Veritone, Inc.
Q1 2019 Earnings Call Transcript

Published: 9 May 2019

[Operator:]

Good afternoon. Welcome to Veritone's First Quarter 2019 Earnings Conference Call. I'm Brian Alger, Senior Vice President of Corporate Development, Investor Relations. After the market closed today, Veritone issued a press release announcing results for the first quarter ended March 31, 2019. The press release is available in the Investor section of our website. Joining me for today's call are Veritone's Chairman and CEO; Chad Steelberg and the Company's CFO; Pete Collins. Following their remarks, we'll open up the call for questions. Please note that certain information discussed on the call today will include forward-looking statements about future events and Veritone's business strategy and future financial and operating performance, including its expected net revenues for the second quarter of 2019. These forward-looking statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the statements. Certain of these risks and assumptions are discussed in Veritone's SEC filings, including its annual report on Form 10-K. These forward-looking statements are based on assumptions, as of today May 8, 2019 and Veritone undertakes no obligation to revise or update them. In addition to the Company's GAAP financial results, during this call we'll be presenting and discussing the Company's earnings before interest expense, depreciation, amortization, and stock-based compensation, adjusted to exclude certain acquisition, integration, and financing related expenses or adjusted EBITDA, which is a non-GAAP financial measure. A reconciliation of the Company's adjusted EBITDA to its net loss is included in the Company's press release issued today. Finally, I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of the Company's website at www.veritone.com. Now I'd like to turn the call over to our Chairman and CEO Chad Steelberg. Chad.

[Chad Steelberg:]

Thank you, Brian. Welcome everyone and thank you for joining us today. I'm very pleased with our strong financial and operating performance in the first quarter. Our revenue was a record $12.1 million, an increase of 177%, compared with the first quarter of 2018, reflecting both the contributions of our recent acquisitions and organic growth. We exceeded our forecasted revenues and delivered new products, which continue to expand our customer base and overall TAM, while improving our adjusted EBITDAS loss rate. Last month our Attribute application received a Product of the Year Award in the Best New Radio Technology category at the 2019 NAB Radio Show. Also our IDentify and Redact applications, which serve critical needs in the law enforcement community, are rapidly driving new opportunities at home and abroad. And finally, our Veritone One advertising business posted almost 40% organic growth year-over-year as it continues to leverage aiWARE to differentiate its advertising services. On the whole, Veritone's 2019 is off to a tremendous start. On last quarter's call, I reviewed the progress we have made on the key objectives we outlined during our IPO in 2017. I am pleased to report that progress is continuing and in many cases accelerating. Recall that our first objective was to increase the non-advertising component of our revenue mix from 5% at the time of our IPO to a target of 80% or higher. We said last quarter that we expected our aiWARE software and services revenue to exceed 50% threshold by the end of Q2 of this year. I am pleased to report that we achieved this goal a quarter early. Our total aiWARE's software and services revenue in the quarter were $6.4 million, up 29% sequentially and 117% versus the first quarter of 2018. We also made good progress in diversifying our SaaS revenue in the first quarter, with more than 20% of our SaaS revenue generated outside of the media and entertainment vertical. The second objective was improving our adjusted EBITDAS loss rate. I am pleased to report that we saw improvement here as well, with an adjusted EBITDAS loss rate of 77% versus 82% last quarter and 233% in Q1 of 2018. As we said in February, we expect to continue to reduce our EBITDAS loss rate on a year-over-year basis going forward. We continue to gain leverage and synergies from our M&A strategy, the third objective. Wazee Digital had a strong first quarter with an exciting NCAA basketball tournament in March. This acquisition is continuing to open new opportunities for Veritone as we integrate their capabilities. Later this month, we'll be rebranding Wazee Digital as we pursue our integrated solutions for content production, management, and monetization. In addition, Performance Bridge and Machine Box have been instrumental in expanding our TAM. Machine Box has enabled our new IDentify and Redact applications, as well as our ability to generate micro models. And Performance Bridge is driving new relationships and opportunities for us in the podcasting and on-demand content creation space. From a product and technology perspective, we have made enormous progress in the past six months. As we discussed at our first Analyst Day in March, our aiWARE operating system is now enabling multiple applications that address specific workflows and use cases across all three of our current verticals. We have introduced three new products, Attribute, IDentify, and Redact that leverage many of the core capabilities of our Essentials application suite and our aiWARE operating system that were deployed initially for our media and entertainment customers, and more are in development, including our Illuminate application for the legal and compliance vertical. If there is one thing that we want investors to take away from this afternoon's discussion is that we are seeing an operational inflection point in our business that we think validates the strategy we have been working to implement over the past five years. I said earlier that more than 20% of our first quarter SaaS revenue were generated outside of the media and entertainment. In our federal and state and local law enforcement markets, we are generating revenues from two new products, IDentify and Redact. And we will soon be releasing our Illuminate application for the legal and compliance market, which enables users to significantly increase the efficiency and effectiveness of their early case assessment and e-discovery processes. These products offer both cloud and hybrid deployments, and are being sold through multiple channels, including inside sales, outside sales, and system integrators in the United States and abroad. While we are pleased with the strong financial start we had in Q1, we're even more excited about the breadth of engagements that we are seeing from our new applications. Given our progress to date, I want to take a moment to outline how we are thinking about our current product offerings and how we plan to expand and leverage their use going forward. At the core of everything Veritone delivers is our aiWARE operating system, which enables users to orchestrate a constantly expanding ecosystem of AI engines, including Veritone's proprietary engines, engines from cloud infrastructure providers, curated niche engines and more using a single, common platform architecture. Increasingly through our Machine Box acquisition, we now tune and customize these engines to better meet end-users' needs, enabling new applications and use cases. Additionally, with our custom-built adapters, we are now able to ingest virtually any form of data

