Veritone Inc (VERI) 2017 Q3 法說會逐字稿

Good afternoon. Welcome to Veritone's Third Quarter 2017 Earnings Conference Call. Joining us for today's call are Veritone's Chairman and CEO, Chad Steelberg; and the company's Chief Financial Officer, Pete Collins. (Operator Instructions)

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 operating performance for the full year of 2017. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in Veritone's SEC filings, including its registration statement on Form S-1 and its quarterly reports on Form 10-Q. These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, November 6, 2017, and Veritone undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call.

Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.veritone.com.

Now I would like to turn the call over to Veritone's Chairman and CEO, Chad Steelberg. Sir, please proceed.

Welcome, everyone, and thank you for joining us today. After the market close, we issued a press release announcing our results for the third quarter ended September 30, 2017, a copy of which is available in the Investor Relations section of our website.

The third quarter represented a continuation of the same strong growth and operational momentum we've achieved over the last several quarters. We experienced year-to-year growth across all of our key performance indicators; continued to strengthen and expand our AI platform, including releasing our much-anticipated aiWARE Edge, which is a part of our aiWARE operating system and the Veritone Developer Application. We also secured several new major wins for our AI platform, including iHeartMedia and FOX Sports Brasil. I will discuss these highlights in more detail in a bit later on today's call. But first, I'd like to invite our CFO, Pete Collins, to walk us through our financial results and key performance indicators for the third quarter and first 9 months of 2017. Pete?

Thank you, Chad, and good afternoon, everyone.

Turning to our financial results for the third quarter and 9 months ended September 30, 2017. Our net revenues increased 60% to $3.7 million from $2.3 million in Q3 last year. The increase in net revenues for the quarter was due to an increase in Media Agency revenues of $1.1 million or 48% and an increase of $0.3 million or 340% in SaaS licensing revenues from our AI platform.

For the first 9 months of the year, our net revenues increased 70% to $10.9 million from $6.4 million in the same period last year. The increase in net revenues was due to an increase in Media Agency revenues of $3.7 million or 60% and an increase of $0.8 million or 368% in SaaS licensing revenues from our AI platform.

Looking at our AI platform business, the total contract value of new bookings received during the quarter increased to $2.6 million from $394,000 in Q3 of last year, an increase of 571%. In addition, our monthly recurring revenue, under agreements in effect at the end of Q3, Increased 88%, year-over-year, to $135,000 from $72,000 in the third quarter last year.

Our gross profit in the third quarter of 2017 increased 83% to $3.4 million or 92% of net revenues from $1.9 million or 81% of net revenues in Q3 of last year. For the 9-month period, our gross profit increased 89% to $10.1 million or 93% of net revenues from $5.3 million or 83% of net revenues in the same period of 2016. The increases in gross profit and gross margin for both the quarter and 9-months period were primarily due to the operating leverage provided by our higher net revenue level.

Now turning to our expenses. Total operating expenses in the third quarter of 2017 increased 192% to $22.9 million from $7.8 million in Q3 of last year. For the 9-month period, our total operating expenses increased 102% to $44.0 million from $21.8 million in the same period last year. The increase in operating expenses for both periods was due primarily to higher stock-based compensation and increased investments in software development, data science and sales and marketing, as we continue to enhance our AI platform, including developing new products and functionality.

Loss from operations in the third quarter of 2017 was $19.5 million. This compares to the loss from operations in the third quarter of 2016 of $6.0 million. The increase was due primarily to the higher level of operating expenses, which included stock-based compensation of $11.7 million compared with $70,000 in the third quarter of 2016. Loss from operations in the first 9 months of 2017 was $33.9 million compared with a loss from operations of $16.4 million during the same period of 2016.

Stock-based compensation expense was $13.6 million in the first 9 months of 2017 compared with $1.6 million in the first 9 months of 2016.

It's important to note that in September, our market capitalization exceeded $400 million over 5 consecutive business days, which satisfied the vesting condition under the performance-based stock options for a total of 1.04 million shares that had been previously issued to Chad and Ryan Steelberg, under our 2014 plan. We recorded a total of $9.3 million of stock-based compensation expense relating to those options, of which $343,000 was recorded in the second quarter and $8.9 million was recorded in the third quarter upon such vesting.

Net loss attributable to common stockholders in the third quarter of 2017 totaled $19.4 million or $1.31 per share compared with $8.2 million or $3.49 per share in Q3 last year. These EPS figures are based on 14.8 million weighted average shares outstanding for the third quarter of this year compared with 2.4 million weighted average shares outstanding in Q3 of last year.

