Velti Plc (VELT) recently announced their earnings report on August 14, 2012. There have been about five Seeking Alpha articles written recently regarding Velti's performance; mostly with positive feedback. Upon reviewing the articles and having some questions of my own, I decided to reach out to Velti and gain some insight with respect to two of Velti's "hot topic" concerns: its cash flows and days sales outstanding, or DSOs, covering developments over the past half-year. Additionally, I followed up regarding some other points of note about the company.
Collection Of Receivables And Velti Payments
The August 18, 2012 article: "Velti: Baptism By Fire For a Young Company", provided a comment regarding a forum post discussing Velti's late payments from its U.S. Mobclix segment. The comment was made by CDBA.
The majority of the discussion is centered around Velti's inability to meet its Mobclix payment contract terms of 90 days. Many developers accuse Velti of being as late as three months on its payment responsibilities (16 pages of comments). Developers have threatened to leave Velti for other companies including Admob, owned by Google, Inc. (GOOG), and Mobfox, among others. Many comments, however, also gave Velti credit for their services relative to developer needs.
Velti states that the issue Mobclix is currently facing is isolated to Mobclix only. In the past, Mobclix was able to pay developers on a more timely basis. Since being acquired in 2010, the process for collections and payments for the Mobclix segment has been independent of Velti's integrated process.
Velti is restructuring its collections of receivables in order to improve its DSO which will likewise improve Velti's payable responsibilities. Currently in the U.S. segment, payment collection times range from 45-75 days to 90-180 days. This explains and justifies the complaints from the post. However, not all payables are being delayed and Mobclix collections and payments have been integrated into Velti's comprehensive process. Velti estimates that the issues with the Mobclix payments should be resolved by the fall of this year.
Additionally, not including the United Kingdom, UK, the average European collection for receivables takes roughly 300 days. The UK's collection timing is more similar to the U.S. On the Europe front, existing and new customers are being asked to restructure payment terms including interim billing adjustments for some payments to be collected within a three-month period and the remaining balance to be collected at the end of the working payment term.
As U.S. and UK revenues continue to increase (Americas 126% and UK 189% year-over-year from the most recent earnings report) and the restructuring process in Europe progresses, DSOs will improve. Velti has made a few presentations and spoken to this at a higher level over the past few months. Please refer to the most recent second quarter earnings announcement transcript and/or slideshow presentation for additional information.
Barriers To Competition
Velti possesses five established patents and has 21 pending patents to protect their algorithms and technology platforms. Velti has over 12 years experience and provides an exchange platform for both mobile advertising and marketing. They have successfully launched over 4,000 campaigns and have reached roughly 1.5 billion end users. This provides Velti with a superior amount of data and information to provide services to future and existing customers to develop a wide variety of mobile campaigns. To date, there is not another company that possesses this breadth of experience and service.
As Velti continues to scale, third-party costs will continue to rise. These costs are required as part of the early stages of developing campaigns and are billed in advance. The key metric to focus on is that third-party costs should be rising at a slower growth rate versus revenue growth.
This has not been the case over the previous eight and five quarters. Velti's revenues have grown roughly 13% and 15% sequentially over the past eight and five quarters, while their third-party costs have grown roughly 13% and 16% over the same period. Over the past two quarters, third-party costs have slowed to roughly 8%.
Risks To Data And Information
Velti does not collect primary data such as social security numbers, personal addresses, etc. These are collected by Velti's customers, usually merchants. Velti collects data and information related to consumption activities such as a consumer's preference for buying coffee from Starbucks Corporation (SBUX). Velti has the ability to know how often consumers make purchases and for which products. Velti also is able to collect mobile device identification numbers used to engage in consumption activities. Velti maintains five different data centers which provide 24/7 monitoring and maintain the high-standard level of data security.
Velti provides unique investment exposure to the mobile device market. The potential for Velti to continue to scale its revenue is significant as growth in the U.S. and UK have shown. The company is displaying improvement in DSOs. This trend should continue to improve Velti's collections and payments. The third quarter announcement will provide further transparency and details on whether Velti has contained the payment issues for Mobclix, and should show continued DSO progress.
Disclosure: I am long VELT.