[Pete Collins:]

Thank you, Chad. And good afternoon, everyone. As Chad mentioned, our first quarter results were quite positive driven by net revenue growth and management of operating expenses. From my seat, the first quarter headline is that our organic net revenues increased by 36%, while our operating expenses, excluding the businesses we acquired, stock-based compensation, and depreciation and amortization, increased by just 6%. This shows the operating leverage we can generate now that we have invested in aiWARE for the past five years. First, I'd like to review our financial highlights of the first quarter of 2019 as compared with the first quarter of 2018. As a reminder, in the third quarter of 2018, we acquired three companies

[Chad Steelberg:]

Thanks, Pete. We are very pleased with our start to 2019. The takeaway from our standpoint is that the operational inflection points of product, channel, and revenue diversification we have discussed since our IPO are happening. This early momentum is encouraging us to move forward aggressively to pursue the huge opportunities we see for our technology. In the upcoming months, we expect to see further revenue diversification across products, geography, verticals, and channels. Over the next several weeks, we look forward to connecting directly with our investors and analysts. Next week we will be at the Oppenheimer Emerging Growth Conference in New York City. Then on the week of May 29, we will be attending the Craig-Hallum, one-on-one conference in Minneapolis. Finally, we will be in London the week of June 18 for the 5th Annual ROTH London Conference. To arrange meetings at any or all of these events, we encourage institutional investors to reach out to their respective brokers or please contact Brian with questions about these events. Operator, I would like to begin the Q&A session.

[Operator:]

[Operator Instructions] Your first question comes from Chad Bennett with Craig-Hallum. Your line is open.

[Chad Bennett:]

Hey, guys. Great job again on the execution and beat in the quarter and good to see that coming from both sides of the business.

[Chad Steelberg:]

Thanks, Chad.

[Chad Bennett:]

So maybe for Chad. It seems like I mean, M&E is doing great, but it seems like there's something going on under the hood in terms of momentum behind the other verticals and I assume it's mainly government driven but maybe it's legal also. And specifically for your IDentify and Redact applications kind of what's really driving? I mean, your proof-of-concepts you say are going to double this quarter. Your revenue coming from these new verticals is now becoming real. What's really driving the government growth and maybe the traction you're seeing, whether it's proof-of-concepts or overall revenue there?

[Chad Steelberg:]

Yes, it's actually a couple different factors. On the federal side, the growth that we've seen in Q1 is really related to the penetration into the channel market, specifically with some large global system integrators that have been working both domestically and internationally at both the federal and the local level where they're applying aiWARE to solve some really difficult challenging problems. And we're now into the contracting phase with some of the partnerships they've brought us. On the local level, specifically the state and local law enforcement, the two applications IDentify and Redact are really seeing fantastic traction, both in terms of the efficacy, in terms of being able to identify suspects through video-based surveillance data, matched up against known offender's databases. I think since inception now we're well over a 100 suspects that have been successfully identified with the technology in just a couple initial pilots. And the second is really some of the legal challenges with regards to the redaction application. So you're now seeing legislation come down in California, Ohio, and many other states which are now from a public information disclosure perspective are forcing law enforcement to – on a far more rapid timeline be forced to disclose a redacted version of their audio and video-based evidence. And so this new compliance law is really creating a fantastic opportunity that Veritone's new redaction application is fitting perfectly with that market demand.