For the first 9 months of 2017, net loss attributable to common stockholders totaled $51.3 million or $5.94 per share compared with $20.3 million or $10.37 per share in the first 9 months of 2016. These EPS figures are based on 8.6 million weighted average shares outstanding for the first 9 months of 2017 compared with 2.0 million weighted average shares outstanding in the same period last year.

Now turning to our balance sheet. At the end of the quarter, we had cash and cash equivalents and marketable securities of $60.4 million and no long-term debt.

Next, I'd like to shift gears to our key performance indicators, or KPIs, for both our Media Agency business and our AI platform business. We've made great progress again this quarter in our KPIs for both of these businesses. As I mentioned on our last call, in order to track the progress of our Media Agency business, we evaluate 3 key performance metrics: the number of new customers added under master service agreement, the total number of active customers and the average media spend per customer. The first 2 of these KPIs, which track the number of new and active customers, provide us with insight regarding our ability to grow the market share of our Media Agency business by winning new customers as well as keeping tabs customer churn. During Q3, we added 9 net new customers compared with 6 net new customers in the same period last year, a 50% increase. In terms of active customers, we had a total of 49 as of the end of the quarter compared with 35 at the prior year quarter-end, a 40% increase.

Our third KPI for the Media Agency is average media spend per customer, which allows us to analyze not only spending trends, but our ability to grow media spend with existing customers. During Q3, our average media spend per customer was $649,000 compared with $570,000 in the same period last year, which is a 14% increase. It's important to keep in mind that while this business is mature and provides the solid foundation for Veritone, it can also experience volatility in net revenues from time to time.

Now moving to our Artificial Intelligence platform KPIs. We had 37 customers on the platform at the end of the quarter compared with 13 at the prior year quarter-end, an increase of 185%. We had 170 total accounts on the platform at the end of the quarter compared with 14 at the prior year quarter-end. And finally, we had 122 third-party active cognitive engines on the platform at the end of the quarter compared with 28 at the prior year quarter-end, which was an increase of 336%.

During the quarter, we processed 711,000 total hours of video and audio files compared with 331,000 in the prior year period, an increase of 115%. As we grow and expand our AI platform, we will continue to provide goalpost to make it easier to track our success. With that in mind, we expect to end the year with approximately 425 accounts and approximately 150 active third-party cognitive engines on our platform and having processed approximately 2.75 million hours of video and audio files during the year.

That completes my financial summary. I'll now turn the call back over to Chad. Chad?

Thanks, Pete. I'd now like to provide some operational updates related to what we discussed on our last call as well as highlights on new developments that happened in Q3. I'll also provide an update on our AI product development and new customer wins as well as our business outlook.

Let's begin with our operational highlights for the third quarter, starting with our aiWARE Edge operating system that we launched in August. As some of you know, aiWARE is our AI operating system, which supports both on-premise and cloud-based deployment models. It currently manages 122 cognitive engines, spanning 14 cognitive classes. At its core, aiWARE is powered by Conductor version 3.1, which is Veritone's proprietary and ensemble learning technology. Using the on-premise version of aiWARE, users can ingest unstructured contents and structured data and perform on-premise orchestrated cognition using certain engines located behind their firewall, versus having to always route all of their content to the cloud for AI processing. Currently, a subset of our engine are containerized and able to run on-prem, and we're working to on board additional engines with our partners. AiWARE creates a secured network, spanning LANs, WANs, and the cloud for cognitive engines and their output to move freely throughout our digital universe. The cognitive engine output can be transmitted to the customer's account in our cloud application or kept on-premise for immediate integration with on-premise enterprise applications. This enables customers to leverage our platform's capabilities across heterogenous content repositories, regardless of where that data is stored.

This new on-premise version of aiWARE allows customers to analyze their unstructured content within their network, which is required by some companies' data security policies. Other companies prefer the on-premise approach to provide a cost-effective method for analyzing large quantities of on-premise content. Bringing these containerized cognitive engines to the content minimizes data movement and provides high-scale parallel processing of large media volumes. For this on-premise content, our operating system recommends which cognitive engine to select and provides [chaining]and blending capabilities. Some of the use cases for aiWARE on-premise customers include: facial recognition against known persons of interest; human asset tracking and behavior anomaly detection; ad tracking and content repurposing; near real-time air checks and sponsorship integration; automated closed captioning; corporate compliance of unstructured audio and video assets. We are very pleased with the customer response to aiWARE, especially via the Quantum direct and channel partner sales teams. since aiWARE was launched in late August, we have identified over 80 opportunities, have submitted 10 proposals that are under review by customers; we're in 12 trials or POCs; and we have entered into 2 licensing agreements with customers. The qualitative feedback we are hearing is that aiWARE is a significant differentiator for Quantum versus other storage providers and a whole new way to utilize stored video content for broadcasters, government agencies and channel partners.

