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.

Synchronoss Technologies Tempers Near Term Outlook Because Of Hurricane Sandy

A lot has happened to Synchronoss Technologies (SNCR) since my previous article. Most notably, Hurricane Sandy. According to the November 5th conference call transcript, not only did they adjust their view for next quarter, Q4, but they are not giving guidance for 2013 for the time being. This is because major clients like AT&T (T) and Verizon (VZ) are allocating resources to the clean-up, and restoration of power in the Northeast United States. This is priority one, and well should be.

As altruistic as the majority of us are, we are still dealing with Wall Street, and the projected price of equities. Synchronoss is no exception, and took a hit even after they reported a very good Q3. The security was trading near $23 thirty days ago, but has since slammed on the brakes, and now crosses the tape at $18. Although it provides an important service to smartphone owners, and has a huge potential in cloud infrastructure for Tier 1 carriers, it's selling for less than 50% of the 52 week high.

Before I get into 2013, let's examine some bullet points condensed from CFO Larry Irving in the prepared statements concerning Q4.

• It is our expectation that AT&T will be down slightly both on a sequential and a year-over-year basis in the fourth quarter (it should be noted that Ma Bell constitutes about 50% of revenues).
• We do not believe it is prudent to expect that Synchronoss will achieve the upper end of the guidance range we established prior to the hurricane. Due to this uncertainty, we are providing a wider range than in previous calls.
• This translates into a full-year results as follows. Total non-GAAP revenues in the range of $269.3 million to $273.3 million, representing growth of 17% to 19%. We are now targeting non-GAAP EPS of $1.05 to $1.08.

At first glance, you can see why Synchronoss sold off. However, when doing basic arithmetic on the full year projections, we get a stock that is not selling for a bargain, but at a reasonable valuation: P/E of 18, growth at 18%, and PEG rate of one.

The reasons I believe the stock is under pressure, besides the reduced Q4 guidance, is threefold:

1. The mobile technology sector in which it resides is currently out of favor, which instills negative investor psychology. Just look at valuations of Apple (AAPL) and Google (GOOG).
2. Because of Hurricane Sandy, Wall Street's perception of an additional delay in 2013's cloud infrastructure initiatives by AT&T and Verizon. This is above and beyond the diminished expectations for Q4.
3. The upcoming battle between the carriers (where Synchronoss has an alliance), and the mobile smartphone/tablet companies like Apple, Google and Amazon (AMZN) for the privilege of backing up your smartphone data. Think pictures, videos, music, and text, just like Apple's iCloud.

Regarding the mobile sector being out of favor, I believe it is just a question of time before investors rotate back into stocks like Apple and Google, and the securities that support their portable products. Smartphones and tablets aren't going away soon. The flavor of the last two quarters has been dividend paying, "risk off" equities. My impression is that will soon fade, especially when the fiscal cliff is behind us.

Service Providers like AT&T and Verizon may very well delay cloud infrastructure developments, but it won't be for very long. AT&T already moved ahead with their initial cloud deployment with Synchronoss. At Verizon, Synchronoss made tremendous progress in building out the infrastructure necessary to support the rollout of the consolidated cloud services next year. Another key cloud buildup is over the Atlantic where Vodafone (VOD) and Telefonica of Spain are partners with Synchronoss.

Concerning the turf war between the service providers and the mobile device companies for the right to back up your wireless data, that is an area that could be very lucrative for Synchronoss. CEO Steve Waldis articulates that the basic synchronization, backup, and securing content that they currently excel in is like table stakes. What will really take revenues and earnings to hypergrowth, is by commanding a large market share in the storing of all smartphone and tablet data. This is what the carriers are working on with the company.

According to Mr. Waldis:

During 2012 we have seen the initial adoption of comprehensive cloud platforms, and the fleshing out of carrier cloud strategies. As we look towards 2013, we see carriers moving into production with cloud platforms, fine-tuning their go-to-market strategies, and then ramping adoption. Then in 2014 we begin to realize the full potential of the cloud growth as all the platforms and marketing programs and devices are in place, and at full scale for the entire year.

This will come to fruition if the carriers have their way. However, Apple, Google and Amazon are already there, albeit on a much smaller scale. To the best of my knowledge, what differentiates the carriers from the device makers in their storage strategies, is that carriers will be device agnostic. For instance, if you utilize iCloud, that's just for Apple products. The Tier 1 service providers are operating system neutral, and want to take full advantage of consumers who utilize their "family plans".