[Chad Bennett:]

So is that – so that's new to me. Is there a timeline or a deadline that they have to be in compliance with that video redaction standard, I guess?

[Chad Steelberg:]

Actually there is. There's actually two laws that went into effect in the state of California. I don't have the numbers right in front of me at this point in time, but I can probably look them up. But one is actually coming live in July, goes into effect and rapidly accelerates – I think it's less than 30 days before actually fines start to – actually it's 45 days before fines go into effect if they can't properly redact and disclose that evidence.

[Chad Bennett:]

What are their options other than redact, Chad?

[Chad Steelberg:]

There's number of applications historically that have been used in this process, all involving heavy manual labor, specifically from products like Adobe Premiere where law enforcement officials have to sit down and manually track faces and other personal – personally identifiable information that they'd like to redact from the videos.

[Chad Bennett:]

Right. Yes, okay. Great. That sounds really interesting. And then secondly, I think at least from my standpoint in talking with investors, there's some confusion about the status of your formerly I think very large shareholder, Acacia and kind of where we sit today from an ownership standpoint there. Are you guys comfortable disclosing kind of where they're at and what form of equity they own these days?

[Pete Collins:]

Chad, I'll take that. This is Pete. So Acacia filed a regulatory filing as of the end of March recently and indicated that their total interest is 1.7 million shares. However, that includes 1.1 million warrants that are priced at $13.61 a share. So the number of shares that they actually hold is around 600,000 to 650,000, which is basically equal to about one day's trading from an average perspective in our stock. So the amount of shares that they hold, excluding the warrants, has been decreasing since back in August.

[Chad Bennett:]

Okay. No, that's great color. I think it'll be helpful. One last one for me, maybe for Pete. Pete, as we kind of annualize I guess on the acquisitions in the September quarter, maybe more so on the December quarter, how should we think about the SaaS aiWARE business growth from an organic basis as we look at it when we lap these transactions? And I'll hop off. Thanks.

[Pete Collins:]

Well, last quarter our SaaS growth was up 29% on an organic basis. And as Chad was just describing to you, we did pick up a good amount of revenue in the government sector in the first quarter. It was about 20% of our revenue in the quarter, which was very nice. But we're seeing traction now with the development from a marketplace perspective on Redact as well as IDentify. The additional pilots and proof-of-concept that we're working on there, the trials that we've got indicate the traction that we've got. So I'd say that, Chad, from a marketplace perspective, we're seeing very good traction across all three verticals in SaaS. And we don't see any reason why that wouldn't continue going out when we start to anniversary the acquisitions of Wazee and the other two businesses in the second half of the year.

[Chad Bennett:]

Thanks, guys. Nice job again.

[Pete Collins:]

Thank you.

[Chad Steelberg:]

Yes. Thanks, Chad. Chad, hey, I was able to look up those two bills, so for our investors and for your own identification. In California, for example, the two new laws were Senate Bill 1421 and Assembly Bill 748, and they've repealed prior laws that treated most types of law enforcement records as confidential, expanding the types of records that law enforcement agencies are now required to release in response to public records requests as well as shortening the time deadlines for their releases. So we're seeing similar laws to that actually being enacted both in Nevada and Ohio, and we expect it to continue.

[Chad Bennett:]

Perfect. Thanks, Chad.

[Operator:]

Your next question comes from Mike Latimore with Northland Capital. Your line is open.

[Unidentified Analyst:]

Hi. This is Vijay Devar for Mike Latimore. Thanks for taking my question. I'm interested in knowing more about your combined Wazee and aiWARE offering. Would you speak a little bit about the number of days you were able to land during the last quarter and impact on the ASPs for this combined offering?

[Chad Steelberg:]

Yes. I mean, at a high level the integration has gone extremely well. Especially pleased with the way the teams have come together. In fact, two of the executives at Wazee are now core parts of our product and go-to-market sales team. The Wazee applications themselves now have the capabilities to have real-time cognitive search integrated into their data stores, which expands the capabilities of a customer looking for specific audio and video-based clips at events such as the NCAAs and other major events like golf, et cetera. So again part of our core initiative there was not only to be able to ingest more content at a quicker rate, which we've accomplished, but also to expand and provide better transparency into identifying the appropriate clips in real-time.

[Unidentified Analyst:]

Okay. Did you – were there any deals won during the quarter or how does the pipeline look?

[Chad Steelberg:]

Yes. The pipeline for the business continues to expand nicely. We're cross-selling both to our existing customers as well as upselling aiWARE products to Wazee's customers. So the interest was very strong. We continue to see growth throughout Q1 and expect that to continue for the balance of the year. In terms of new customers, again we're not making comments specifically on customers on this call. But when we do and we have the capability through press releases.

