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Executives

Alexandros Moukas - Co-Founder, Chief Executive Officer and Executive Director

Jeffrey G. Ross - Chief Financial Officer

Mari Jean Baker - Interim Chief Operating Officer, Director and Member of Remuneration Committee

Analysts

Andre Sequin - RBC Capital Markets, LLC, Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Velti Plc (VELT) Q2 2013 Earnings Call August 20, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to Velti's 2013 Second Quarter Financial Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Christina Carrabino [ph], in for Leslie Green, Investor Relations for Velti. Please go ahead.

Unknown Executive

[Audio Gap]

Including in comments made in response to questions, the company will provide projections and make other forward-looking statements regarding, among other things, its proposed sale of its remaining advertising business, its future financial performance and longer-term operating model, the financial impact of its recent restructuring, its ability to manage cash and generate free cash flow, its ability to control costs, its expected growth in key markets, its sales pipeline and additional market opportunities, as well as other market conditions and trends. Management wishes to caution you that such statements deal with future events and are based upon 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, the continued agreement by HSBC to work with Velti in continued willingness to forebear calling due to the outstanding indebtedness under the law Velti's acquisite as well as Velti's ability to manage cash and reduce operating expenses without sacrificing strategic growth, reduce DSOs, add new and maintain existing customer relationships and expand into new markets and verticals.

In addition to the factors that may be discussed on 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 www.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

Thank you, and welcome to our second quarter earnings call. As you know, we expected challenges to improving Velti's financial position and long-term growth. However, the second quarter proved to be more difficult than expected. At the same time, we're taking the right steps to further focus the company on predictable business, predictable customers and predictable geographies. We expect to realize additional benefits as cost reductions that have been previously implemented begin to take effect, and we'll continue to work at bringing our cost in line with our revenues. All these actions are positioning Velti to grow at 2014 from a new healthy baseline. I want to assure you that we recognize the seriousness of the current situation. And over the past few months, we have made significant progress in extricating ourselves from certain businesses that had been at the root of many of the difficulties we have today. We will be touching on this in a few minutes.

As we navigate through the difficult times, we continue to believe that there's substantial value in the company development field, both in our technology and our customer relationships and the significant opportunity ahead. We are committed in doing all we can as a company to deliver value to our shareholders, customers and other stakeholders. With that, I'll turn the rest of the call over to Jeff Ross, our Chief Financial Officer, who joined us earlier in the year and to Mari Baker, our Chief Operating Officer, who joined us in early Q2. Jeff?

Jeffrey G. Ross

Thanks, Alex. While we are disappointed with many of the elements of our financial results this quarter, let me start with a high-level overview to put our performance in context. We came into this year with a focus on cash flows generation. Fundamentally, this plan had 3 pillars. One, the focus on revenues that would be collectible within 100 days with targeted growth in North America, Western Europe and the BRICs. Two, the significant reduction in capital expenditures. And three, a reduction of our operating expenses.

Additionally, as we executed on this plan during the first half of 2013, we expected the collections from our legacy receivables, along with the new faster paying business we were pursuing will support our cash needs. While we have executed well against reducing capital and operating expenditures, we have not made the progress we intended around generating new revenues, particularly in North America. This is especially true with regard to our advertising business, which, for 2012, represented $54.3 million in revenue, and in Q2, contributed approximately $8.9 million of revenue.

The primary reason for our disappointing results in advertisings is our failure to make timely payments to preempt publishers on our Mobclix Ad Exchange business, which resulted in a substantial decline in that business. Additionally, we have not made the progress we anticipated in collecting our receivables, particularly from Greece and Cyprus. Instead, we have experienced the deterioration in collections on amounts due from customers located within these jurisdictions, and indications from these same customers that future payments were also at risk.

While payment patterns in that region have always been very slow, the continued worsening of the Greek economy, along with the banking crisis in Cyprus, seem to materially impact the financial stability of the customers -- of the company's Greek customers and result in a significant decline in our credit worthiness. Historically, these customers had exhibited a solid payment history, and while slow, there has been very limited write-offs of amounts due.

Starting in the fourth quarter, we have begun reducing our ongoing risk and exposure to commercial activities within these regions. But as of the end of Q1 of 2012, these entities still held approximately 2/3 of our outstanding accounts receivable and accrued revenues.

In Q2, we engaged Deloitte Financial Advisory Services to assist in evaluating the near-term and long-term collectibility of receivables on the books of our Greek and Cypriot subsidiaries. As a result of these evaluations, we are taking a charge in Q2 of more than $100 million to our trade receivables and accrued contract receivables.