In The Art Of War, Sun Tzu said: "The best strategy in war is to win without a fight.". If only it were that easy. This brewing storm between the carriers and smartphone manufacturers is not to be taken lightly. Picking the winners will ultimately lead investors to a bigger bankroll. My bet is on Synchronoss Technologies and the carriers. However, this is not to shortchange Google or Apple, I just think their focus is too narrow. At least Apple's is.

Fusion-IO: It's Not Just About Big Data, But About Fast Data

If you opened up a time capsule going back to my last article on Fusion-IO (FIO), you might surmise that not too much happened regarding share price. After all, the stock currently crosses the tape at roughly $25, and that's where it stood three months ago after announcing a killer quarter (it was their last quarter in fiscal year 2012). That may make sense since revenues were up only 11% sequentially in their most recent report with a lot of expectations for the security.

However, the stock was not stagnant. Just the opposite. It was in perpetual motion. Because of a showstopper Q4, and top notch technology, the Wall Street press has treated this company like royalty. The result was a moving target that topped the charts at $32, only to come back down to what I continue to believe is an inflated level at $25. Although I like the company, especially with a hired gun like Steve Wozniak as Chief Scientist, I still maintain this is a risky equity. Let's examine the 2013 Q1 conference call, and see what you think.

First and foremost, two customers, Apple (AAPL) and Facebook (FB), represent approximately 56% of revenues. Hewlett-Packard (HP) accounts for an additional 14% of sales, which brings us a total of 70% on the top line for just three companies. That is not diversification, although these are premium clients to have on the ledger. Many of Fusion-IO's enterprise end-users fulfill their products through OEM Hewlett-Packard. "Hyperscale accounts" like Apple and Facebook are handled by the in-house marketing staff.

Another item I consider somewhat dicey is that earnings from Q1 2013 were substantially lower than a year earlier. As presented in the press release: "Net income for the fiscal first quarter of 2013 was $3.9 million, or $0.04 per diluted share, compared to net income of $7.2 million, or $0.07 per diluted share, in the fiscal first quarter of 2012.". This may have accounted for the sell-off after the conference call.

Going forward to next quarter, revenue is expected to be flat sequentially. Stock pundits like Jim Cramer use the expression "under promise, over deliver" when describing the low balling tactic some CEO's use to goose an equity's value, but I don't think this is the case for Fusion-IO. Too many times during the conference call, company executives used expressions like:

• A macro environment that by all accounts appears to be growing more tepid.
• Visibility is more difficult in this kind of an environment. And so our customers provide a little less tail, long tail if you will, as to what their deployment schedules are.
• The macro environment is a little more attentive than it was six months ago. And our customers do in essence provide a little bit less visibility in the market. So while we know we're not immune to whatever the macro environment is up to, our solutions are more compelling in a tightening market scenario.

An additional tidbit that makes me wary about near term valuation of Fusion-IO is that revenues are back-end loaded. Full year sales growth for the company is expected to be in the range of 45 to 50%. We've already established that first and second quarters are practically flat, which means they'll really pour it on in Q4. I think that's great for the company, and the market is a forward looking mechanism, but a lot can happen in 3-6 months. What I'm suggesting is that the stock could go lower, not just on macro business conditions, but for company specific reasons.

So what's all the hubbub about the company? Their technology. It is projected to decimate the competition. Their two big clients, Facebook and Apple, are the upper crust of Silicon Valley, and primarily use leading edge technologies to remain ahead of the pack. Like the title of this post suggests, Fusion's software is faster than their rivals, and considerably more cost effective.

They produce an open system that runs on a majority of servers in the data center. With Fusion-IO's ioTurbine, Direct Cache and ION data accelerator software products, they are able to improve the capabilities of storage platforms including HP's 3PAR, Cisco's (CSCO) Blade Server, IBM's (IBM) D series, Dell's (DELL) Compellent and NetApp's (NTAP) ONTAP. In fact, during the second half of the year, recent marketing partnerships with both Cisco and NetApp will further expand Fusion's global footprint.

No stock gets a free pass, and Fusion-IO is certainly not an exception. Just look at what happened to the security after this past quarter when everything seemed copacetic. If we examine some of the measurables as provided by Seeking Alpha, we can see that the short float is 30.4%, forward p/e ratio is 222, price/sales is 5.5, and price/book is 5. That to me is a dangerous stock.

Although a legit company, it is no longer a favorite of the momentum crowd, which may put additional pressure on the equity because of negative investor psychology. Investor psychology can go both ways. My impression is that if you are a patient investor, you may be able to purchase this stock at a more advantageous price.