Velti, Plc (VELT) 5.98 7-10-2012
What makes this a good business?
We believe this is an outstanding business model with robust revenue growth resulting from their superior platform solution within an ecosystem of many top mobile advertisers, media firms and solution providers. Velti is a global provider of mobile marketing and advertising technology and solutions that enable brands, advertising agencies, mobile operators and media to implement highly targeted, interactive and measurable campaigns by communicating with and engaging consumers via their mobile devices. It provides their customers with full-fledged marketing campaigns through mobile lifecycle marketing and advertising, including media planning, ad serving and ad routing services, the creation of mobile internet and landing pages, various post-click mobile marketing activities, and mobile analytics. Velti helps their customers plan a marketing initiative, continuously reach the end users, create cost effective micro-sites, interact with their customers through SMS and MMS, and measure and review marketing/advertising results.
Velti has grown rapidly in the last two years, fueled by a successful U.S. public offering in 2011 and strategic acquisitions (including Mobile Interactive Group, Air2Web and CASEE) within the past 12 months. In March, the company announced 2011 revenues of $189.2 million-an increase of 63% over 2010. In May, the company announced Q1 2012 revenues at $51.8 million, which exceeded guidance and represented a 75% increase in revenue over Q1 2011. After further reviewing their recent financial reports, it appears that their internal organic growth rate was about 40% prior to several acquisitions. Considering that they also appear to have the potential to establish themselves as a monopolistic business, Durig Capital has selected it for early addition to our Monopoly Portfolio.
As other large companies come in this rapidly expanding market, most are working from a more traditional technology utilizing web based solutions. Velti has taken the clever approach of tethering it to the telco providers, who are the gatekeepers of this new mobile technology and who often have a great distrust for intentions and relationships of such large players as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Velti's integration of mGage Marketplace platform for both private and public exchanges have helped advertising agencies' mobile transaction requirements, and Velti estimates more than 200 premium publishers will be integrated before the end of 2011. Agencies can research, plan, execute, track and optimize mobile marketing campaigns from a central location based on the advanced analytic and reporting functionality. Brands are able to track buyers from the first impression through post-click and compare how campaigns are performing across all media inventories.
Velti is a global company with large markets in Europe and North America, and is expanding into the fast-growing Chinese market through the opening of a new office in Beijing and their acquisition of CASEE, the largest mobile advertising exchange in China. Velti has also partnered with HT Media Limited, India's second-largest media group, on a mobile marketing joint venture called HT Mobile Solutions. Velti's traditional clients are telecommunications providers around the world such as Vodafone (NASDAQ:VOD), Orange, Verizon (NYSE:VZ), AT&T (NYSE:T), T-Mobile, Telenor (OTCPK:TELNY), Cellular South, China Mobile (NYSE:CHL), China Unicom (NYSE:CHU), Telkom SA (OTCPK:TLKGY), MTS, Orascom-WIND, MTEL, Vivatel, and SingTel. In 2011, 8 of the 10 largest mobile operators have become clients of Velti. Interpublic Group (NYSE:IPG) is one of Velt's first technology clients, and this channel contributes about 40% of their overall revenues. Their client list also includes, Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), Disney (NYSE:DIS), and Dell (NASDAQ:DELL).
Several of the world's top mobile technology leaders have joined Velti to form the ODIN Working Group, including Jumptap, RadiumOne, MdotM, StrikeAd, Smaato, Adfonic and SAY Media. The ODIN Working group is actively working with leading privacy organizations including the Digital Advertising Alliance, TrustE and Evidon to ensure the highest levels of consumer privacy. Velti won the prestigious 2011 OMMA (Online Media, Marketing and Advertising) Global Award for its Integrated Online Campaign for National Geographic's documentary, "The Last Lions," which had over a quarter million mobile consumers engaged. Most recently, Velti was named the winner of the 2012 Juniper Future Mobile Award in the mobile advertising category by Juniper Research. Juniper Future Mobile Awards are given to companies that have made a significant contribution to their sector and are poised to make considerable market impact in the future.
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The Mobile Marketing Industry
If you are a wine enthusiast, or for that matter an enthusiast in any field, your mobile device will reveal this about you because of what you search for and what you read on the internet. New mobile marketing platforms will also know which shops or retailers may be of interest you. Utilizing your mobile phone's history and current GPS location, selective marketing campaigns will begin to vie for your attention when you're in close proximity to a product they know have a rich history of reviewing. Companies will pay premium dollars to get this "in the immediate vicinity" consumer's attention, which illustrates why a technology platform in the mobile environment is very exciting to the advertising industry.
According to Maravedis, new smartphone activation is forecast to increase from 170 million devices worldwide in 2011, to 1.75 billion in 2016. That's a 10 fold increase in only 5 years, and does not include the Tablet market, for which Infinite Research is predicting a slightly less 56% compound annual growth rate for the next five years. This advertising, combined with the internet, has a major upside winter holiday season in both the US and Europe.
Our previous studies have revealed to us that companies achieving monopoly/platform positions have more of a "gutter approach" versus the individual roof shingle, which interacts only with the rain that falls on it. While gutters often remain unseen, they typically receive the same amount of rain (or in business terms, profit) as all of the shingles combined. Velti is endeavoring to be the stand alone leader and the de facto standard for this entirely new, and rapidly developing, mobile media market. Along with better and more complete services, Velti is orchestrating outstanding barriers to competition, while being able to achieve excellent margins and economics of scale as a result of their many strategic partnerships.
There is a lawsuit against Velti, similar to suits against several other advertising firms, by Augme Technologies (AUGT.OB). This type of litigation is very common with technology companies, in which numerous competitive companies are targeted for patent infringement, many of which have much bigger financial war chests, such as Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL). Augme is losing money rapidly and may not want, or maybe can't afford, a long term legal battle over US legal rights with a company such as Velti considering the small amount of US business Velti has compared with others that Augme is suing.
Both the organic growth and the acquisition pace of Velti have been fervent, and there are concerns about their management's ability to maintain a long term focus and solid execution within this industry's enormous tidal wave ride. It appears the employees regard their overall working condition as average, when employment is hard to come by. If this company is to continue growing such a blistering pace, it will need to improve and streamline internal operations. With that said, they do plan on significantly reducing their capex in the second half of 2012 and throttle down their aggressive build out. Perhaps this reduction would also allow them more time to implement US operational improvements.
The company was recently punished by investors, partly as a result of their slow collection of receivables. While this is a reflection of the advertising industry, as this revenue channel grows from 40% up to a projected 60% it will likely draw continued criticism.
The potential market for mobile advertising is enormous. With a 96% retention rate of their best clients and the average account up 44% year over year, they can boast an internal organic growth rate of over 40% before acquisitions. In the current economy, that would be a growth rate welcome by most any company. Considering that this growth also comes with increasing profit margins helps validate our belief that Velti's platform is realizing true economics of scale along with market leadership. Most notably, we see Velti as possibly having many monopolistic type advantages that have moved it from a startup company to the forefront of a tsunami growth market.
The latest Velti updates may be found here.
Disclosure: Durig Capital and certain of its clients currently hold positions in Velti, Plc.
Disclosure: I am long VELT.