It's important to clarify that all of these write-down is attributable to our business, which primarily sold customized mobile marketing platforms to customers with businesses that were principally located within Greece and Cyprus, this business we internally referred to as our enterprise business. The write-down is not reflective of accounts receivable from our other customers or in other geographies.

As part of Deloitte's engagement, Scott Avila from Deloitte is serving as the company's Chief Restructuring Officer, working with management to help us through this period.

There are parts of our business that have been performing relatively well. To that point, we have seen year-over-year double-digit growth in the part of our mobile marketing business, that will be our primary focus in the future. This growth has not been sufficient, however, to offset the decline in advertising and in our enterprise business. The further deterioration of the Greek and Cypriotic economic environment and our assessment that a substantial reserves against the existing accounts receivable was needed, led us to speed up the transition fully away from the enterprise business in the second quarter. As a result of all of these factors, revenues and adjusted EBITDAs came in well-below expectations for the quarter.

Turning to our full results. For the quarter, revenue came in at $31.2 million compared to guidance of $42 million to $45 million. As mentioned, this shortfall had several contributing factors. Our advertising revenues were well below our expectations, largely driven by a decline in traffic as publishers moved off the Velti Mobclix platform because we were increasingly unable to timely meet our payment obligations and the fundamental elimination of our enterprise business.

In terms of the breakdown between advertising and marketing business for the second quarter, advertising contributed approximately $8.9 million to our total revenues while mobile marketing revenues comprised the remaining.

For the quarter, geographic breakdown of revenues is as follows. In Americas, we generated $10.6 million, which was 35 -- 34% of our total revenue; in Western Europe, which includes the U.K., we generated $11.6 million or 37% of total revenue; other Europe generated $0.4 million or 1% of revenue; and finally, Asia and Africa generated $8.6 million or 28% of total revenue. Pro forma operating expenses for Velti, excluding Starcapital, which is our consolidated variable interest entity, were $28.2 million in Q2, which was a 22% reduction from the prior quarter as a result of greater cost controls and a restructuring effort initiated at the end of April that continued through June. The benefit of these restructuring reductions was partially visible in Q2 and will be fully recognized in Q3.

Adjusted EBITDA for Velti, excluding Starcapital, which excludes restructuring charges and the onetime write-off of certain receivables was negative $17.5 million compared with our guidance of negative $8 million to negative $12 million. Our adjusted EBITDA shortfall is primarily the result of 2 items. A shortfall in revenues, discussed above, and a decline in our overall gross profit percentage that primarily resulted from a significant number of commitments for non-variable third-party cost that were associated with our enterprise business. In Q2, we wrote off all remaining obligations associated with the enterprise business.

With respect to free cash flow, our free cash flow for the second quarter was 3 -- negative $3.3 million. Cash and liquidity at June 30, we had approximately $19.4 million of cash. And while we remain in violation of our debt covenants with HSBC, we remained in close dialogue with the bank regarding our liquidity needs, and they continue to be supportive, although this is an ongoing process.

During July, the bank extended an additional $7.5 million in funding. At the end of Q2, we had $90.8 million -- sorry, 90.8 million common shares outstanding, which was an increase over the prior year -- prior quarter, primarily as a result of our private placement and MIG contingent confirmation [ph].

And finally, while we are expecting operating results to improve in the second half of the year, given the uncertainty caused by our current business environment and restructuring activities, we are rescinding all EBITDA and free cash flow guidance for the remainder of the year.

With that, I am turning it over to Mari. Mari?

Mari Jean Baker

Thank you, Jeff. I would like to touch on some of the key initiatives we have launched to improve operating efficiency, and importantly, drive management discipline throughout the organization. As Alex and Jeff mentioned, this a challenging period for the company. However, we have taken a hard look at our assets and have confidence that we have superior products that our management team will be executing with a new level of coordination and discipline, and that we have identified a path forward, which may not be smooth, but should get us to the right place.

Our solutions have been the drivers for why Velti is a leader in mobile marketing, providing a unique wide range of services that are performance-based and outcome-driven. Our considerable expertise in the mobile channel, combined with a substantial amount of behavioral data that we collect and analyze allows us to create and execute highly effective campaigns for our customers. This is why our customer retention rate in our mobile marketing business is greater than 95%. Over the past 3 months, I've spent significant time in our offices in San Francisco, New York, London and Athens and have found a group of committed employees working hard to turn the business around. Additionally, as I've met with customers in some of these locales, I've been encouraged by their positive reflections on the quality of Velti's service, technology and team.