In the channel partner category, we have signed 9 partners, including: AWS, Quantum, resellers and system integrators; with 7 of those 9 already on boarded and actively selling. In addition, we have 35 new channel partners in our pipeline. The integrated solution has been extremely well received by the market. In fact, in September, the solution earned a Best of Show award at the global IBC 2017 show in Amsterdam. Perhaps, even more encouraging is the fact that we were able to secure our first customer win right out of the gate. The first appointment of aiWARE and Xcellis is expected to be at FOX Sports Brasil, which will deploy the solution on-premise to index their media archive, beginning with Portuguese transcription. Our expansion into Latin America and new relationship with FOX Sports Brasil are part of our strategy to afford purpose-built AI services across the world, stay close to our clients and foster stronger relationships with international experts. By having a presence in Latin America, we are positioned to deliver premium services, technology and partner support that will help us deliver outstanding business value to customers in this market. Future potential use cases for FOX Sports Brasil include: indexing with face recognition; logo and optical character recognition; and then Portuguese transcription of their live streams.

AiWARE has also enabled third-party MAM and DAM providers to transform post-production workflows by accepting previously untapped AI-enabled metadata generated by aiWARE. Another recent and very significant development for us is the availability of aiWARE on the AWS Marketplace. Veritone is now an advanced technology partner in the AWS Partner Network, and we provide AWS' customers with full access to aiWARE and our application suite. We will provide more detail regarding this exciting development as it progresses. However, we expect this AWS partnership to dramatically accelerate our go-to-market strategy as it rolls out.

As I mentioned in my opening remarks, another major development during Q3 was our beta launch of the Veritone Developer Application, or VDA, as we call it internally. VDA allows third-party cognitive engines and third-party applications to integrate with our platform using our software development kit and self-service tools. We expect to launch VDA and make it generally available to our global partner community by year-end.

For third-party cognitive engine developers, VDA gives them access to our platform, which links the cognitive engines to potential customers and to training data that they use to improve the performance, speed and accuracy of their engines.

VDA also expands their ability to iterate and create multiple models to target specific market niches. We believe that facilitating the addition of more cognitive engines and third-party applications onto our platform will have a number of benefits to Veritone and our customers. First, having more cognitive engines on our platform will bring enhanced cognitive capabilities and additional classes of cognition to our customers. The enhanced cognition will come not only from additional engines, but also from our ensemble learning technology, Conductor, which is even more impactful when it has a larger set of cognitive engines to inference.

We have approximately 25 new cognitive engines in the VDA on-boarding process at this time. We believe that VDA will help us provide our customers with a broad range of engine options across a spectrum of speed, accuracy and deployment models and cost. VDA, coupled with aiWARE, creates a robust flexible AI platform, enables our partners and customers with the tools to build and deploy custom cognitive engines that are highly tuned to their business needs.

The second expected benefit to Veritone and our users is in helping application developers to quickly and effectively build customized workflows and industry-specific applications on top of our aiWARE platform to meet the needs of the users in many industries. This capability is important for resellers, VARs and system integrators, because it allows them to create a customized solution for their customers using the underlying technical architecture and cognitive processing of Veritone, further extending the reach of our platform. For example, a customer with both video content and structured data related to specific assets, such as vehicle data in multiple locations, formats and languages, can create an application that understands, tracks and even predicts the behavior of those assets. Large third-party system integrators and consulting firms will be able to build custom applications on our platform to provide customized solutions to their partners. We expect to generate revenues from the increased cognitive engine utilization linked to the VDA business applications and participate in the application SaaS revenues directly, similar to Salesforce's apps in their app marketplace. Currently, we have a handful of business applications in development using VDA and our SDKs. As we gather feedback from these early adopters, we'll extend invitations to a broader audience over time.