[Unidentified Analyst:]

Okay, great. Thank you.

[Pete Collins:]

Thank you.

[Operator:]

Your next question comes from Darren Aftahi with ROTH Capital Partners. Your line is open.

[Darren Aftahi:]

Hey, guys. Thanks for taking my questions. Nice quarter. I want to dig in a little deeper on Attribute. Chad, maybe can you just talk a little bit about the traction there and what you're seeing? And then how that kind of transcends the ability to cross-sell both the DMH as well as with Veritone One, just given how that kind of connects? Second question on Illuminate. Just want to get some clarity. How many customers are either currently are going to be in beta when that gets launched or paid pilot? And then, Pete, you rattled off some numbers in your prepared remarks I think about aiWARE with SaaS. One was government and I think the other was media and entertainment. If you just repeat those numbers that that'd be helpful. Thanks.

[Chad Steelberg:]

Yes, perfect. So talking about the Attribute application, again, winning the NAB Product of the Year in Radio Award was spectacular for us earlier this month. I think that's a testimony to the efficacy and product fit from market perspective. We've signed a number of different large broadcasters. We have a number of others still in the pipeline in process and contracting. I believe this is a game-changer for broadcast based media, both for radio and for television, not only domestically but abroad. It really puts broadcast media on an even playing field with its digital counterparts, such as Google, Yahoo!, et cetera, in terms of being able to measure the true impact of the campaigns that are running across their network, both in terms of knowing exactly when the ad runs but also correlating that back to the actual response that's happening on the websites for those advertisers. In terms of how that application actually impacts the Wazee side, it's not really a tight correlated fit to the DMH product. It's obviously having a tremendous impact in terms of Veritone One. And I think Veritone One doesn't have anything in terms of secret sauce, in terms of better non-exclusive access or better access to Attribute. It just knows how to leverage that product and the great results based upon the campaigns that Veritone One are placing in the intelligence. The difference now is it can be measured by our clients, and the value truly quantified in terms of the benefit that it's exceeding what other agencies can produce. That makes sense?

[Darren Aftahi:]

It does. I guess where I'm going with the DMH is, given you have that kind of unique set with attribution with someone who is advertising and effectively selling inventory. If they own content, are you seeing any scenarios where they're actually being attracted to become kind of both the content and the advertising side, and hence you're going to look out the whole ecosystem, or maybe it's a little bit too early for that?

[Chad Steelberg:]

Yes, I think it's still too early for that. I mean Attribute right now is really being used by the broadcasters themselves in terms of being able to help advertisers quantify the value that they're providing to their advertising clients. In the case of the DMH, it's really about being able to use aiWARE to search and identify the appropriate content in near real-time and deliver that to the appropriate audience. Attribute doesn't necessarily factor into that equation at this point in time. To move on to your second question, though, Illuminate, we've run a number of beta tests in Q1. The results have been quite positive. We expect to see, call it, half a dozen customers coming onto the platform in some type of paid pilots or unpaid pilots in Q2 as we work out some of the go-to-market issues and really expect from a revenue standpoint that to gain traction in Q3.

[Pete Collins:]

And Darren, let me pick up the question you had about the numbers I was rattling off. Let me see if I can go back and go over it a second time. So on our organic SaaS business, a year ago our revenues were $1.3 million, and this year they were $1.6 million. But a year ago, they included about $600,000 from the legal and compliance vertical and we only had $85,000 in that vertical this year. As you know, we had called out that there was a large project in the first quarter last year. So what drove the increase of $300,000 was really about $900,000 of increased revenue across both the media and entertainment and the government verticals. So in media and entertainment, it's a combination of new clients as well as the land and expand with existing clients and that delivered about $429,000 year-over-year increase or a 68% increase. And then on the government side, it was over $400,000 of revenue primarily from three pilot projects with the global system consulting firm – global consulting firm. Two of those were in the UK and one was in the U.S.

[Darren Aftahi:]

Great, thanks.

[Pete Collins:]

Yes. Thank you.

[Chad Steelberg:]

Thanks.

[Operator:]

[Operator Instructions] There are no further questions at this time. I will now turn the call back over to the presenters.

[Chad Steelberg:]

Thank you for joining us on today's call. We want to thank our employees, partners, and investors for supporting us as we pursue our mission of building the AI operating system of the future. We look forward to updating you on our progress on our next call. Operator?

[Operator:]

This concludes today's conference call. You may now disconnect.