In support of that, I would like to point to some of our key customer retention and new business wins. In the U.K., we re-signed contracts with a number of key partners, including Vodafone and Channel 5, and launched mobile marketing campaigns for several media and broadcast companies. In the U.S, we renewed our relationship with one of the largest U.S. retailers, who operates over 1,000 locations and uses geolocation at mobile targeting [ph] and notification to drive in-store traffic, customer acquisition and gift registry.

In India, we closed more than 20 new deals, including a program with Nokia to allow Nokia to interact with its 70 million mobile subscribers using Velti's platform. And in China, we signed our largest deal in over a year of securing a $650,000 program with China Unicom.

We are pleased with the progress since some of our new initiatives, including Velti Pay, which quickly built into a $5 million annualized run rate of new clients, following its successful June launch and our mobile customer acquisition business, is expected to continue doubling revenues quarter-over-quarter into 2014.

Our leadership team is aligned and running at full speed to ensure disciplined execution of the company's strategy and plans to become cash generative. During the quarter, we conducted a review of the various cost centers and business lines in the company, which enabled us to reduce operating expenses by $40 million on an annualized basis compared with Q1. Key elements included aligning functions more closely with the business units in reducing overhead, exiting business lines that were generating significant losses for the company and consolidating facilities.

We are also on track with the initiative launched in Q4 to reduce our annual capital expenditures by more than $40 million compared to last year. In order to better align our organization with our business focus, we restructured our North America sales organization with our business units to create greater alignment between the business and the sales teams, as we continue to see growth in North America. We also streamlined the organization by reducing the number of Senior Vice President-level executives and placing greater decision-making responsibility with local account teams who are closer to the customer. We are significantly restructuring our U.S. advertising business and have exited our mobile ad network business, Velti Media, which was generating significant losses for the company.

Additionally, we recently engaged in investment banker to sell the remainder of our U.S. advertising business, also known as Mobclix, as well as look at other strategic opportunities for the company.

We are continuing to streamline the organization during Q3, and focusing in on our core opportunities for growth within our business lines, as well as core geographies in the U.K., Western Europe, North America, India and China. Our core theme moving forward is making sure we are pursuing good businesses in good geographies with good companies. To that end, we have exited our enterprise business, and are seeking buyers for our supply-side Ad Exchange business while focusing our sales teams at our Mobile Marketing business, and winning and renewing programs with premier global brands such as Vodafone, Nokia, Coca-Cola and Toyota. We are investing in new products and services to help customers capitalize on the unique capabilities of mobile devices to support their efforts to acquire, engage and retain customers. We have launched a new version of our mGage ignite platform to give customers greater control over managing programs that support customers life cycle management and long-term loyalty. Our new release of the mGage Communicate Pro platform is currently being rolled out simultaneously in the U.S. and U.K., and the platform brings new functionality, which allows brands to conduct interactive mobile marketing campaigns with a global reach.

As we move into the second half of the year, we are more disciplined, more focused organization. We have worked to put much in the past behind us, exiting certain business lines and geographies. We are committed to aligning the organization with the opportunities going forward and doing all we can to deliver value to customers and shareholders. Now, let me turn it back to Alex to close.

Alexandros Moukas

Thanks, Mari. In closing, we understand that this has been a difficult time for shareholders, as it has been for the company as well. There is opportunity ahead. We believe the explosive growth in the mobile industry is continuing, and we can explore this opportunities, both within developed and developing markets. Brands are increasingly leveraging the mobile channel to supplement or even replace traditional marketing channels as a means to engage and develop customer relationships. Velti is very well-positioned with significant differentiators in terms of our expertise, technology, breadth of services and global reach, all of which allow us to capitalize on these opportunities. By focusing on our core business in core markets that offer good business dynamics and payment terms, we believe there is opportunity to be one of the long-term winners in the evolution of marketing to mobile platforms.

We have taken significant operating steps and continue to make tough decisions to lower our cost and organize our resources around our most important business opportunities and inject discipline to the organization.

And with this, we're going to open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Andre Sequin from RBC Capital Markets.

Andre Sequin - RBC Capital Markets, LLC, Research Division

First, on the ongoing restructuring, outside of Mobclix, are there still more cuts to come on either the revenue or expense side in the back of the year? And then on Mobclix itself, on the potential Mobclix sale, maybe you can talk a little about your thinking there, is this just for the cash or are the liquidity needs of Mobclix itself too high? Or is there strategic reason why you feel like Mobclix just doesn't fit in the picture anymore?

