an example, Wells Fargo downgraded estimates on the 31st. The target was dropped to $4.5-6.0 from a previous valuation range of $10-12. The ironic part was the firm believes the CFO comments are worthy of lowering the 2013 revenue and earnings to $337M and $0.61.
While honestly Wells Fargo appears more downbeat on the CFO comments than expected (note the stock didn't decline for over an hour after the comment was made), the analyst still forecast earnings of $0.61. Most companies would die for that earnings level. The stock only trades at 6.5x that earnings level.
For most investors, the frustration mounts over the 2013 earnings drop from $0.97 to $0.55 ever since the divestiture of assets announced along with the Q3 earnings report. So again a disconnect exists between the markets and management if these customer cuts are truly trashing earnings. If the extremely long cash cycle customers were still profitable even after factoring costs, than why cut the revenue in the first place?
Millennial Media Comparison
As many investors have discussed in the past, the comparison to Millennial Media (MM) remains a valid relative discussion. The company runs a mobile advertising exchange and is valued at nearly $900M with expectations for 2013 revenue and earnings of $286M and $0.15.
Clearly the numbers are below the higher estimates for Velti that is only worth around $260M. While Millennial Media trades near all-time lows after a successful IPO in early 2012, the company along with Velti will both ultimately benefit from the growth of advertising demand from smartphones, tablets, and even futuristic devices. Suggesting that Millennial deserves a drastically higher valuation because it has had fewer struggles with Wall Street expectations is a disaster waiting to happen for investors.
As suggested back in the early December article, investors will likely look back at the early December prices in the low $3s and regret not buying the stock. The stock soared to $6 on the December bounce and it won't be surprising to see a similar rebound in February.
The new CFO wants to clean up some of the low-quality contracts from the past. Nothing stated at the analyst day dampens the long-term growth potential of Velti. Being an experienced technology CFO, the likelihood exists that he lowered the bar to the point that expectations are easily exceeded going forward.
Ultimately the stock will obtain some momentum and valuation similar to Millennial could be in the realm of possibility in the future.
Disclosure: I am long VELT.
Additional disclosure: Please consult your financial advisor before making any investment decisions.