Velti (VELT) is a young company in the nascent mobile advertising and marketing industry. Alexandros Moukas wears a lot of hats for the organization: Co-founder, CEO, Executive Director, and Chairman of the Executive Committee. I imagine taking a company from a bootstrap business to a publicly traded entity is a lot like parenting; no matter how much studying you do, there is nothing like on-the-job-training. Right now, Mr. Moukas is getting a real education in what it's like to be in the public eye of a back-end loaded industry like Madison Avenue.
Traditionally, many advertising agencies and marketing departments allocate their yearly budgets in the late Fall, near the end of the calendar year when they know how much they have to spend for the next twelve months. As a result, Velti's earnings tend to be lopsided. Investors don't look long term in today's world. They're going quarter to quarter, which is why the stock price is under pressure. My impression is that if you are patient, you may very well earn a decent sum with this company. Full disclosure, I'm long the stock with my average price of $9/share.
Velti does more than smartphones. It is in the tablet market, too. In the next few years, there may be six billion smartphones and tablets sold. That's a big universe. Smartphones and tablets are the heir apparent to feature phones, de facto communications tools, and you're going to need to send your marketing message to the end user somehow. Although Velti is on top of a very small hill, it is a globally positioned organization, and its platform can reach 4.3 billion consumers in more than 70 countries.
The stock has been in the limelight a few times in its short 18-month trading history, only to peter out and become persona non grata for a variety of reasons. In Q1 of this year, Velti sold off because Wall Street was concerned about receivables, or DSOs (Days Sales Outstanding), being too elongated. The Q2 DSOs were reduced from 272 days in the prior quarter, to 266 days. This area still needs improvement, but the company is working on it by reducing a proportion of its business that comes from "legacy activities" in high-DSO areas. Velti is also executing internal process improvements to combat the problem.
Another reason why investors may have kept the stock at arm's length is the negative perception of mobile advertising by financial television pundits. I've heard from more than one larger-than-life commentator on CNBC that the ads on mobile devices are too small to click, unlike their older sibling, the browser banner advertisement. I disagree with this theory. By the sheer volume of smartphones and tablets being bought, you are going to get people engaging with the advertisements.
Looking at some of the finer points of Velti's Q2 conference call, my take is that individuals may be clicking on these mini banner ads. Revenues for the quarter were at $58.7 million, a growth of 71% compared with Q2 2011. Full year guidance for 2012 sales of $285 million on the low side, and the high end is $296 million. Somebody is connecting with the advertisements.
Here are some of the takeaways from the analyst presentation as paraphrased by CEO Moukas:
- Velti experienced 126% year-over-year growth in Americas, primarily the U.S. market, in Q2. It continues to believe that revenue from the U.S. will double this year, making the U.S. its largest country by far.
- SaaS (software as a service) revenue for the second quarter of 2012 was $48.9 million, an increase of 78% compared with $27.6 million in the second quarter of 2011.
- Despite global macroeconomic weakness, the secular growth story of the mobile channels continue to trump the cyclical market concerns. The company managed to grow its business in Europe by 30% year-over-year. It's somewhat hard to say what would that growth had been if Europe was growing by 2% or 3% a year. It would probably have been more, but it's actually very hard to quantify.
- During the quarter, the company signed new agreements with Disney (DIS) and Nestea. In addition, it also signed incremental agreements with Toyota (TM) and Calvin Klein.
- Another major achievement in the second quarter was its completion of integrations of Air2Web and MIG. MIG continues to dominate Western Europe in high-growth areas, such as real-time mobile and social interactions, as well as mobile to TV interaction.
- The competitive landscape is quite fragmented, both in terms of services and geographies. Velti's customers seek great value in having one provider that can address the full gamut of mobile services rather than having to piece together multiple solutions to address their requirements.
Wall Street liked the numbers for the quarter, and investors boosted the stock price right after the analyst presentation. However, in my mind, it wasn't enough. Velti needs some sort of propulsion system to get the stock going again, and the acceleration may be in the form of a return to positive earnings.
If we examine Yahoo Finance average analyst estimates, Velti is projected to earn $.73/share for 2012. At its current price of roughly $7.20, that gives us a P/E ratio of 10. It's also projected to grow 34% a year the next half decade. This extrapolation includes 46% for this year, and 32% for 2013. Sure, if you are investing for the current quarter, earnings were nil. Q3 is projected to be a measly $.04/share, but if we go three months further to Q4, the bottom line jumps to $.72/share. This is not an optical illusion. Velti is like a powder keg with a four-month fuse.
Traders may like the stock because of its volatility, and the fact that they can flip the stock for an instant payoff in January if indeed the company does have a blowout fourth quarter. I like the company's prospects for the next five years, so I'm hanging onto my shares unless they get bid up to biblical proportions. I'm a firm believer that the mobile sector is going to become overvalued in the next few years, much the same way that cloud computing stocks became inflated right after the market meltdown in 2008/2009.
I think the Disney win is huge because it is a leading edge technology company that includes the ESPN family of networks. A big presence in the United States is also in Velti's favor because this is where the majority of multinational corporations reside. If you want to know more about the company, check out the Velti 2012 White Paper, prepared and presented by newly acquired MIG. Without bogging you down, it gives you loads of information on mobile marketing and advertising, plus some case studies of the company's clients.
Disclosure: I am long VELT.