Saturday, November 17, 2012

Velti's Q3: Why The Doomsday Scenario?

Like just about everybody else these days, investors tend to live in the moment. This is probably due to the 24/7 Twitter world we live in, but if you take a step back, you may be less inclined to suffer from investing myopia. Case in point: Velti (VELT).

After reporting Q3 financial results, the security sold off considerably because although Velti met revenue expectations, they were six cents short on earnings. This equates to a loss of three cents a share as opposed to earning three cents. Many large companies beat on earnings, and come up short on sales. For small companies, it's just the opposite. Despite that fact, Velti got crushed, down about 35% to $4.50 the day after the presentation. In addition, the equity has sunk approximately 60% from $10 since the major indexes started correcting in mid September.

According the the Q3 conference call transcript, Velti gave Wall Street what they've been asking for: a solid business plan for lowering DSOs (day sales outstanding). Elevated DSOs caused the shares to sell off last quarter, only to rebound when the company announced they signed a huge yet-to-be-named brand as a client. DSOs for Q3 were 242 days, very high by conventional standards, but an improvement over Q2.

To combat this problem, CEO Alexandros Moukas announced a divestiture of assets in the Balkan countries, select North African and Middle Eastern geographies, and his ancestral homeland of Greece. DSOs in these areas were approximately 450 days, and have heavy capital requirements. The slate will be swept clean in 2013, and DSOs are projected to be under 180 days by the end of the year.

If we examine guidance for Q4, and full year 2012, I believe you are getting a bargain at $3.85/share. CFO Wilson Cheung articulated:

Starting with the fourth quarter, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal developed software capitalization will be in the range of $97.1 million to $113.1 million, and adjusted EBITDA of $50.8 million to $59.8 million.

From a full year perspective, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal software development capitalization will be in the range of $270 million to $286 million, and adjusted EBITDA of $68.3 million and $77.3 million.

With 65 million shares outstanding, this gives us a market cap of $250 million. As just stated by Mr. Cheung, revenues are projected to be around $278 million, which equates to a price/sales of under one. This is for a company that is growing revenues at approximately 62% this year, and is projected to be 35% in 2013.

Earnings for Velti are back-end loaded for the fourth quarter. The company will be on the plus side for not only Q4, but 2012, too. Yahoo Finance earnings estimates for the current year are $.60, with $.64 projected for the last quarter of this year. That's a full year P/E Ratio of 6.5. Very reasonable, if not a blue light special. The big problem here is that throughout the year, earnings are very lumpy. Not what pleases the average investor, or Wall Street. However, this is the business billing cycle for the advertising industry.

So why would Velti be selling at a reduced price? A few things:

  • Macro Environment: The S&P 500 is down over 10% since early September, taking a majority of equities down with it (Velti is not a member of the index). Issues like the Fiscal Cliff are putting a lot of pressure on the markets, and stocks in general.
  • Small Caps Are Out Of Favor: The "risk off" trade is in vogue right now. Dividend paying stocks are the flavor of the month. When the Fiscal Cliff issue is resolved, or compromise from both parties appears to be happening, then the "risk on" companies will surge to the forefront.
  • Wireless Stocks Are Out of Favor: When you see a quality company like Apple (AAPL) down 25% in two months, you can infer the wireless sub-sector is the fall guy. The fever has been broken on the companies having anything to do with smartphones and tablets. Velti is a major player in mobile marketing and advertising.
  • High Frequency Trading: Selling begets more selling. Fundamentals have very little impact on the trading bots that constitute 70% of all the action on the exchanges. Once a stock gets in motion to the upside, or to the downside, there is a herd mentality, especially with the cyborgs.
Investors got religion over wireless stocks last year, and I continue to believe they will be leaders, as opposed to laggards once the fiscal cliff issue is behind us. I'm betting they will defy gravity, and have placed substantial bets on the sector with equities like Velti. Besides making headway on the fiscal cliff, there two other catalysts that may propel the company forward in the next few months.

Number one is Apple. Apple is like a glowing ember in a dry forest, just ready to ignite the tinder that surrounds it. The same holds true with Google (GOOG) and the Android operating system. If either one of these companies reports business is coming apart at the seams for their handheld products, it may generate a halo effect for stocks that depend on the sale of wireless devices.

The second catalyst would be a confirmation of just who this new client is, that supposedly signed the biggest mobile advertising contract ever with Velti. Twenty-seven million dollars for a two year deal. Velti is holding an analyst meeting at the end of January, and stated they would like to make an announcement there, if not sooner via press release. You can rack your brain guessing who this may be, but it could be anybody.

You won't find stocks like Velti covered in Investors Business Daily because it sells for under $10. Stocks sell for under $10 for a reason: they are dangerous. As an investor, you should be aware of this, and use judgement and caution. I'm more than eager to march in Velti's parade because I believe in the company, and the wireless sector. Even after a really rough day on Thursday, Velti was down again on Friday, so the final capitulation may not be in.