Mari Jean Baker

Sure. Related to ongoing restructuring we are continuing to work across the board in evaluating our business lines. We have identified areas and are working with the teams close to those to continue to identify areas where we need to increase investments, identify areas where we need to reduce investments. So we do have ongoing efforts in place to continue to make sure that we are focused on the opportunities that will deliver value going forward.

Jeffrey G. Ross

And with respect to Mobclix, I mean, principally the reason is around liquidity and our ability to provide sufficient liquidity with respect to the Mobclix business, specifically with respect to the payment of publishers. As long as we can't accomplish that in the midterm, we were having significant issues trying to accomplish that, the business will continue in decline. So in order to maximize the value and to do the best that we can for the publishers, we are looking for a buyer that will be able to take better advantage of that asset than we can currently. As far as its fit within our overall strategy, we still do believe that the combination of advertising and mobile marketing has value. But in the near term, our ability to capitalize on that, again, given our liquidity needs, it was a detriment as opposed to a positive.

Alexandros Moukas

And to follow up on what Jeff just said, we are keeping certain assets on the advertising side, and we continue to work on them. But as Jeff said on the sales side business, it's very important to take care of the publishers, and we feel that's going to be much fast -- I think in a much quicker pace with the new owner of Mobclix.

Operator

Our next question comes from Scott Zeller from Needham & Company.

Scott Zeller - Needham & Company, LLC, Research Division

I'm out of the office here. So the first question would be I think Jeff, -- I heard you rescinded guidance on, I believe, EBITDA, but what about revenue guidance?

Jeffrey G. Ross

Scott, we have pretty much taken revenue guidance out last quarter, so we don't have anything out there standing. Our -- we -- I think what I said is we expect operations -- operational results to improve for the remainder of the year, so that would be up off the numbers this quarter. But we're not throwing a specific target out there at this point, given everything that's going on.

Scott Zeller - Needham & Company, LLC, Research Division

Okay. And then can you help us understand what came to light with the Deloitte activity, and why the conclusions they reached were different, perhaps from the previous review of receivables?

Jeffrey G. Ross

Yes, sure. So Scott, in Q2 as our liquidity -- I mean, as we move through Q2 into Q3, we were -- I think we were pretty clear that we were depending on the collection of some of these old receivables. And as targets kept getting pushed out and numbers kept getting missed, and we're pushing on our customers and having additional conversation, it became apparent that our expectation were too high with respect to collections and that some of these customers were in significant financial difficulty. At that point, we had engaged Deloitte to help us try to figure out the magnitude of the issue and if there's more that we could be doing, and the result of their reserve formed the basis -- or the result of their review formed the basis for the reserve that we took in before.

Scott Zeller - Needham & Company, LLC, Research Division

Okay. So it sounds as if the conclusion that you had difficulty collecting was a function of the economies deteriorating, not that the review by Deloitte was different from that of your current auditor?

Jeffrey G. Ross

Correct. I mean we've gone through these results with our current auditor. It was a pretty robust process where the customers confirm balances, confirm that their balances were valid, that they had the intention to pay. But then when we started looking at their financial condition, especially in light of things like the Cyprus banking crisis, where a lot of Greek companies had debt -- sorry, had funds and that started to trickle -- that occurred in late Q1, but really started to trickle through the Greek economy in Q2, along with just further deterioration of the Greek economy, it became pretty clear that we needed to take out a larger reserve.

Operator

Our next question comes from Peter Stabler from Wells Fargo.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

A couple of questions for Jeff. So can you help me reconcile a couple of things here, or at least tell me what I'm misunderstanding here. I think in the past, Alex, you referred to your exposure to Greece from a revenue perspective as being in the high single-digit percent, yet with the write-down, here we're being told that it's attributable almost entirely to Greek-related revenues. I think in the past, you've repeatedly talked about Western -- or at parts of Europe of being a source of challenges with regard to receivables. So can you help me reconcile why this is such a large number tied to such a small economy?

Jeffrey G. Ross

So if you go back in history, the company's starting point was in Greece and there was a significant amount of business done there. These receivables, in many instances, are substantially old, accounting for our significant overall DSO. So many of the receivables that we're writing off relate to time periods before even 2012. Although some do relate into 2012. So they -- the -- when we have internally in an SEC filings consisted with guidance reported revenue, it's been based on the location or the jurisdiction of incorporation of most of the companies, especially when we did business with them in multiple geographies. So the revenue exposure, from a technical SEC perspective, was less than probably the business exposure that was at a higher level, along with the fact that some of these are significantly old.

Operator

Ladies and gentlemen, this concludes the Q&A session. Thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time. Have a good day.

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