These technology innovations and developments highlight the capabilities of our world-class engineering and product teams. And we believe that they will give us significant additional sales opportunities, moving forward. One of the primary uses of the proceeds from our IPO has been to strengthen and expand our organization by hiring world-class engineering and data science talent and proven business development executives. Along that line, I'm excited to introduce 2 new key hires that we made in Q3. First, Michael Sandoval has joined our team as our innovation officer. Michael is a proven technologist and entrepreneur, having built an AI-related business that was steeped with data scientists. He also spent more than 10 years at Microsoft where he founded and ran the Microsoft Partner Solutions Center. Michael's responsibilities include: data science, channel programs, professional services and our partner ecosystem.

The other key hire during the quarter was Dr. Wolf Kahn, a proven data scientist with PhDs in both computer science and electrical engineering from MIT. In addition to serving as Chief Scientist for an AI-related business, Wolf taught at the University of Washington for more than 5 years, supervising PhD students doing research in meta-control, optimization and quantum control. As our new VP, Principal Data Scientist, Wolf is using his expertise to expand the capability of Conductor, our orchestration technology that manages cognitive engines across multiple classes as well as other special projects in the field of second-order machine learning.

Including the additions of Wolf and Michael to our team, we increased our headcount by 17 people in Q3. This included adding 8 people in sales and marketing, 5 people in engineering and data science and 4 in general and administration. These additions put our total headcount at 176 employees at the end of the quarter.

From a sales standpoint, we recently signed our largest AI platform customer agreement to date with iHeartMedia, the leading audio company with the largest reach of any radio or television outlet in America. This is a 2-year expansion of our existing relationship that gives iHeartMedia a license to our aiWARE platform for over 200 of its radio stations in the top 50 markets. Our technology will enable iHeartMedia to, seamlessly and automatically process, transform and review audio content in near real-time with enhanced ad and content tracking, comprehensive analytics, faster content extension and smarter media management. Our platform will support iHeart's initiatives to enhance advertising and content to increase the value of radio advertising.

Previously, iHeart spent hours reviewing ad placements in addition to indexing, packaging, extending and distributing content. In 2017, the U.S. radio industry, as a whole, is projected to have $17.8 billion in advertising revenue. Though verifying and organizing ad verification and performance data is imperative, Veritone enables iHeartMedia to focus on more creative marketing strategies rather than on monotonous analysis of data. Using advanced AI-based metadata creation and analytics, iHeartMedia will now be able to provide near real-time reporting of performance and verification for its advertisers, showing concrete metrics and ad spend ROI.

Our media and entertainment pipeline continues to grow, including radio and television broadcasters, sports leagues and teams and media and digital asset management providers, both domestically and abroad. Our sales pipeline in this market has also extended to infrastructure and service providers, such as telephone, wireless and cable operators.

Our legal and compliance business unit continues to make inroads, expanding its revenue base and sales pipeline. We expect to begin production on a 6-figure contract for Veritone Legal, which represents our largest contract to date in this vertical. We continue to invest in this market and are bullish on its prospects, as we are hearing from the initial legal and compliance customers currently on the platform that aiWARE is the most accurate, cost-effective and feature-rich solution currently available for unstructured content analysis.

We continue our FedRAMP and secured cloud deployment efforts within the government vertical, with initial pilot partners now using aiWARE. We expect this to be a significant contributor to our revenue base in the second half of 2018. While organic expansion of our customer base and technology continue to fuel our market success and revenue growth, we're continuing to explore inorganic opportunities, as they present themselves.

As I've talked about on our prior calls, we are looking to acquire businesses that process audio, video and other unstructured data and provide their products via a SaaS model to their customers. Companies that have significant existing customer bases are more interesting to us, particularly where we believe that aiWARE will enable those businesses to enhance the value of the solution they offer to their customers.

We have had a very active pipeline of synergistic targets that we are talking with, and we hope to sign at least 1 by year's end. We'll keep you apprised of any significant developments in this area.

So in summary, Veritone SaaS revenue continues to grow at triple-digit rate year-over-year by expanding the value and depth of intelligence we offer to our existing clients while adding new customers through more efficient and cost-effective sales channels. The caliber of our team continues to strengthen, as we attract key personnel from companies like IBM, Google, Amazon and Microsoft that share our firm belief that we are building the AI operating system of the future.

Again, thank you all for your time today. We look forward to updating you on our progress on future calls.

We're now ready to open the line for questions. Operator?

(Operator Instructions) Now our first question will come from Mike Latimore with Northland Capital.

