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. They are 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, they are a globally positioned organization, and their 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 they are working on it by reducing a proportion of their 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 theses mini banner ads. Revenues for the quarter were $58.7 million, growth of 71%, compared with Q2 2011. Full year guidance for 2012 sales is $285 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. They continue to believe that revenue from the U.S. will double this year, making the U.S. their 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. They managed to grow their 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, they signed new agreements with Disney (DIS) and Nestea. In addition they also signed incremental agreements with Toyota (TM) and Calvin Klein.
- Another major achievement in the second quarter was their 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.
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 they do have a blowout fourth quarter. I like their 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 they are a leading edge technology company which includes the ESPN family of networks. A big presence in the United States is also in their favor because this is where the majority of multinational corporations reside. If you are interested in doing business with Velti, or want to know more about their 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 their clients.