On the -- just on the Media Agency business, can you talk a little bit about the seasonality in that business? I think, last year you had more positive seasonality around the third quarter and given the composition of the customers there, how do you think about the holiday seasonal effect?

(technical difficulty)

(Operator Instructions) We are now live again. Please proceed.

This is Derrick on. Sorry about that, we had an IP phone issue. So we're back connected and open for questions. Operator?

(Operator Instructions) Our next question will come from Sameet Sinha with B. Riley FBR.

This is actually Lee Krowl filling in for Sameet. Real quick, just on the FedRAMP progress, I know you guys had a few milestone certifications that were on slate for Q1 approval. With this pilot program you mentioned, does that you mean you have the necessary certifications to kind of ramp that whole opportunity?

No. There's some work we can do prior to getting that certification. So that's the type of work we're doing at this point. We think that we're going to be complete with our development and self-assessment by the end of Q1 of '18. And then the third-party assessment and certification will be coming in the summer of '18. So in the remarks we made, we said that we see it being a second half '18 revenue opportunity for us.

Got it, okay. And then can you just talk about the AWS relationship. Is that pre-revenue? And then, I guess, can you just talk about the ramp opportunity with that as a third-party integration?

Sure. AWS, and our integration now is one of their partner is a new development. We don't want to go into too much speculation as to what that will actually afford us. However, given Amazon's dominant position as the leading cloud provider, growing at double-digit rates. We're extremely excited about what it means, both domestically and abroad for us, in 2018.

Got it. And then just one last question. On the FOX opportunity you guys announced, you, kind of, suggested that there's incremental opportunities to be had in the Latin America market. Will that require any incremental investment? Or can you tackle those opportunities with the existing sales force you have today?

So no incremental investment. Right now, we're activating all of those sales through new channel partners that were brought to us through the Quantum relationship. Part of our expansion plan is really enabling that channel distribution on a global basis, which we're now solving for in Q4, and anticipate that being a major contributor to our growth in 2018.

(Operator Instructions) Our next question is from Mike Latimore with Northland Capital Market.

Sorry about that. I think my phone cut out there. Just in terms of the account, I think you said, you expect 425 accounts by year-end versus 170 in the third quarter or so, so what -- can you talk a little bit about the drivers to get there?

Yes. So the main driver for that, Mike, is going to be the on boarding of the iHeart station. So we mentioned that there's over 200 stations that will be coming onto the platform here in Q4. So that's the majority of it. And then we do have other, mostly broadcasters that -- radio broadcasters that are in the sales pipeline that we're expecting to bring on board which will allow us to go from 170 up to that 425.

Okay. And then how is CBS Radio? Is that fully deployed now? And then I think there is a chance they get acquired or merged here? Is that an opportunity for you guys? Or how do you think about that?

Yes. It's -- CBS Radio is fully deployed. And as far as their upcoming merger with Entercom, yes, there is an opportunity for us to pick up some additional business as they merge their 2 businesses together. That's one of the items that's in our pipeline.

Got it. And then you mentioned, I think, in the legal vertical, you're in production on a 6-figure deal, I believe, can you talk just little bit more about that? Is that tied to like a specific case, or what's driving that opportunity?

Yes, it's through a reseller that our team has been working with, and there's one particular litigation matter that, that project will be based on, that we'll be bringing on. We're expecting it to be a project that will span more than 1 quarter. It's kind of a large project. But the 6-figure sales opportunity in the fourth quarter is in not that we'll be performing this quarter here. And we think it will continue on into our next year.

Okay. And then what should we model for stock comp in the fourth quarter?

So we don't really give guidance, but the -- if you think about what we've talked about on the call, we had $11.6 million as a stock-based comp in the third quarter, with $8.9 million of that related to the performance-based stock options that were vested in the quarter. So that leaves you with a run rate of about $2.7 million, which is probably the right run rate to think about for this quarter. There'll be -- I'm expecting some options to get awarded at the board meeting, coming up later in the quarter. So it might be $2.8 million or so. But in that vicinity, is what I'm thinking of.

(Operator Instructions) At this time, this concludes our question-and-answer session. If your question was not taken you may contact Veritone's Investor Relations team at VERI@liolios.com.

I'd now like to turn the call back over to Mr. Steelberg, for his closing remarks.

Thank you. 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 for building the AI operating system of the future. We look forward to updating you on our progress on our next call. Operator?

Thank you for joining us today for Veritone's Third Quarter 2017 Earnings Call. You may now disconnect.